-----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, FyTFrJRzyh04S+n+mokibbTtccbV4nqdHR6DmXbuZv7MJIaJCSUNOH0+5tNaSgSL lw1NUnYW/vZy6UwSjXDk+Q== 0000883322-98-000015.txt : 19981116 0000883322-98-000015.hdr.sgml : 19981116 ACCESSION NUMBER: 0000883322-98-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 98746456 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 September 30, 1998 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 October 30, 1998: 8,335,799 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 for the three and nine months ended September 30, 1998 and 1997 3 Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 PART II OTHER INFORMATION - -------------------------- Item 2. Changes in Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 - ---------- 3 PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (unaudited) Three months ended September 30, Nine months ended September 30, 1998 1997 1998 1997 ------ ------ ------ ------ Sales $17,530 $17,158 $49,410 $46,460 Cost of sales 8,052 8,095 24,052 22,824 ------- ------- ------- ------- Gross profit 9,478 9,063 25,358 23,636 Operating expenses: Research and development expenses 2,514 2,244 6,425 6,408 Selling, general and Administrative expenses 5,759 5,292 16,967 15,158 Relocation costs 2,246 - 2,246 - ------- ------- ------- ------- Total operating expenses 10,519 7,536 25,638 21,566 ------- ------- ------- ------- Income (loss) from operations (1,041) 1,527 (280) 2,070 Other income 225 291 718 803 ------- ------- ------- ------- Income (loss) before income taxes (816) 1,818 438 2,873 Provision (benefit) for income taxes (259) 441 92 747 ------- ------- ------- ------- Net income (loss) $ (557) $ 1,377 $ 346 $ 2,126 ======= ======= ======= ======= Comprehensive income (loss) $ (372) $ 1,448 $ 520 $ 2,038 ======= ======= ======= ======= Basic earnings (loss) per share $ (0.07) $ 0.15 $ 0.04 $ 0.24 ======= ======= ======= ======= Diluted earnings (loss) per share $ (0.07) $ 0.15 $ 0.04 $ 0.23 ======= ======= ======= ======= Weighted average number of shares used in the computation of: Basic earnings per share 8,389 8,887 8,562 8,838 Diluted earnings per share 8,389 9,337 8,886 9,210 See accompanying notes to condensed consolidated financial statements
4 PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) September 30, December 31, 1998 1997 ------ ------ ASSETS Current assets: Cash and cash equivalents $ 6,458 $12,257 Short-term investments 9,304 6,524 Accounts receivable - net 16,555 16,106 Inventories 13,160 13,507 Deferred taxes 1,443 1,474 Prepaid expenses and other 410 276 ------- ------- Total current assets 47,330 50,144 Long-term investments 4,711 6,789 Property and equipment - net 3,968 4,575 Other assets 2,125 2,247 ------- ------- $58,134 $63,755 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,293 $ 2,806 Accrued salaries, wages and related liabilities 2,581 2,375 Other accrued liabilities 1,209 606 Income taxes payable (384) 676 Reserve for warranties 1,136 1,084 Deferred revenue and customer deposits 117 122 ------- ------- Total current liabilities 7,952 7,669 Deferred taxes 413 408 Shareholders' equity: Common stock, $.01 par value. Authorized 30,000 shares; issued and outstanding 8,313 at 1998 and 8,935 at 1997 83 89 Additional paid-in capital 29,088 35,414 Unearned compensation (96) - Accumulated other comprehensive income: Unrealized holding gain on investments 71 33 Foreign currency translation adjustment 200 65 Retained earnings 20,423 20,077 ------- ------- Total shareholders' equity 49,769 55,678 ------- ------- $58,134 $63,755 ======= ======= See accompanying notes to condensed consolidated financial statements
5 PROTOCOL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Nine months ended September 30, 1998 1997 ------ ------ Cash flows from operating activities: Net income $ 346 $ 2,126 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,743 1,813 Write-off of assets 719 - Amortization of bond premium 77 267 Provision for deferred taxes 23 (9) Other non-cash items 96 - Increase (decrease) in cash resulting from changes in: Accounts receivable (409) (129) Inventories 391 (879) Prepaid expenses and other assets (113) (11) Accounts payable and accrued liabilities 1,084 (22) Income taxes payable (1,038) 358 Reserve for warranties 52 3 Deferred revenue and customer deposits (5) (37) ------- ------- Net cash provided by operating activities 2,966 3,480 Cash flows from investing activities: Purchase of investments (8,855) (12,024) Proceeds from maturity of investments 8,115 14,715 Acquisition of property and equipment (1,410) (1,722) Capitalization of software development costs (191) - Acquisition of intangible assets (74) (10) ------- ------- Net cash provided by (used in) investing activities (2,415) 959 Cash flows from financing activities: Proceeds from exercise of stock options and stock purchase plan 974 888 Repurchase of common stock (7,498) - ------- ------- Net cash provided by (used in) financing activities (6,524) 888 ------- ------- Effect of exchange rates on cash and cash equivalents 174 (24) ------- ------- Net increase (decrease) in cash and cash equivalents (5,799) 5,303 Cash and cash equivalents at beginning of period 12,257 6,903 ------- ------- Cash and cash equivalents at end of period $ 6,458 $12,206 ======= ======= Supplemental disclosure of cash flow information: Cash paid for income taxes $ 1,024 $ 295 Supplemental schedule of noncash transactions: Increase in investment in Protocol Medical Systems Ltd. due to release of compensatory shares of common stock from escrow $ 91 $ 91 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, 1997. 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 are as follows: September 30, December 31, (in thousands) 1998 1997 - ------------------------------------------------------------------------- Raw materials $ 4,949 $ 5,521 Work in process 2,575 2,460 Finished goods 3,306 3,569 Demonstration instruments 2,330 1,957 ------- ------ Total inventories $13,160 $13,507 ======= ====== PROPERTY AND EQUIPMENT Property and equipment is stated at cost and includes the following: September 30, December 31, (in thousands) 1998 1997 - ------------------------------------------------------------------------- Equipment $11,920 $11,732 Furniture and fixtures 1,886 1,757 Leasehold improvements 252 683 ------ ------ 14,058 14,172 Less accumulated depreciation and amortization 10,090 9,597 ------ ------ Property and equipment - net $ 3,968 $ 4,575 ====== ====== 7 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, the benefit of the Company's research and experimentation tax credits and tax-exempt interest income earned on investments. See Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of income taxes. BASIC AND DILUTED EARNINGS PER SHARE In accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" both basic earnings per share and diluted earnings per share are presented. 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 The Company has adopted SFAS No. 130, "Reporting Comprehensive Income" which establishes standards for the reporting and display of comprehensive income and its components. The following is a reconciliation of net income to comprehensive income: Three months ended September 30, Nine months ended September 30, (in thousands) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------ Net income (loss) $ (557) $ 1,377 $ 346 $ 2,126 Other comprehensive income, net of tax Foreign currency translation adjustments 147 55 136 (88) Unrealized holding gain arising during the period 38 16 38 - ------- ------- ------- ------- Other comprehensive income (loss) 185 71 174 (88) ------- ------- ------- ------- Comprehensive income (loss) $ (372) $ 1,448 $ 520 $ 2,038 ======= ======= ======= =======
8 RELOCATION OF SUBSIDIARY During the third quarter of 1998 the Company relocated its wholly-owned subsidiary, Pryon Corporation, from Menomonee Falls, Wisconsin to the Company's Beaverton, Oregon facility in order to improve operating efficiencies. This relocation included moving all Pryon operations including key management personnel and was complete by the end of the third quarter of 1998. The relocation resulted in a reduction of 56 employees from manufacturing, engineering and administrative functions. The Company incurred $2.2 million ($1.8 million after tax) in relocation costs in the third quarter of 1998. These costs include employee severance benefits, lease and other contract terminations, key employee, inventory and equipment relocation costs as well as a write-off of $482,000 of fixed assets and capitalized software development costs related to assets that will not be utilized by the Company's Beaverton facility. At the end of the third quarter of 1998, relocation costs of $779,000 were not disbursed. The Company anticipates that these remaining balances will be expended by the end of 1998, except for amounts related to longer term lease and other contract terminations. PENDING LITIGATION In 1990, the Company entered into a development and supply agreement with Gensia, Inc. to develop and supply a closed-loop drug delivery and monitoring device ("GenESA device"). This agreement was amended in December 1997. Gensia began shipments of the GenESA device to Europe in 1995 and received FDA clearance to market the product in the United States in the third quarter of 1997. In April 1998, the Company was informed that Gensia plans no additional purchases of the GenESA device under the 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 and is seeking damages of approximately $10 million. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Statement changes the way public companies report segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to shareholders. The Company plans to adopt the statement for the quarter ending December 31, 1998. In October 1997, the AICPA issued Statement of Position (SOP) 97-2, "Software Revenue Recognition", which supercedes SOP 91-1. The Company adopted SOP 97-2 for software transactions entered into beginning January 1, 1998. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. The revenue allocated to software products generally is recognized upon delivery of the products. The revenue allocated to post- contract customer support generally is recognized ratably over the term of the support and revenue allocated to service elements generally is recognized as the services are performed. The impact on the Company's Consolidated Financial Statements is not material. 9 In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 also requires that changes in the derivative's fair value be recognized currently in results of operations unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company does not expect SFAS No. 133 to have a material impact on its Consolidated Financial Statements. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Third Quarter 1998 vs. Third Quarter 1997 - ------------------------------------------- Sales. Sales for the third quarter of 1998 increased 2.2% to $17.5 million from $17.2 million for the third quarter of 1997. U.S. military revenues increased 360.9% to $2.8 million (16.0% of total sales) in the third quarter of 1998 from $609,000(3.5% of total sales) in the third quarter of 1997. Several large military orders were shipped during the third quarter of 1998. Domestic sales, excluding military revenues and Original Equipment Manufacturer ("OEM") sales of Pryon OEM products and GenESA devices, decreased 11.4% to $9.8 million (56.1% of total sales) in the third quarter of 1998 from $11.1 million (64.6% of total sales) in the third quarter of 1997. The decrease in domestic sales in the third quarter of 1998 was primarily due to a reduction in the average sales price of monitors caused by fewer highly configured monitors. This reduction was partially offset by an increase in the unit sales of Flexible Monitoring systems including the Acuity central workstation. International sales, excluding international OEM sales of Pryon OEM products and GenESA devices, decreased 6.6% to $3.2 million (18.3% of total sales) in the third quarter of 1998 from $3.4 million (20.0% of total sales) in the third quarter of 1997. This decrease in international sales was principally due to the continuing strength of the U.S. dollar against foreign currencies and soft economic conditions particularly in Europe and Asia. OEM sales decreased 16.7% to $1.7 million (9.7% of total sales) in the third quarter of 1998 from $2.0 million (11.8% of total sales) in the third quarter of 1997 primarily due to a $317,000 decrease in sales to certain of its OEM customers. Gross profit. As a percentage of sales, gross profit increased to 54.1% in the third quarter of 1998 from 52.8% in the third quarter of 1997. The increase in gross margin was primarily due to improved manufacturing efficiencies in the third quarter of 1998. Research and development. Research and development expenses increased 12.0% to $2.5 million in the third quarter of 1998 from $2.2 million in the third quarter of 1997. The increase in research and development expenses resulted primarily from the write-off of an engineering software license and related fixed assets as the Company no longer intends use these assets in future product development. As a percentage of sales, research and development expenses increased to 14.3% in the third quarter of 1998 from 13.1% in the third quarter of 1997. 11 Selling, general and administrative. Selling, general and administrative expenses increased 8.8% to $5.8 million in the third quarter of 1998 from $5.3 million in the third quarter of 1997. This increase resulted primarily from the establishment of direct sales organizations in Germany and France in 1998 and an increase in the number of direct sales representatives and clinical application specialists employed by the Company to expand the field sales and service operations. As a percentage of sales, selling, general and administrative expenses increased to 32.9% in the third quarter of 1998 from 30.8% in the third quarter of 1997. Relocation costs. In the third quarter of 1998, the Company incurred $2.2 million ($1.8 million after tax) of relocation costs related to the relocation of the operations of its Pryon subsidiary from Wisconsin to Oregon. These costs include employee severance, write-off of assets that will not be utilized in Oregon, lease and other contract terminations, and costs to relocate key employees as well as inventory and equipment. The relocation resulted in a reduction of 56 employees from manufacturing, engineering and administrative functions. Other income. Other income decreased 22.8% to $225,000 in the third quarter of 1998 from $291,000 in the third quarter of 1997 primarily due to a decrease in interest income. Cash and investments decreased as the Company repurchased common stock during 1998 under a previously announced buy-back program. Provision for (benefit from) income taxes. The benefit from income taxes was $259,000 in the third quarter of 1998 compared to a provision for income taxes of $441,000 in the third quarter of 1997. The annual effective tax rates used in 1998 and 1997 were 21% and 26%, respectively, the decrease being primarily due to greater expected percentage benefits from tax-exempt interest and research and experimentation credits. Tax rates in the third quarters were also beneficially impacted by the effects of a reduction of the tax rates used in the first six months of each year, resulting in effective tax rates of 31.7% and 24.3% in the third quarter of 1998 and 1997, respectively. Net income (loss). The net loss in the third quarter of 1998 was $557,000 or $0.07 per diluted share compared to net income of $1.4 million or $0.15 per diluted share in the third quarter of 1997. Excluding costs associated with the relocation of Pryon, net income for the third quarter of 1998 would have been $1.2 million or $0.15 per diluted share. The Company expects net income in 1998, excluding costs associated with the relocation of Pryon, to remain relatively flat compared to 1997 as a result of increases in its marketing and sales efforts in 1998, including increases in the number of direct sales representatives, clinical application specialists, field service engineers, and the establishment of direct sales organizations in France and Germany during 1998. Net income exclusive of relocation costs is a non-GAAP measure and investors should not rely on it as a substitute for GAAP measures. Because the relocation of the Pryon subsidiary was unusual in nature, management believes that a measure of net income excluding the relocation is meaningful and useful to investors as it provides an alternative basis with which management and investors can assess the profitability of the Company's core operations. 12 Nine Months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997 - ----------------------------------------------------------------------------- Sales. Sales for the first nine months of 1998 increased 6.3% to $49.4 million from $46.5 million for the first nine months of 1997. U.S. military revenues increased 221.3% to $6.5 million (13.2% of total sales) in the first nine months of 1998 from $2.0 million (4.4% of total sales) in the first nine months of 1997 due to several large military orders shipped during the first nine months of 1998. Domestic sales, excluding military revenues and Original Equipment Manufacturer ("OEM") sales of Pryon OEM products and GenESA devices, increased 5.5% to $26.7 million (54.1% of total sales) in the first nine months of 1998 from $25.3 million (54.5% of total sales) in the first nine months of 1997. The growth in domestic sales was primarily due to an increase in the unit sales of Flexible Monitoring systems including the Acuity central stations. International sales, excluding international OEM sales of Pryon OEM products and GenESA devices, decreased 17.8% to $10.7 million (21.8% of total sales) in the first nine months of 1998 from $13.1 million (28.1% of total sales) in the first nine months of 1997. This decrease in international sales was principally due to the continuing strength of the U.S. dollar against foreign currencies and soft economic conditions particularly in Europe and Asia. OEM sales of Pryon OEM products and GenESA devices decreased 10.5% to $5.4 million (10.9% of total sales) in the first nine months of 1998 from $6.0 million (12.9% of total sales) in the first nine months of 1997. Pryon OEM sales decreased by $1.1 million primarily as a result of a decrease in sales to certain of its OEM customers. This decrease was partially offset by an increase of $437,000 in sales of the GenESA device to Gensia Automedics, Inc. Gensia received clearance from the Food and Drug Administration (FDA) to market the GenESA device in the United States in 1997. In April 1998, the Company was informed that Gensia plans 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 and seeking damages of approximately $10 million. Gross profit. As a percentage of sales, gross profit increased slightly to 51.3% in the first nine months of 1998 from 50.9% in the first nine months of 1997 primarily due to an improvement in gross margins of Pryon OEM products. Research and development. Research and development expenses remained level at $6.4 million in the first nine months of 1998 compared to the first nine months of 1997. As a percentage of sales, research and development expenses decreased to 13.0% in the first nine months of 1998 from 13.8% in the first nine months of 1997. Selling, general and administrative. Selling, general and administrative expenses increased 11.9% to $17.0 million in the first nine months of 1998 compared to $15.2 million in the first nine months of 1997. This increase resulted primarily from the establishment of direct sales organizations in Germany and France in 1998 and an increase in the number of direct sales representatives and clinical application specialists employed by the Company to expand the field sales and service operations. As a percentage of sales, selling, general and administrative expenses increased to 34.3% in the first nine months of 1998 from 32.6% in the first nine months of 1997. 13 Relocation costs. In the third quarter of 1998, the Company incurred $2.2 million ($1.8 million after tax) of relocation costs related to the relocation of the operations of its Pryon subsidiary from Wisconsin to Oregon. These costs include employee severance, write-off of assets that will not be utilized in Oregon, lease and other contract terminations, and costs to relocate key employees as well as inventory and equipment. The relocation resulted in a reduction of 56 employees from manufacturing, engineering and administrative functions. Other income. Other income decreased 10.6% to $718,000 in the first nine months of 1998 from $803,000 in the first nine months of 1997 as interest income decreased due to a reduction in the cash and investments balance as the Company repurchased shares of common stock in 1998. This decrease was partially offset by a higher rate of return on investments in 1998. Provision for income taxes. The provision for income taxes decreased to $92,000 in the first nine months of 1998 from $747,000 in the first nine months of 1997, representing effective tax rates of 21.0% and 26.0%, respectively. The effective tax rate, which reflects the estimate of the Company's annual effective tax rate, decreased primarily due to a reduction in the estimate of net taxable income for 1998 and the corresponding greater percentage benefits from tax-exempt interest and research and experimentation credits. Net income. Net income decreased 83.7% to $346,000 or $0.04 per diluted share in first nine months of 1998 from $2.1 million or $0.23 per diluted share in the first nine months of 1997 primarily due to costs associated with the relocation of the Pryon subsidiary. Excluding the costs associated with the relocation of the Pryon subsidiary, net income for the first nine months of 1998 would have been $2.1 million or $0.24 per diluted share. The Company expects net income in 1998, excluding costs associated with the relocation of Pryon, to remain relatively flat compared to 1997 as a result of increases in its marketing and sales efforts in 1998, including increases in the number of direct sales representatives, clinical application specialists, field service engineers, and the establishment of direct sales organizations in France and Germany during 1998. Net income exclusive of relocation costs is a non-GAAP measure and investors should not rely on it as a substitute for GAAP measures. Because the relocation of the Pryon subsidiary was unusual in nature, management believes that a measure of net income excluding the relocation is meaningful and useful to investors as it provides an alternative basis with which management and investors can assess the profitability of the Company's core operations. 14 LIQUIDITY AND CAPITAL RESOURCES The Company maintained its strong financial position as of September 30, 1998 with working capital balances of $39.4 million and a current ratio of 6.0:1 as compared to working capital of $42.5 million and a current ratio of 6.5:1 at December 31, 1997. Cash flow from operating activities for the first nine months of 1998 was $3.0 million as compared to cash flow from operating activities of $3.5 million for the first nine months of 1997. In January 1998 the Company's Board of Directors adopted a resolution authorizing the repurchase of up to 1,000,000 outstanding shares of the Company's common stock over a 12 month period. During the first nine months of 1998, the Company repurchased 822,000 shares. 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 is in the process of assessing its computer software programs and operating systems used in its internal operations, including applications used in its financial, 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. The Company estimates that its internal assessment of its computer software programs and operating systems is approximately 50% complete and will be completed in the first quarter of 1999. Costs incurred by the Company to date in its assessment of internal systems have not been material, and future costs to complete this assessment are not anticipated to be 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 system provided by the Company. The operation of the Acuity system and the monitor in the year 2000 and beyond should not be adversely affected by this connectivity issue. The Company has also contacted most 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 70% 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. 15 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 has not developed 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, and such a scenario has not been clearly identified. The Company intends to determine whether to develop a contingency plan by the end of the first quarter of 1999. FORWARD-LOOKING STATEMENTS This Quarterly Report contains statements, including statements regarding the Company's expectations as to net income for 1998, the anticipated operating efficiencies associated with the relocation of Pryon Corporation, and the anticipated effects of the Year 2000 issue, that are forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 that 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 Company's increased marketing and sales efforts in 1998, the establishment of direct sales organizations in France and Germany during 1998, 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. 16 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. 17 PART II. OTHER INFORMATION Item 2. Changes in Securities During the quarter ended September 30, 1998, 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 15,519 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. No matters were submitted to a vote of security holders during the quarter ended September 30, 1998. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 10.1 Sublease between NIKE, Inc. and Protocol Systems, Inc. dated August 13, 1998 10.2 Executive Employment Agreement between Protocol Systems, Inc. and Allen L. Oyler dated July 1, 1998 10.3 Executive Employment Agreement between Protocol Systems, Inc. and Carl P. Hollstein dated July 1, 1998 10.4 Executive Employment Agreement between Protocol Systems, Inc. and Craig M. Swanson dated July 1, 1998 10.5 Executive Employment Agreement between Protocol Systems, Inc. and James P. Fee dated July 1, 1998 10.6 Executive Employment Agreement between Protocol Systems, Inc. and James B. Moon dated July 1, 1998 10.7 Executive Employment Agreement between Protocol Systems, Inc. and James P. Welch dated July 1, 1998 10.8 Executive Employment Agreement between Protocol Systems, Inc. and Richard L. Roa dated July 1, 1998 10.9 Executive Employment Agreement between Protocol Systems, Inc. and Donald M. Abbey dated July 1, 1998 27.1 Financial Data Schedule (b) No reports were filed on Form 8-K during the quarter for which this report is filed. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROTOCOL SYSTEMS, INC. (Registrant) Date: November 12, 1998 By /s/ David F. Bolender --------------------- David F. Bolender Chief Executive Officer and Chairman of the Board of Directors By /s/ Craig M. Swanson --------------------- Craig M. Swanson Vice-President and Chief Financial Officer EX-10.1 2 SUBLEASE 1. PARTIES This Sublease is entered into this 13th day of August, 1998, by and between NIKE, Sublessor, and Protocol Systems, Inc., Sublessee, as a Sublease under the Master Lease dated December 13, 1990, as amended by documents dated 12/3/92 and 2/13/96, entered into by NIKE as Lessor, and Sublessor under this Sublease as Lessee; a copy of the Master is attached hereto as Exhibit 'A'. 2. PROVISIONS CONSTITUTING SUBLEASE A. This Sublease is subject to all of the terms and conditions of the Master Lease in Exhibit 'A' and Sublessee shall assume and perform the obligations of the Lessee in said Master Lease, to the extent said terms and conditions are applicable to the Premises subleased pursuant to this Sublease. Sublessee shall not commit or permit to be committed on the Premises any act or omission which shall violate any term or conditions of the Master Lease. In the event of termination of Sublessor's interest as Lessee under the Master Lease for any reason, then this Sublease shall terminate coincidentally therewith without any liability of Sublessor to Sublessee. B. All of the terms and conditions contained in the Master Lease are incorporated herein except for paragraphs 1, 2, 3, 4A, 4B, 29 and 30 as terms and conditions of this Sublease (with each reference therein to Lessor and Lessee to be deemed to refer to Sublessor and Sublessee) and along with all of the following paragraphs set out in this Sublease, shall be complete terms and conditions of this Sublease. 3. PREMISES Sublessor leases to Sublessee and Sublessee hires from Sublessor the following described Premises together with the appurtenances, situated in the City of Beaverton, County of Washington, State of Oregon, commonly known and described as 8605 SW Creekside Place, and consisting of approximately 14,000 sq. feet in southwest portion of building consisting of portions of the first and second floors shown on the drawing attached as Exhibit B. 4. RENTAL Sublessee shall pay to Sublessor as rent for the Premises in advance on the first day of calendar month of the term of this Sublease without deduction, offset, prior notice or demand, in lawful money of the United States the sum of thirteen thousand five hundred and eighty dollars ($13,580.00). If the commencement date is not the first of the month, or if the Sublease termination date is not the last day of the month, a prorata monthly installment shall be paid at the then current rate for the fractional month during which the Sublease commences and/or terminates. Receipt of $6,133.00 is hereby acknowledged for rental for the first partial month (14/31), and the additional amount of N/A as non-interest bearing security for performance under this Sublease. In this event, Sublessee has performed all of the terms and conditions of this Sublease throughout the term, upon Sublessee vacating the Premises, the amount paid as a security deposit shall be returned to Sublessee after first deducting any sums owing to Sublessor. Monthly payment includes full cost of physical space and proportionate share of common area charges; Sublessee to pay all directly billed utility charges. The rent component is the sum of $10,640 per month (computed at the rate of $.76 per rentable square foot) and CAM charges of $2,940 per month (computed at the rate of .21 per rentable square foot per month). 5. TERM A. The term of this Sublease shall be for a period of approximately eight (8) months, commencing on August 17, 1998, and ending on March 31, 1999. B. In the event Sublessor is unable to deliver possession of the Premises at the commencement of the term, Sublessor shall not be liable for any damage caused thereby, nor shall this Sublease be void or voidable but Sublessee shall not be liable for rent until such time as Sublessor offers to deliver possession of the Premises to Sublessee, but the term hereof shall not be extended by such delay. If Sublessee, with Sublessor's consent, takes possession prior to commencement of the term, Sublessee shall do so subject to all covenants and conditions hereof and shall pay rent for the period ending with the commencement of the term at the same rental as that prescribed for the first month of the term prorated at the rate of 1/30th thereof per day. 6. USE Sublessee shall use the Premises for general office and for no other purpose without written consent of Sublessor. 7. NOTICES All notices or demands of any kind required or desired to be given by Sublessor or Sublessee hereunder shall be in writing and shall be in the United States mail, certified and registered, postage prepaid, addressed to the Sublessor, or Sublessee, respectively, at the address set forth after their signatures at the end of this Sublease. Addresses of the parties may be changed by notice as provided herein. Notices may also be sent by private courier service or facsimile transmission and all notices shall be effective when received during business hours. Notice addresses are as follows: Sublessor: Jim Robison, Director of Administration Services, NIKE, Inc., One Bowerman Drive, Beaverton, OR 97005-6453; FAX (503) 671-4715; Sublessee: 8500 S.W. Creekside Place Beaverton, OR 97008, Attn: Craig Swanson, Vice President of Finance, FAX (503) 526-4299. All rent and other payments due under this Sublease or the Master Lease shall be made to Sublessor at the same address. 8. ACCESS TO TELEPHONE ROOM Sublessee shall be entitled to access and use of the central telephone room serving the Premises for installation of its telephone switching equipment, such access and installation to be done in a way which does not interfere with use of such room and equipment by Sublessor. 9. COMMON AREA MAINTENANCE CHARGES Sublessee shall pay common area maintenance charges attributable to the Subleased Premises which are currently $.21 per rentable square foot per month and paid together with rent. Sublessee shall also pay all utility charges billed to the Master Lease premises during the term of the Sublease, so long as there are no other tenants occupying the building. 10. ACCESS TO CARD KEY SYSTEM Sublessee shall be given access to and use of the existing card key security access system and shall be allowed to connect the system to Sublessee's card key computer system. Sublessor's property management personnel will be allowed access to the subleased premises for purposes of inspection and repair. 11. PURCHASE OF PERSONAL PROPERTY Sublessee agrees that upon execution of this Sublease, it shall purchase those items of furniture listed on the attached Exhibit C from Sublessor for the sum of $50,000, and such sum shall be paid upon signing of this Sublease in addition to rent for the month of August. Sublessor will give a bill of sale warranting its ownership of such items, which Sublessee will accept AS IS with no warranties as to condition. 12. EARLY POSSESSION Sublessee may take possession of the Premises upon execution hereof for purposes of doing work in preparation for occupancy. Such early occupancy shall be subject to all terms and conditions of this Sublease, except that rent will not commence until the date stated herein. 13. Paragraphs 8 through 14 are attached hereto and made a part hereof prior to the execution of the Lease. SUBLESSOR: NIKE, INC. SUBLESSEE: PROTOCOL SYSTEMS, INC. By: Tim Robinson By: Craig M. Swanson Address: One Bowerman Drive Address: 8500 SW Creekside Place Beaverton, OR 97005 Beaverton, OR 97008 The undersigned Landlord under the Master Lease attached as Exhibit 'A', hereby consents to the subletting of the Premises described herein on the terms and conditions contained in this Sublease. This consent shall apply only to the Sublease and shall not be deemed to be a consent to any other Sublease. Dated: September 11, 1998 Landlord: By: Eileen Newkirk Regional Manager PS Business Parks, L.P. EX-10.2 3 Protocol Systems, Inc. EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ PARTIES: Protocol Systems, Inc. ("Company") 8500 SW Creekside Place Beaverton, OR 97008 ALLEN L. OYLER ("Executive") 12288 SW 131st Ave. Tigard, Oregon 97223 DATE: July 1, 1998 RECITALS: A. The Company wishes to obtain the services of the Executive for at least the duration of this Agreement, and the Executive wishes to provide his services for such period, all upon the terms and conditions set out in this Agreement. B. It is expressly recognized by the parties that the Executive's continuance in the Executive's position with the Company and agreement to be bound by the terms of this Agreement represents a substantial commitment to the Company in terms of the Executive's personal and professional career and a foregoing of present and future career options by the Executive, for all of which the Company receives substantial value. C. The parties recognize that a Change of Control (as defined below) may result in material alteration or diminishment of the Executive's position and responsibilities and substantially frustrate the purpose of the Executive's commitment to the Company and forbearance of career options. D. The parties recognize that in light of the above-described commitment and forbearance of career options, it is essential that, for the benefit of the Company and its stockholders, provision be made for a Change of Control Termination (as defined below) in order to enable the Executive to accept and effectively continue in the Executive's position in the face of inherently disruptive circumstances arising from the possibility of a Change of Control, although no such change is now contemplated or foreseen. NOW, THEREFORE, for valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments. 1.2 "Board" shall mean the Board of Directors of Protocol Systems, Inc. 1.3 "Disability" shall mean the inability of the Executive to perform the essential functions of his position under this Agreement with or without reasonable accommodation because of physical or mental incapacity for a continuous period of five (5) months, as reasonably determined by the Company after consultation with a qualified physician selected by the Company. 1.4 "Company" shall mean Protocol Systems, Inc. and, any successor in interest by way of consolidation, operation of law, merger or otherwise. 1.5 "Confidentiality Agreement" shall mean that certain Non-competition and Confidentiality Agreement dated 26 August 1993 by and between the Company and Executive. ARTICLE 2 EMPLOYMENT, DUTIES AND TERM 2.1 EMPLOYMENT. Upon the terms and conditions set forth in this Agreement, the Company hereby employs the Executive in the position of Vice President, Human Resources & Administration, and the Executive accepts such employment. 2.2 DUTIES. The Executive shall devote his full-time and best efforts to the Company and to fulfilling the duties of his position which shall include such duties as may from time to time be assigned him by the Chief Executive Officer, provided that such duties are reasonably consistent with the Executive's position. The Executive shall comply with the Company's policies and procedures to the extent they are not inconsistent with this Agreement, in which case the provisions of this Agreement prevail. 2.3 TERM. This Agreement shall remain in effect until the earlier of (i) termination pursuant to Article 4 or Article 6 of this Agreement or (ii) two (2) years from the date of this Agreement, provided however that if a Change in Control occurs within two (2) years from the date of this Agreement, then this Agreement shall remain in effect for two (2) years from the date of the first Change in Control event described in Section 6.1.1. ARTICLE 3 COMPENSATION AND EXPENSES 3.1 BASE SALARY. For all services rendered under this Agreement, the Company shall pay Executive a Base Salary that is not less than Executive's Base Salary as of the date of this Agreement. If the Executive's salary is increased from time to time during the term of this Agreement, the increased amount shall be the Base Salary for the remainder of the term and any extensions. All amounts payable to the Executive under this Agreement shall be reduced by such amounts as are required to be withheld by law. 3.2 BONUS AND INCENTIVE. Bonus or incentive compensation shall be in the sole discretion of the Board. Except as otherwise provided in Article 6, the Company shall have the right in accordance with the terms of any bonus or incentive plan to alter, amend or eliminate all or any part of such plan, or the Executive's participation therein, without compensation to the Executive. 3.3 BUSINESS EXPENSES. The Company shall, in accordance with, and to the extent of, its policies in effect from time to time, reimburse all ordinary and necessary business expenses reasonably incurred by the Executive in performing his duties as an employee of the Company, provided that the Executive accounts promptly for such expenses to the Company in the manner prescribed from time to time by the Company. ARTICLE 4 EARLY TERMINATION 4.1 EARLY TERMINATION. This Article 4 governs termination of this Agreement at any time during the term of the Agreement; provided, however, that this Article shall not govern a "Change of Control Termination" as defined in Article 6. A Change in Control Termination is governed solely by the provisions of Article 6. 4.2 TERMINATION FOR CAUSE. The Company may terminate this Agreement and Executive's employment immediately for "Cause" as that term is defined herein, upon written notice to the Executive. 4.2.1 "Cause" means any one of the following: (a) fraud, (b) misrepresentation, (c) theft or embezzlement of the Company assets, (d) intentional violations of law involving moral turpitude, (e) the continued failure by the Executive to satisfactorily perform his duties as reasonably assigned to the Executive pursuant to Section 2.2 of this Agreement for a period of sixty (60) days after a written demand for such satisfactory performance which specifically and with reasonable detail identifies the manner in which it is alleged the Executive has not satisfactorily performed such duties, and (f) any material breach of the Confidentiality Agreement. 4.2.2 In the event of termination for Cause pursuant to this Section 4.2, the Executive shall be paid his Base Salary through the date of termination specified in any notice of termination. The Executive will not be entitled to any bonuses or incentives which are not earned and payable at the time of the termination. 4.3 TERMINATION WITHOUT CAUSE. Either the Executive or the Company may terminate this Agreement and the Executive's employment without Cause by providing at least seventy-five (75) days' written notice; provided, however, that the Company shall have the option of making termination of the Agreement and termination of the Executive's employment effective immediately upon notice, in which case Executive shall be paid his Base Salary through a notice period of seventy-five (75) days. This Section 4.3 shall not be applicable where Cause for termination exists. 4.3.1 If the notice of termination is given by the Company, in addition to any other amounts payable to Executive, under this Section 4.3, the Company shall pay Executive within fifteen (15) days following termination, a lump sum amount equal to one (1) year's Base Salary. 4.3.2 In the event that termination occurs pursuant to Section 4.3.1 then, in addition to the payments specified in said Section, the Company shall pay to the Executive bonuses, if any, as follows: 4.3.2.1 Company shall pay Executive an amount equal to the annual bonus or annual incentive, if any, to which the Executive would otherwise have become entitled under any Company bonus or incentive plan in effect at the time of termination of this Agreement had the Executive remained continuously employed for the full fiscal year in which termination occurred and continued to perform his duties in the same manner as they were performed immediately prior to termination; provided, however, that such bonus or incentive amount shall be pro-rated to the date of termination. The amount payable pursuant to this Section 4.3.2.1 shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year. 4.3.2.2 In the event Executive would have been entitled to a quarterly bonus or quarterly incentive payment had he remained employed for the entire quarter in which Executive was terminated, the Company shall pay Executive such quarterly bonus or incentive amount pro-rated to the date of termination, payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full quarter. 4.4 Termination in the Event of Death or Disability. This Agreement and Executive's employment shall terminate in the event of death or Disability of the Executive. 4.4.1 In the event of the Executive's death, the Company shall pay an amount equal to six (6) month's Base Salary to the executor, administrator or other personal representative of the Executive's estate. The amount shall be paid as a lump sum as soon as practicable following Company's receipt of notice of the Executive's death. All such payments shall be in addition to any payments due pursuant to Section 4.4.3 below. 4.4.2 In the event of termination due to Executive's Disability, Base Salary shall be terminated as of the final day of the fifth month referenced in the definition of "Disability." Unless otherwise disqualified by the disability benefit program provider, this Section is not intended to limit the Executive from qualifying for and claiming disability benefits from any other disability program in which the Executive may be enrolled or otherwise for which he is qualified at the time of disability. 4.4.3 In the event of termination by reason of the Executive's death or Disability, the Company shall pay to the Executive an amount equal to the amount the Executive would have received in incentive plan bonus for the year in which termination occurred had "target" goals been achieved, provided, however, that such amount shall be pro-rated to the date of termination. This amount shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year in which termination occurred. 4.5 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment by the Company pursuant to Section 4.3.1 or termination due to Disability, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") and shall continue such payment for the period of time the Executive is entitled to continue such coverage under COBRA. 4.6 ENTIRE TERMINATION PAYMENT. The compensation provided for in this Article 4 shall constitute the Executive's sole remedy for termination pursuant to this Article. The Executive shall not be entitled to any other termination or severance payment which may be payable to the Executive under any other agreement between the Executive and the Company preceding or following the date of termination. ARTICLE 5 CONFIDENTIALITY; CONFLICT OF INTEREST 5.1 PROPRIETARY INFORMATION. Executive shall keep confidential, except as the Company may otherwise consent in writing, and not disclose or make any use of except for the benefit of the Company, at any time either during or subsequent to his employment by the Company, any Proprietary Information which he may produce, obtain or otherwise acquire during the course of his employment. As used herein, "Proprietary Information" shall include any trade secrets, confidential information, knowledge, data, or other information of the Company relating to products, processes, know-how, designs, formulae, test procedures and results, customer lists, business plans, marketing plans and strategies, and pricing strategies, or other subject matter pertaining to any business of the Company for any of its clients, customers, consultants, licensees of affiliates, which information is not in the public domain at the time of the alleged breach. In the event of the termination of the Executive's employment for any reason whatsoever, Executive shall promptly return all records, materials, equipment, drawings and the like pertaining to any Proprietary Information. 5.2 COVENANT NOT TO COMPETE. Executive acknowledges that he will provide special skills, and acquire special information, regarding the activities of the Company. Executive agrees, therefore, that he will not, for a period of twelve (12) months from and after the date he ceases to be employed by the Company, join, control or participate in the ownership, management, operation or control of or be connected with, any business located in the United States of America whose commercial products are in direct competition with the Company or which is developing products which will be in direct competition with the Company, in such a manner and position that he would likely use Proprietary Information, unless released from such obligation by the Board of Directors of the Company. Executive agrees that he shall be deemed to be connected with a business if such a business is carried on by a partnership in which he is a general or limited partner or employee of a corporation or association of which he is a shareholder, officer, director, employee, member, consultant or agent; provided, that nothing herein shall prohibit the purchase or ownership by him of shares of less than five percent (5%) in a publicly or privately held corporation. Executive agrees to submit a list of such business interests in Exhibit A attached hereto and incorporated by reference herein. Notwithstanding the foregoing, this Section 5.2 shall not apply to the Executive if the Executive's employment was terminated pursuant to Section 4.3 or Section 6.1.2.1 of this agreement. 5.3 CONSENT TO INJUNCTION. Executive agrees that the Company will or would suffer an irreparable injury if Executive were to compete with the business of the Company or any of its subsidiaries in violation of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction and Executive stipulates to the entering of such injunctive relief prohibiting him from competing with the Company or any present affiliate of the Company in connection with the business of the Company, in violation of this Agreement. 5.4 SEVERABILITY. The parties intend that the covenants contained in Section 5.2 be deemed to be separate covenants as to each county and state, and that if in any judicial proceeding a court shall refuse to enforce all of the separate covenants included herein because, taken together, they cover too extensive a geographic area or because any one includes too large an area or because they cover too large a period of time, the parties intend that such covenants shall be reduced in scope to the extent required by law or, if necessary, eliminated from the provisions hereof, and that all of the remaining covenants hereof not so affected shall remain fully effective and enforceable. 5.5 ASSIGNMENT OF INVENTIONS. As used in this Agreement, "inventions" shall include, but not be limited to, ideas, improvements, designs, and discoveries. Executive hereby assigns and transfers to the Company entire right, title and interest in and to all inventions whether or not conceived by Executive (whether made solely by Executive or jointly with others) during the period of his employment with the Company which relate in any manner to the actual or demonstrably anticipated business, work, or research an development of the Company or its subsidiaries, or result from or are suggested by any tasks assigned to Executive or any work performed by Executive for or on behalf of the Company or its subsidiaries. Executive agrees that all such inventions are sole property of the Company, provided, however, that this Agreement does not require assignment of any invention if such assignment would contravene applicable state law. 5.6 DISCLOSURE OF INVENTIONS, PATENTS. Executive agrees that in connection with any invention as defined in Section 5.5, above: 5.6.1 Executive will disclose such invention promptly in writing to the Board of Directors of the Company, with a copy to the President, regardless of whether he believes the invention is protected by applicable state law, in order to permit the Company to claim rights to which it may be entitled under this Agreement. Such disclosure shall be received in confidence by the Company. 5.6.2 Executive will, at the Company's request, promptly execute a written assignment of title to the Company for any invention required to be assigned by Section 5.5 ("assignable invention") and Executive will preserve any such assignable invention as confidential information of the Company; and 5.6.3 Upon request, Executive agrees to assist the Company or its nominee (at its expense) during and at any time subsequent to his employment in every reasonable way to obtain for its own benefit patents and copyrights for such assignable inventions in any and all countries, which inventions shall be and remain the sole and exclusive property of the Company or its nominee, whether or not patented or copyrighted. Executive agrees to execute such papers and perform such lawful acts as the Company deems to be necessary to allow it to exercise all right, title, and interest in such patents and copyrights. 5.6.4 Executive agrees to submit a list of inventions made prior to his employment by the Company on Exhibit B attached hereto and incorporated by reference herein. 5.7 EXECUTION OF DOCUMENTATION. In connection with Section 5.5 and Section 5.6, Executive further agrees to execute, acknowledge and deliver to the Company or its nominee upon request and at its expense all such assignments of inventions, patents, and copyrights to be issued therefor, as the Company may determine necessary or desirable for which to apply. Executive agrees to obtain letters, patents, and copyrights on such assignable inventions in any and all countries and/or protect the interest of the Company or its nominee in such inventions, patents and copyrights and to vest title thereto in the Company or its nominee. 5.8 OTHER OBLIGATIONS. Executive acknowledges that the Company from time to time may have agreements with other persons or with the U.S. Government, or agencies thereof, which impose obligations or restrictions on the Company regarding inventions made during the course of work thereunder or regarding the confidential nature of such work. Executive agrees to be bound by all such obligations and restrictions and to take all action necessary to discharge the obligations of the Company thereunder. 5.9 TRADE SECRETS OF OTHERS. Executive represents that his performance of all the terms of this Agreement and as an employee of the Company such employment does not and will not breach any agreement to keep in confidence proprietary information, knowledge, or data acquired by Executive in confidence or in trust prior to his employment with the Company. Executive will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. Executive agrees not to enter into any agreement either written or oral in conflict herewith. 5.10 CONFLICT OF INTEREST. During Executive's employment with the Company, Executive will engage in no activity or employment which may conflict with the interest of the Company and will comply with the Company's policies and guidelines pertaining to business conduct and ethics. 5.11 PREVIOUS AGREEMENTS. Executive represents and warrants to the Company that as of the date of this Agreement, he has fully complied with the terms of the Confidentiality Agreement. Executive's obligations under this Agreement are in addition to, do not limit, and are not limited by, Executive's Confidentiality Agreement. To the extent any provision of the Confidentiality Agreement conflicts with the provisions of this Agreement, the provisions of this Agreement control. 5.12 SURVIVAL OF OBLIGATIONS. The provisions of this Article 5 shall survive termination of this Agreement. ARTICLE 6 CHANGE OF CONTROL 6.1 Definitions. For purposes of this Article 6, the following definitions shall be applied: 6.1.1 "Change of Control" shall mean any of the following events: 6.1.1.1 a merger or consolidation to which the Company is a party if the individuals and entities who were stockholders of the Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) of the total combined voting power for election of directors of the surviving corporation immediately following the effective date of such merger or consolidation; or 6.1.1.2 the direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), in the aggregate, of securities of the Company, representing twenty percent (20%) or more of the total combined voting power of the Company's then issued and outstanding securities, by any person or entity, or group of associated persons or entities acting in concert; or 6.1.1.3 the sale of all or substantially all of the assets of the Company to any person or entity which is not a subsidiary of the Company; or 6.1.1.4 the stockholders of the Company approve any plan or proposal for the liquidation of the Company; or 6.1.1.5 a change in the composition of the Board at any time during any consecutive 24-month period such that the Continuity Directors cease for any reason to constitute at least a seventy percent (70%) majority of the Board. For purposes of this clause, "Continuity Directors" means those members of the Board who either: 6.1.1.5.1 were directors at the beginning of such consecutive 24-month period; or 6.1.1.5.2 were elected by, or on the nomination or recommendation of, at least a two-thirds (2/3) majority of the then-existing Board. 6.1.2 "Change of Control Termination" shall mean, with respect to the Executive, any of the following events occurring within two (2) years after a Change of Control: 6.1.2.1 Termination of the Executive's employment by the Company for any reason other than for Cause, as Cause is defined in Section 4.2 of this Agreement. 6.1.2.2.Termination of employment with the Company by the Executive pursuant to Section 6.2 of this Article 6. A Change of Control Termination shall not, however, include termination by reason of death or Disability. 6.1.3 "Good Reason" shall mean a good faith determination by the Executive, in the Executive's reasonable judgment, that any one or more of the following events has occurred without the Executive's express written consent, after a Change of Control, and the Company's failure to correct such occurrence for a period of thirty (30) days following Executive's written notice to Company identifying the event alleged to provide Good Reason and stating Executive's intent to invoke Section 6.2 of this Article 6. 6.1.3.1 A change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change of Control, or any removal of the Executive from, or any failure to re-elect the Executive to, any of such positions, which has the effect of materially diminishing the Executive's responsibility or authority; 6.1.3.2 A reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change of Control; 6.1.3.3 A requirement by the Company that the Executive be based anywhere other than within twenty-five (25) miles of the Executive's job location at the time of the Change of Control; 6.1.3.4 A material diminishment of Executive's pension, bonus, incentive, stock ownership, purchase, option, life insurance, health, accident, disability, or any other employee compensation or benefit plan, program or arrangement and/or any membership (collectively, "Benefit Plans"), in which the Executive is participating immediately prior to a Change of Control; or the taking of any action by the Company that would materially adversely affect the Executive's participation or materially reduce the Executive's benefits under any Benefit Plans or Benefit Plan; 6.1.3.5 Any material breach of this Agreement by the Company. 6.1.4 "Internal Revenue Code" -- Any references to a section of the Internal Revenue Code shall mean that section of the Internal Revenue Code of 1986, or to the corresponding section of such Code, as from time to time amended. 6.2 CHANGE OF CONTROL TERMINATION RIGHT. For a period of two (2) years following a Change of Control, the Executive shall have the right, at any time, to terminate employment with the Company for Good Reason. Such termination shall be accomplished by, and effective upon, the Executive giving written notice to the Company of the Executive's decision to terminate. Except as otherwise expressly provided in this Agreement, upon the exercise of said right, all obligations and duties of the Executive under this Agreement shall be of no further force and effect. 6.2.1 Change of Control Termination Payment. In the event of a termination pursuant to Section 6.2, without further action by the Board, the Company shall, within thirty (30) days of such termination, make a lump sum payment to the Executive, equal to two (2) years' Base Salary. 6.2.2 In addition to the amounts paid pursuant to Section 6.2.1 the Company shall pay to the Executive an amount equal to (a) two (2) times what the Executive would have received in incentive plan bonus for the year in which termination occurs as if the "target" goals had been achieved for that fiscal year, or (b) the actual amount of the incentive bonus to which the Executive would have been entitled had he remained with the Company based on the Company's actual performance, for the fiscal year in which termination occurs, whichever is greater. The amount provided by this Section 6.2.2 shall be earned and payable on the date that is fifteen (15) days after the date Executive would have been paid an annual incentive bonus had he remained with the Company for the fiscal year in which termination occurs. 6.2.3 Notwithstanding anything in this Agreement to the contrary, in the event any of the payments to the Executive under this Agreement would constitute an excess parachute payment pursuant to Section 280 G of the Internal Revenue Code, the amount payable pursuant to Section 6.2.2 shall be reduced by the minimum amount necessary such that none of the compensation payable to Executive as a result of a Change in Control shall constitute an excess parachute payment. 6.3 INTEREST. In the event the Company does not make timely payment in full of the Change of Control Termination payment described in Section 6.2, the Executive shall be entitled to receive interest on any unpaid amount at the lower of: (a) prime rate of interest (or such comparable index as may be adopted) established from time to time by the Company's principal banking institution or (b) the maximum rate permitted under Section 280G(d)(4) of the Internal Revenue Code. 6.4 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment pursuant to Section 6.2 herein, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under COBRA and such payment shall continue for the period of time the Executive is entitled to continue such coverage under COBRA. 6.5 VESTING OF STOCK OPTIONS. All unvested stock options held by Executive, if any, shall vest immediately upon a Change in Control Termination as defined in paragraph 6.1.2.1. Executive may exercise such options in accordance with the terms and conditions of the stock option plan and the agreement pursuant to which such options were granted. ARTICLE 7 GENERAL PROVISIONS 7.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company and each subsidiary, whether by way of merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of the Company, and any such successor or assign shall absolutely and unconditionally assume all of the Company's obligations hereunder. 7.2 NOTICES. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be delivered or mailed to any such party at its address as set forth at the beginning of this Agreement. Either party may change its address, by notice to the other party given in the manner set forth in this Section. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the third business day thereafter or when it is actually received, whichever is sooner. 7.3 CAPTION. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 7.4 GOVERNING LAW. The validity, construction and performance of this Agreement shall be governed by the laws of the State of Oregon 7.5 MEDIATION. In case of any dispute arising under this Agreement which cannot be settled by reasonable discussion, the parties agree that, prior to commencing any arbitration proceeding as contemplated by Section 7.6 they will first engage the services of a professional mediator agreed upon by the parties and attempt in good faith to resolve the dispute through confidential non- binding mediation. Each party shall bear one-half (1/2) of the mediator's fees and expenses and shall pay all of its own attorneys' fees and expenses related to the mediation. 7.6 ARBITRATION. Any dispute concerning the interpretation, construction, breach or enforcement of this Agreement or arising in any way from Executive's employment with Company or termination of employment shall be submitted to final and binding arbitration. Such arbitration is to be before a single arbitrator in Portland, Oregon. In the event the parties are unable to agree upon an arbitrator, an arbitrator shall be appointed by the court pursuant to ORS 36.320. The arbitration shall be conducted pursuant to the rules of the American Arbitration Association ("AAA") Employment Dispute Resolution Rules. Executive and the Company agree that the procedures outlined in Section 7.5 and 7.6 are the exclusive method of dispute resolution. 7.7 ATTORNEY FEES. If any action at law, in equity or by arbitration is taken to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled, including fees and expenses on appeal. 7.8 CONSTRUCTION. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 7.9 WAIVERS. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law. 7.10 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon the Executive, his administrators, executors, legatees, and heirs. In that this Agreement is a personal services contract, it shall not be assigned by the Executive. 7.11 MODIFICATION. This Agreement may not be and shall not be modified or amended except by written instrument signed by the parties hereto. 7.12 ENTIRE AGREEMENT. This Agreement together with the Confidentiality Agreement constitutes the entire agreement and understanding between the parties hereto in reference to all the matters herein agreed upon. This Agreement replaces and supersedes all prior employment agreements or understandings of the parties hereto; provided, however, that the Confidentiality Agreement continues in full force and effect according to its terms. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. EXECUTIVE PROTOCOL SYSTEMS, INC. By - -------------------------- ------------------------------ Allen L. Oyler David Bolender, Chairman & CEO EX-10.3 4 Protocol Systems, Inc. EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ PARTIES: Protocol Systems, Inc. ("Company") 8500 SW Creekside Place Beaverton, OR 97008 CARL P. HOLLSTEIN ("Executive") 10880 SW Avocet Court Beaverton, OR 97007 DATE: July 1, 1998 RECITALS: A. The Company wishes to obtain the services of the Executive for at least the duration of this Agreement, and the Executive wishes to provide his services for such period, all upon the terms and conditions set out in this Agreement. B. It is expressly recognized by the parties that the Executive's continuance in the Executive's position with the Company and agreement to be bound by the terms of this Agreement represents a substantial commitment to the Company in terms of the Executive's personal and professional career and a foregoing of present and future career options by the Executive, for all of which the Company receives substantial value. C. The parties recognize that a Change of Control (as defined below) may result in material alteration or diminishment of the Executive's position and responsibilities and substantially frustrate the purpose of the Executive's commitment to the Company and forbearance of career options. D. The parties recognize that in light of the above-described commitment and forbearance of career options, it is essential that, for the benefit of the Company and its stockholders, provision be made for a Change of Control Termination (as defined below) in order to enable the Executive to accept and effectively continue in the Executive's position in the face of inherently disruptive circumstances arising from the possibility of a Change of Control, although no such change is now contemplated or foreseen. NOW, THEREFORE, for valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments. 1.2 "Board" shall mean the Board of Directors of Protocol Systems, Inc. 1.3 "Disability" shall mean the inability of the Executive to perform the essential functions of his position under this Agreement with or without reasonable accommodation because of physical or mental incapacity for a continuous period of five (5) months, as reasonably determined by the Company after consultation with a qualified physician selected by the Company. 1.4 "Company" shall mean Protocol Systems, Inc. and, any successor in interest by way of consolidation, operation of law, merger or otherwise. 1.5 "Confidentiality Agreement" shall mean that certain Non-competition and Confidentiality Agreement dated 17 May 1993 by and between the Company and Executive. ARTICLE 2 EMPLOYMENT, DUTIES AND TERM 2.1 EMPLOYMENT. Upon the terms and conditions set forth in this Agreement, the Company hereby employs the Executive in the position of Vice President, Manufacturing, and the Executive accepts such employment. 2.2 DUTIES. The Executive shall devote his full-time and best efforts to the Company and to fulfilling the duties of his position which shall include such duties as may from time to time be assigned him by the Chief Executive Officer, provided that such duties are reasonably consistent with the Executive's position. The Executive shall comply with the Company's policies and procedures to the extent they are not inconsistent with this Agreement, in which case the provisions of this Agreement prevail. 2.3 TERM. This Agreement shall remain in effect until the earlier of (i) termination pursuant to Article 4 or Article 6 of this Agreement or (ii) two (2) years from the date of this Agreement, provided however that if a Change in Control occurs within two (2) years from the date of this Agreement, then this Agreement shall remain in effect for two (2) years from the date of the first Change in Control event described in Section 6.1.1. ARTICLE 3 COMPENSATION AND EXPENSES 3.1 BASE SALARY. For all services rendered under this Agreement, the Company shall pay Executive a Base Salary that is not less than Executive's Base Salary as of the date of this Agreement. If the Executive's salary is increased from time to time during the term of this Agreement, the increased amount shall be the Base Salary for the remainder of the term and any extensions. All amounts payable to the Executive under this Agreement shall be reduced by such amounts as are required to be withheld by law. 3.2 BONUS AND INCENTIVE. Bonus or incentive compensation shall be in the sole discretion of the Board. Except as otherwise provided in Article 6, the Company shall have the right in accordance with the terms of any bonus or incentive plan to alter, amend or eliminate all or any part of such plan, or the Executive's participation therein, without compensation to the Executive. 3.3 BUSINESS EXPENSES. The Company shall, in accordance with, and to the extent of, its policies in effect from time to time, reimburse all ordinary and necessary business expenses reasonably incurred by the Executive in performing his duties as an employee of the Company, provided that the Executive accounts promptly for such expenses to the Company in the manner prescribed from time to time by the Company. ARTICLE 4 EARLY TERMINATION 4.1 EARLY TERMINATION. This Article 4 governs termination of this Agreement at any time during the term of the Agreement; provided, however, that this Article shall not govern a "Change of Control Termination" as defined in Article 6. A Change in Control Termination is governed solely by the provisions of Article 6. 4.2 TERMINATION FOR CAUSE. The Company may terminate this Agreement and Executive's employment immediately for "Cause" as that term is defined herein, upon written notice to the Executive. 4.2.1 "Cause" means any one of the following: (a) fraud, (b) misrepresentation, (c) theft or embezzlement of the Company assets, (d) intentional violations of law involving moral turpitude, (e) the continued failure by the Executive to satisfactorily perform his duties as reasonably assigned to the Executive pursuant to Section 2.2 of this Agreement for a period of sixty (60) days after a written demand for such satisfactory performance which specifically and with reasonable detail identifies the manner in which it is alleged the Executive has not satisfactorily performed such duties, and (f) any material breach of the Confidentiality Agreement. 4.2.2 In the event of termination for Cause pursuant to this Section 4.2, the Executive shall be paid his Base Salary through the date of termination specified in any notice of termination. The Executive will not be entitled to any bonuses or incentives which are not earned and payable at the time of the termination. 4.3 TERMINATION WITHOUT CAUSE. Either the Executive or the Company may terminate this Agreement and the Executive's employment without Cause by providing at least seventy-five (75) days' written notice; provided, however, that the Company shall have the option of making termination of the Agreement and termination of the Executive's employment effective immediately upon notice, in which case Executive shall be paid his Base Salary through a notice period of seventy-five (75) days. This Section 4.3 shall not be applicable where Cause for termination exists. 4.3.1 If the notice of termination is given by the Company, in addition to any other amounts payable to Executive, under this Section 4.3, the Company shall pay Executive within fifteen (15) days following termination, a lump sum amount equal to one (1) year's Base Salary. 4.3.2 In the event that termination occurs pursuant to Section 4.3.1 then, in addition to the payments specified in said Section, the Company shall pay to the Executive bonuses, if any, as follows: 4.3.2.1 Company shall pay Executive an amount equal to the annual bonus or annual incentive, if any, to which the Executive would otherwise have become entitled under any Company bonus or incentive plan in effect at the time of termination of this Agreement had the Executive remained continuously employed for the full fiscal year in which termination occurred and continued to perform his duties in the same manner as they were performed immediately prior to termination; provided, however, that such bonus or incentive amount shall be pro-rated to the date of termination. The amount payable pursuant to this Section 4.3.2.1 shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year. 4.3.2.2 In the event Executive would have been entitled to a quarterly bonus or quarterly incentive payment had he remained employed for the entire quarter in which Executive was terminated, the Company shall pay Executive such quarterly bonus or incentive amount pro-rated to the date of termination, payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full quarter. 4.4 Termination in the Event of Death or Disability. This Agreement and Executive's employment shall terminate in the event of death or Disability of the Executive. 4.4.1 In the event of the Executive's death, the Company shall pay an amount equal to six (6) month's Base Salary to the executor, administrator or other personal representative of the Executive's estate. The amount shall be paid as a lump sum as soon as practicable following Company's receipt of notice of the Executive's death. All such payments shall be in addition to any payments due pursuant to Section 4.4.3 below. 4.4.2 In the event of termination due to Executive's Disability, Base Salary shall be terminated as of the final day of the fifth month referenced in the definition of "Disability." Unless otherwise disqualified by the disability benefit program provider, this Section is not intended to limit the Executive from qualifying for and claiming disability benefits from any other disability program in which the Executive may be enrolled or otherwise for which he is qualified at the time of disability. 4.4.3 In the event of termination by reason of the Executive's death or Disability, the Company shall pay to the Executive an amount equal to the amount the Executive would have received in incentive plan bonus for the year in which termination occurred had "target" goals been achieved, provided, however, that such amount shall be pro-rated to the date of termination. This amount shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year in which termination occurred. 4.5 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment by the Company pursuant to Section 4.3.1 or termination due to Disability, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") and shall continue such payment for the period of time the Executive is entitled to continue such coverage under COBRA. 4.6 ENTIRE TERMINATION PAYMENT. The compensation provided for in this Article 4 shall constitute the Executive's sole remedy for termination pursuant to this Article. The Executive shall not be entitled to any other termination or severance payment which may be payable to the Executive under any other agreement between the Executive and the Company preceding or following the date of termination. ARTICLE 5 CONFIDENTIALITY; CONFLICT OF INTEREST 5.1 PROPRIETARY INFORMATION. Executive shall keep confidential, except as the Company may otherwise consent in writing, and not disclose or make any use of except for the benefit of the Company, at any time either during or subsequent to his employment by the Company, any Proprietary Information which he may produce, obtain or otherwise acquire during the course of his employment. As used herein, "Proprietary Information" shall include any trade secrets, confidential information, knowledge, data, or other information of the Company relating to products, processes, know-how, designs, formulae, test procedures and results, customer lists, business plans, marketing plans and strategies, and pricing strategies, or other subject matter pertaining to any business of the Company for any of its clients, customers, consultants, licensees of affiliates, which information is not in the public domain at the time of the alleged breach. In the event of the termination of the Executive's employment for any reason whatsoever, Executive shall promptly return all records, materials, equipment, drawings and the like pertaining to any Proprietary Information. 5.2 COVENANT NOT TO COMPETE. Executive acknowledges that he will provide special skills, and acquire special information, regarding the activities of the Company. Executive agrees, therefore, that he will not, for a period of twelve (12) months from and after the date he ceases to be employed by the Company, join, control or participate in the ownership, management, operation or control of or be connected with, any business located in the United States of America whose commercial products are in direct competition with the Company or which is developing products which will be in direct competition with the Company, in such a manner and position that he would likely use Proprietary Information, unless released from such obligation by the Board of Directors of the Company. Executive agrees that he shall be deemed to be connected with a business if such a business is carried on by a partnership in which he is a general or limited partner or employee of a corporation or association of which he is a shareholder, officer, director, employee, member, consultant or agent; provided, that nothing herein shall prohibit the purchase or ownership by him of shares of less than five percent (5%) in a publicly or privately held corporation. Executive agrees to submit a list of such business interests in Exhibit A attached hereto and incorporated by reference herein. Notwithstanding the foregoing, this Section 5.2 shall not apply to the Executive if the Executive's employment was terminated pursuant to Section 4.3 or Section 6.1.2.1 of this agreement. 5.3 CONSENT TO INJUNCTION. Executive agrees that the Company will or would suffer an irreparable injury if Executive were to compete with the business of the Company or any of its subsidiaries in violation of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction and Executive stipulates to the entering of such injunctive relief prohibiting him from competing with the Company or any present affiliate of the Company in connection with the business of the Company, in violation of this Agreement. 5.4 SEVERABILITY. The parties intend that the covenants contained in Section 5.2 be deemed to be separate covenants as to each county and state, and that if in any judicial proceeding a court shall refuse to enforce all of the separate covenants included herein because, taken together, they cover too extensive a geographic area or because any one includes too large an area or because they cover too large a period of time, the parties intend that such covenants shall be reduced in scope to the extent required by law or, if necessary, eliminated from the provisions hereof, and that all of the remaining covenants hereof not so affected shall remain fully effective and enforceable. 5.5 ASSIGNMENT OF INVENTIONS. As used in this Agreement, "inventions" shall include, but not be limited to, ideas, improvements, designs, and discoveries. Executive hereby assigns and transfers to the Company entire right, title and interest in and to all inventions whether or not conceived by Executive (whether made solely by Executive or jointly with others) during the period of his employment with the Company which relate in any manner to the actual or demonstrably anticipated business, work, or research an development of the Company or its subsidiaries, or result from or are suggested by any tasks assigned to Executive or any work performed by Executive for or on behalf of the Company or its subsidiaries. Executive agrees that all such inventions are sole property of the Company, provided, however, that this Agreement does not require assignment of any invention if such assignment would contravene applicable state law. 5.6 DISCLOSURE OF INVENTIONS, PATENTS. Executive agrees that in connection with any invention as defined in Section 5.5, above: 5.6.1 Executive will disclose such invention promptly in writing to the Board of Directors of the Company, with a copy to the President, regardless of whether he believes the invention is protected by applicable state law, in order to permit the Company to claim rights to which it may be entitled under this Agreement. Such disclosure shall be received in confidence by the Company. 5.6.2 Executive will, at the Company's request, promptly execute a written assignment of title to the Company for any invention required to be assigned by Section 5.5 ("assignable invention") and Executive will preserve any such assignable invention as confidential information of the Company; and 5.6.3 Upon request, Executive agrees to assist the Company or its nominee (at its expense) during and at any time subsequent to his employment in every reasonable way to obtain for its own benefit patents and copyrights for such assignable inventions in any and all countries, which inventions shall be and remain the sole and exclusive property of the Company or its nominee, whether or not patented or copyrighted. Executive agrees to execute such papers and perform such lawful acts as the Company deems to be necessary to allow it to exercise all right, title, and interest in such patents and copyrights. 5.6.4 Executive agrees to submit a list of inventions made prior to his employment by the Company on Exhibit B attached hereto and incorporated by reference herein. 5.7 EXECUTION OF DOCUMENTATION. In connection with Section 5.5 and Section 5.6, Executive further agrees to execute, acknowledge and deliver to the Company or its nominee upon request and at its expense all such assignments of inventions, patents, and copyrights to be issued therefor, as the Company may determine necessary or desirable for which to apply. Executive agrees to obtain letters, patents, and copyrights on such assignable inventions in any and all countries and/or protect the interest of the Company or its nominee in such inventions, patents and copyrights and to vest title thereto in the Company or its nominee. 5.8 OTHER OBLIGATIONS. Executive acknowledges that the Company from time to time may have agreements with other persons or with the U.S. Government, or agencies thereof, which impose obligations or restrictions on the Company regarding inventions made during the course of work thereunder or regarding the confidential nature of such work. Executive agrees to be bound by all such obligations and restrictions and to take all action necessary to discharge the obligations of the Company thereunder. 5.9 TRADE SECRETS OF OTHERS. Executive represents that his performance of all the terms of this Agreement and as an employee of the Company such employment does not and will not breach any agreement to keep in confidence proprietary information, knowledge, or data acquired by Executive in confidence or in trust prior to his employment with the Company. Executive will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. Executive agrees not to enter into any agreement either written or oral in conflict herewith. 5.10 CONFLICT OF INTEREST. During Executive's employment with the Company, Executive will engage in no activity or employment which may conflict with the interest of the Company and will comply with the Company's policies and guidelines pertaining to business conduct and ethics. 5.11 PREVIOUS AGREEMENTS. Executive represents and warrants to the Company that as of the date of this Agreement, he has fully complied with the terms of the Confidentiality Agreement. Executive's obligations under this Agreement are in addition to, do not limit, and are not limited by, Executive's Confidentiality Agreement. To the extent any provision of the Confidentiality Agreement conflicts with the provisions of this Agreement, the provisions of this Agreement control. 5.12 SURVIVAL OF OBLIGATIONS. The provisions of this Article 5 shall survive termination of this Agreement. ARTICLE 6 CHANGE OF CONTROL 6.1 Definitions. For purposes of this Article 6, the following definitions shall be applied: 6.1.1 "Change of Control" shall mean any of the following events: 6.1.1.1 a merger or consolidation to which the Company is a party if the individuals and entities who were stockholders of the Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) of the total combined voting power for election of directors of the surviving corporation immediately following the effective date of such merger or consolidation; or 6.1.1.2 the direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), in the aggregate, of securities of the Company, representing twenty percent (20%) or more of the total combined voting power of the Company's then issued and outstanding securities, by any person or entity, or group of associated persons or entities acting in concert; or 6.1.1.3 the sale of all or substantially all of the assets of the Company to any person or entity which is not a subsidiary of the Company; or 6.1.1.4 the stockholders of the Company approve any plan or proposal for the liquidation of the Company; or 6.1.1.5 a change in the composition of the Board at any time during any consecutive 24-month period such that the Continuity Directors cease for any reason to constitute at least a seventy percent (70%) majority of the Board. For purposes of this clause, "Continuity Directors" means those members of the Board who either: 6.1.1.5.1 were directors at the beginning of such consecutive 24-month period; or 6.1.1.5.2 were elected by, or on the nomination or recommendation of, at least a two-thirds (2/3) majority of the then-existing Board. 6.1.2 "Change of Control Termination" shall mean, with respect to the Executive, any of the following events occurring within two (2) years after a Change of Control: 6.1.2.1 Termination of the Executive's employment by the Company for any reason other than for Cause, as Cause is defined in Section 4.2 of this Agreement. 6.1.2.2.Termination of employment with the Company by the Executive pursuant to Section 6.2 of this Article 6. A Change of Control Termination shall not, however, include termination by reason of death or Disability. 6.1.3 "Good Reason" shall mean a good faith determination by the Executive, in the Executive's reasonable judgment, that any one or more of the following events has occurred without the Executive's express written consent, after a Change of Control, and the Company's failure to correct such occurrence for a period of thirty (30) days following Executive's written notice to Company identifying the event alleged to provide Good Reason and stating Executive's intent to invoke Section 6.2 of this Article 6. 6.1.3.1 A change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change of Control, or any removal of the Executive from, or any failure to re-elect the Executive to, any of such positions, which has the effect of materially diminishing the Executive's responsibility or authority; 6.1.3.2 A reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change of Control; 6.1.3.3 A requirement by the Company that the Executive be based anywhere other than within twenty-five (25) miles of the Executive's job location at the time of the Change of Control; 6.1.3.4 A material diminishment of Executive's pension, bonus, incentive, stock ownership, purchase, option, life insurance, health, accident, disability, or any other employee compensation or benefit plan, program or arrangement and/or any membership (collectively, "Benefit Plans"), in which the Executive is participating immediately prior to a Change of Control; or the taking of any action by the Company that would materially adversely affect the Executive's participation or materially reduce the Executive's benefits under any Benefit Plans or Benefit Plan; 6.1.3.5 Any material breach of this Agreement by the Company. 6.1.4 "Internal Revenue Code" -- Any references to a section of the Internal Revenue Code shall mean that section of the Internal Revenue Code of 1986, or to the corresponding section of such Code, as from time to time amended. 6.2 CHANGE OF CONTROL TERMINATION RIGHT. For a period of two (2) years following a Change of Control, the Executive shall have the right, at any time, to terminate employment with the Company for Good Reason. Such termination shall be accomplished by, and effective upon, the Executive giving written notice to the Company of the Executive's decision to terminate. Except as otherwise expressly provided in this Agreement, upon the exercise of said right, all obligations and duties of the Executive under this Agreement shall be of no further force and effect. 6.2.1 Change of Control Termination Payment. In the event of a termination pursuant to Section 6.2, without further action by the Board, the Company shall, within thirty (30) days of such termination, make a lump sum payment to the Executive, equal to two (2) years' Base Salary. 6.2.2 In addition to the amounts paid pursuant to Section 6.2.1 the Company shall pay to the Executive an amount equal to (a) two (2) times what the Executive would have received in incentive plan bonus for the year in which termination occurs as if the "target" goals had been achieved for that fiscal year, or (b) the actual amount of the incentive bonus to which the Executive would have been entitled had he remained with the Company based on the Company's actual performance, for the fiscal year in which termination occurs, whichever is greater. The amount provided by this Section 6.2.2 shall be earned and payable on the date that is fifteen (15) days after the date Executive would have been paid an annual incentive bonus had he remained with the Company for the fiscal year in which termination occurs. 6.2.3 Notwithstanding anything in this Agreement to the contrary, in the event any of the payments to the Executive under this Agreement would constitute an excess parachute payment pursuant to Section 280 G of the Internal Revenue Code, the amount payable pursuant to Section 6.2.2 shall be reduced by the minimum amount necessary such that none of the compensation payable to Executive as a result of a Change in Control shall constitute an excess parachute payment. 6.3 INTEREST. In the event the Company does not make timely payment in full of the Change of Control Termination payment described in Section 6.2, the Executive shall be entitled to receive interest on any unpaid amount at the lower of: (a) prime rate of interest (or such comparable index as may be adopted) established from time to time by the Company's principal banking institution or (b) the maximum rate permitted under Section 280G(d)(4) of the Internal Revenue Code. 6.4 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment pursuant to Section 6.2 herein, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under COBRA and such payment shall continue for the period of time the Executive is entitled to continue such coverage under COBRA. 6.5 VESTING OF STOCK OPTIONS. All unvested stock options held by Executive, if any, shall vest immediately upon a Change in Control Termination as defined in paragraph 6.1.2.1. Executive may exercise such options in accordance with the terms and conditions of the stock option plan and the agreement pursuant to which such options were granted. ARTICLE 7 GENERAL PROVISIONS 7.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company and each subsidiary, whether by way of merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of the Company, and any such successor or assign shall absolutely and unconditionally assume all of the Company's obligations hereunder. 7.2 NOTICES. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be delivered or mailed to any such party at its address as set forth at the beginning of this Agreement. Either party may change its address, by notice to the other party given in the manner set forth in this Section. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the third business day thereafter or when it is actually received, whichever is sooner. 7.3 CAPTION. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 7.4 GOVERNING LAW. The validity, construction and performance of this Agreement shall be governed by the laws of the State of Oregon 7.5 MEDIATION. In case of any dispute arising under this Agreement which cannot be settled by reasonable discussion, the parties agree that, prior to commencing any arbitration proceeding as contemplated by Section 7.6 they will first engage the services of a professional mediator agreed upon by the parties and attempt in good faith to resolve the dispute through confidential non- binding mediation. Each party shall bear one-half (1/2) of the mediator's fees and expenses and shall pay all of its own attorneys' fees and expenses related to the mediation. 7.6 ARBITRATION. Any dispute concerning the interpretation, construction, breach or enforcement of this Agreement or arising in any way from Executive's employment with Company or termination of employment shall be submitted to final and binding arbitration. Such arbitration is to be before a single arbitrator in Portland, Oregon. In the event the parties are unable to agree upon an arbitrator, an arbitrator shall be appointed by the court pursuant to ORS 36.320. The arbitration shall be conducted pursuant to the rules of the American Arbitration Association ("AAA") Employment Dispute Resolution Rules. Executive and the Company agree that the procedures outlined in Section 7.5 and 7.6 are the exclusive method of dispute resolution. 7.7 ATTORNEY FEES. If any action at law, in equity or by arbitration is taken to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled, including fees and expenses on appeal. 7.8 CONSTRUCTION. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 7.9 WAIVERS. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law. 7.10 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon the Executive, his administrators, executors, legatees, and heirs. In that this Agreement is a personal services contract, it shall not be assigned by the Executive. 7.11 MODIFICATION. This Agreement may not be and shall not be modified or amended except by written instrument signed by the parties hereto. 7.12 ENTIRE AGREEMENT. This Agreement together with the Confidentiality Agreement constitutes the entire agreement and understanding between the parties hereto in reference to all the matters herein agreed upon. This Agreement replaces and supersedes all prior employment agreements or understandings of the parties hereto; provided, however, that the Confidentiality Agreement continues in full force and effect according to its terms. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. EXECUTIVE PROTOCOL SYSTEMS, INC. By - -------------------------- ------------------------------ Carl P. Hollstein David Bolender, Chairman & CEO EX-10.4 5 Protocol Systems, Inc. EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ PARTIES: Protocol Systems, Inc. ("Company") 8500 SW Creekside Place Beaverton, OR 97008 CRAIG M. SWANSON ("Executive") 17580 Tree Top Way Lake Oswego, Oregon 97034 DATE: July 1, 1998 RECITALS: A. The Company wishes to obtain the services of the Executive for at least the duration of this Agreement, and the Executive wishes to provide his services for such period, all upon the terms and conditions set out in this Agreement. B. It is expressly recognized by the parties that the Executive's continuance in the Executive's position with the Company and agreement to be bound by the terms of this Agreement represents a substantial commitment to the Company in terms of the Executive's personal and professional career and a foregoing of present and future career options by the Executive, for all of which the Company receives substantial value. C. The parties recognize that a Change of Control (as defined below) may result in material alteration or diminishment of the Executive's position and responsibilities and substantially frustrate the purpose of the Executive's commitment to the Company and forbearance of career options. D. The parties recognize that in light of the above-described commitment and forbearance of career options, it is essential that, for the benefit of the Company and its stockholders, provision be made for a Change of Control Termination (as defined below) in order to enable the Executive to accept and effectively continue in the Executive's position in the face of inherently disruptive circumstances arising from the possibility of a Change of Control, although no such change is now contemplated or foreseen. NOW, THEREFORE, for valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments. 1.2 "Board" shall mean the Board of Directors of Protocol Systems, Inc. 1.3 "Disability" shall mean the inability of the Executive to perform the essential functions of his position under this Agreement with or without reasonable accommodation because of physical or mental incapacity for a continuous period of five (5) months, as reasonably determined by the Company after consultation with a qualified physician selected by the Company. 1.4 "Company" shall mean Protocol Systems, Inc. and, any successor in interest by way of consolidation, operation of law, merger or otherwise. 1.5 "Confidentiality Agreement" shall mean that certain Non-competition and Confidentiality Agreement dated 3 October 1988 by and between the Company and Executive. ARTICLE 2 EMPLOYMENT, DUTIES AND TERM 2.1 EMPLOYMENT. Upon the terms and conditions set forth in this Agreement, the Company hereby employs the Executive in the position of Vice President, Finance & Chief Financial Officer, and the Executive accepts such employment. 2.2 DUTIES. The Executive shall devote his full-time and best efforts to the Company and to fulfilling the duties of his position which shall include such duties as may from time to time be assigned him by the Chief Executive Officer, provided that such duties are reasonably consistent with the Executive's position. The Executive shall comply with the Company's policies and procedures to the extent they are not inconsistent with this Agreement, in which case the provisions of this Agreement prevail. 2.3 TERM. This Agreement shall remain in effect until the earlier of (i) termination pursuant to Article 4 or Article 6 of this Agreement or (ii) two (2) years from the date of this Agreement, provided however that if a Change in Control occurs within two (2) years from the date of this Agreement, then this Agreement shall remain in effect for two (2) years from the date of the first Change in Control event described in Section 6.1.1. ARTICLE 3 COMPENSATION AND EXPENSES 3.1 BASE SALARY. For all services rendered under this Agreement, the Company shall pay Executive a Base Salary that is not less than Executive's Base Salary as of the date of this Agreement. If the Executive's salary is increased from time to time during the term of this Agreement, the increased amount shall be the Base Salary for the remainder of the term and any extensions. All amounts payable to the Executive under this Agreement shall be reduced by such amounts as are required to be withheld by law. 3.2 BONUS AND INCENTIVE. Bonus or incentive compensation shall be in the sole discretion of the Board. Except as otherwise provided in Article 6, the Company shall have the right in accordance with the terms of any bonus or incentive plan to alter, amend or eliminate all or any part of such plan, or the Executive's participation therein, without compensation to the Executive. 3.3 BUSINESS EXPENSES. The Company shall, in accordance with, and to the extent of, its policies in effect from time to time, reimburse all ordinary and necessary business expenses reasonably incurred by the Executive in performing his duties as an employee of the Company, provided that the Executive accounts promptly for such expenses to the Company in the manner prescribed from time to time by the Company. ARTICLE 4 EARLY TERMINATION 4.1 EARLY TERMINATION. This Article 4 governs termination of this Agreement at any time during the term of the Agreement; provided, however, that this Article shall not govern a "Change of Control Termination" as defined in Article 6. A Change in Control Termination is governed solely by the provisions of Article 6. 4.2 TERMINATION FOR CAUSE. The Company may terminate this Agreement and Executive's employment immediately for "Cause" as that term is defined herein, upon written notice to the Executive. 4.2.1 "Cause" means any one of the following: (a) fraud, (b) misrepresentation, (c) theft or embezzlement of the Company assets, (d) intentional violations of law involving moral turpitude, (e) the continued failure by the Executive to satisfactorily perform his duties as reasonably assigned to the Executive pursuant to Section 2.2 of this Agreement for a period of sixty (60) days after a written demand for such satisfactory performance which specifically and with reasonable detail identifies the manner in which it is alleged the Executive has not satisfactorily performed such duties, and (f) any material breach of the Confidentiality Agreement. 4.2.2 In the event of termination for Cause pursuant to this Section 4.2, the Executive shall be paid his Base Salary through the date of termination specified in any notice of termination. The Executive will not be entitled to any bonuses or incentives which are not earned and payable at the time of the termination. 4.3 TERMINATION WITHOUT CAUSE. Either the Executive or the Company may terminate this Agreement and the Executive's employment without Cause by providing at least seventy-five (75) days' written notice; provided, however, that the Company shall have the option of making termination of the Agreement and termination of the Executive's employment effective immediately upon notice, in which case Executive shall be paid his Base Salary through a notice period of seventy-five (75) days. This Section 4.3 shall not be applicable where Cause for termination exists. 4.3.1 If the notice of termination is given by the Company, in addition to any other amounts payable to Executive, under this Section 4.3, the Company shall pay Executive within fifteen (15) days following termination, a lump sum amount equal to one (1) year's Base Salary. 4.3.2 In the event that termination occurs pursuant to Section 4.3.1 then, in addition to the payments specified in said Section, the Company shall pay to the Executive bonuses, if any, as follows: 4.3.2.1 Company shall pay Executive an amount equal to the annual bonus or annual incentive, if any, to which the Executive would otherwise have become entitled under any Company bonus or incentive plan in effect at the time of termination of this Agreement had the Executive remained continuously employed for the full fiscal year in which termination occurred and continued to perform his duties in the same manner as they were performed immediately prior to termination; provided, however, that such bonus or incentive amount shall be pro-rated to the date of termination. The amount payable pursuant to this Section 4.3.2.1 shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year. 4.3.2.2 In the event Executive would have been entitled to a quarterly bonus or quarterly incentive payment had he remained employed for the entire quarter in which Executive was terminated, the Company shall pay Executive such quarterly bonus or incentive amount pro-rated to the date of termination, payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full quarter. 4.4 Termination in the Event of Death or Disability. This Agreement and Executive's employment shall terminate in the event of death or Disability of the Executive. 4.4.1 In the event of the Executive's death, the Company shall pay an amount equal to six (6) month's Base Salary to the executor, administrator or other personal representative of the Executive's estate. The amount shall be paid as a lump sum as soon as practicable following Company's receipt of notice of the Executive's death. All such payments shall be in addition to any payments due pursuant to Section 4.4.3 below. 4.4.2 In the event of termination due to Executive's Disability, Base Salary shall be terminated as of the final day of the fifth month referenced in the definition of "Disability." Unless otherwise disqualified by the disability benefit program provider, this Section is not intended to limit the Executive from qualifying for and claiming disability benefits from any other disability program in which the Executive may be enrolled or otherwise for which he is qualified at the time of disability. 4.4.3 In the event of termination by reason of the Executive's death or Disability, the Company shall pay to the Executive an amount equal to the amount the Executive would have received in incentive plan bonus for the year in which termination occurred had "target" goals been achieved, provided, however, that such amount shall be pro-rated to the date of termination. This amount shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year in which termination occurred. 4.5 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment by the Company pursuant to Section 4.3.1 or termination due to Disability, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") and shall continue such payment for the period of time the Executive is entitled to continue such coverage under COBRA. 4.6 ENTIRE TERMINATION PAYMENT. The compensation provided for in this Article 4 shall constitute the Executive's sole remedy for termination pursuant to this Article. The Executive shall not be entitled to any other termination or severance payment which may be payable to the Executive under any other agreement between the Executive and the Company preceding or following the date of termination. ARTICLE 5 CONFIDENTIALITY; CONFLICT OF INTEREST 5.1 PROPRIETARY INFORMATION. Executive shall keep confidential, except as the Company may otherwise consent in writing, and not disclose or make any use of except for the benefit of the Company, at any time either during or subsequent to his employment by the Company, any Proprietary Information which he may produce, obtain or otherwise acquire during the course of his employment. As used herein, "Proprietary Information" shall include any trade secrets, confidential information, knowledge, data, or other information of the Company relating to products, processes, know-how, designs, formulae, test procedures and results, customer lists, business plans, marketing plans and strategies, and pricing strategies, or other subject matter pertaining to any business of the Company for any of its clients, customers, consultants, licensees of affiliates, which information is not in the public domain at the time of the alleged breach. In the event of the termination of the Executive's employment for any reason whatsoever, Executive shall promptly return all records, materials, equipment, drawings and the like pertaining to any Proprietary Information. 5.2 COVENANT NOT TO COMPETE. Executive acknowledges that he will provide special skills, and acquire special information, regarding the activities of the Company. Executive agrees, therefore, that he will not, for a period of twelve (12) months from and after the date he ceases to be employed by the Company, join, control or participate in the ownership, management, operation or control of or be connected with, any business located in the United States of America whose commercial products are in direct competition with the Company or which is developing products which will be in direct competition with the Company, in such a manner and position that he would likely use Proprietary Information, unless released from such obligation by the Board of Directors of the Company. Executive agrees that he shall be deemed to be connected with a business if such a business is carried on by a partnership in which he is a general or limited partner or employee of a corporation or association of which he is a shareholder, officer, director, employee, member, consultant or agent; provided, that nothing herein shall prohibit the purchase or ownership by him of shares of less than five percent (5%) in a publicly or privately held corporation. Executive agrees to submit a list of such business interests in Exhibit A attached hereto and incorporated by reference herein. Notwithstanding the foregoing, this Section 5.2 shall not apply to the Executive if the Executive's employment was terminated pursuant to Section 4.3 or Section 6.1.2.1 of this agreement. 5.3 CONSENT TO INJUNCTION. Executive agrees that the Company will or would suffer an irreparable injury if Executive were to compete with the business of the Company or any of its subsidiaries in violation of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction and Executive stipulates to the entering of such injunctive relief prohibiting him from competing with the Company or any present affiliate of the Company in connection with the business of the Company, in violation of this Agreement. 5.4 SEVERABILITY. The parties intend that the covenants contained in Section 5.2 be deemed to be separate covenants as to each county and state, and that if in any judicial proceeding a court shall refuse to enforce all of the separate covenants included herein because, taken together, they cover too extensive a geographic area or because any one includes too large an area or because they cover too large a period of time, the parties intend that such covenants shall be reduced in scope to the extent required by law or, if necessary, eliminated from the provisions hereof, and that all of the remaining covenants hereof not so affected shall remain fully effective and enforceable. 5.5 ASSIGNMENT OF INVENTIONS. As used in this Agreement, "inventions" shall include, but not be limited to, ideas, improvements, designs, and discoveries. Executive hereby assigns and transfers to the Company entire right, title and interest in and to all inventions whether or not conceived by Executive (whether made solely by Executive or jointly with others) during the period of his employment with the Company which relate in any manner to the actual or demonstrably anticipated business, work, or research an development of the Company or its subsidiaries, or result from or are suggested by any tasks assigned to Executive or any work performed by Executive for or on behalf of the Company or its subsidiaries. Executive agrees that all such inventions are sole property of the Company, provided, however, that this Agreement does not require assignment of any invention if such assignment would contravene applicable state law. 5.6 DISCLOSURE OF INVENTIONS, PATENTS. Executive agrees that in connection with any invention as defined in Section 5.5, above: 5.6.1 Executive will disclose such invention promptly in writing to the Board of Directors of the Company, with a copy to the President, regardless of whether he believes the invention is protected by applicable state law, in order to permit the Company to claim rights to which it may be entitled under this Agreement. Such disclosure shall be received in confidence by the Company. 5.6.2 Executive will, at the Company's request, promptly execute a written assignment of title to the Company for any invention required to be assigned by Section 5.5 ("assignable invention") and Executive will preserve any such assignable invention as confidential information of the Company; and 5.6.3 Upon request, Executive agrees to assist the Company or its nominee (at its expense) during and at any time subsequent to his employment in every reasonable way to obtain for its own benefit patents and copyrights for such assignable inventions in any and all countries, which inventions shall be and remain the sole and exclusive property of the Company or its nominee, whether or not patented or copyrighted. Executive agrees to execute such papers and perform such lawful acts as the Company deems to be necessary to allow it to exercise all right, title, and interest in such patents and copyrights. 5.6.4 Executive agrees to submit a list of inventions made prior to his employment by the Company on Exhibit B attached hereto and incorporated by reference herein. 5.7 EXECUTION OF DOCUMENTATION. In connection with Section 5.5 and Section 5.6, Executive further agrees to execute, acknowledge and deliver to the Company or its nominee upon request and at its expense all such assignments of inventions, patents, and copyrights to be issued therefor, as the Company may determine necessary or desirable for which to apply. Executive agrees to obtain letters, patents, and copyrights on such assignable inventions in any and all countries and/or protect the interest of the Company or its nominee in such inventions, patents and copyrights and to vest title thereto in the Company or its nominee. 5.8 OTHER OBLIGATIONS. Executive acknowledges that the Company from time to time may have agreements with other persons or with the U.S. Government, or agencies thereof, which impose obligations or restrictions on the Company regarding inventions made during the course of work thereunder or regarding the confidential nature of such work. Executive agrees to be bound by all such obligations and restrictions and to take all action necessary to discharge the obligations of the Company thereunder. 5.9 TRADE SECRETS OF OTHERS. Executive represents that his performance of all the terms of this Agreement and as an employee of the Company such employment does not and will not breach any agreement to keep in confidence proprietary information, knowledge, or data acquired by Executive in confidence or in trust prior to his employment with the Company. Executive will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. Executive agrees not to enter into any agreement either written or oral in conflict herewith. 5.10 CONFLICT OF INTEREST. During Executive's employment with the Company, Executive will engage in no activity or employment which may conflict with the interest of the Company and will comply with the Company's policies and guidelines pertaining to business conduct and ethics. 5.11 PREVIOUS AGREEMENTS. Executive represents and warrants to the Company that as of the date of this Agreement, he has fully complied with the terms of the Confidentiality Agreement. Executive's obligations under this Agreement are in addition to, do not limit, and are not limited by, Executive's Confidentiality Agreement. To the extent any provision of the Confidentiality Agreement conflicts with the provisions of this Agreement, the provisions of this Agreement control. 5.12 SURVIVAL OF OBLIGATIONS. The provisions of this Article 5 shall survive termination of this Agreement. ARTICLE 6 CHANGE OF CONTROL 6.1 Definitions. For purposes of this Article 6, the following definitions shall be applied: 6.1.1 "Change of Control" shall mean any of the following events: 6.1.1.1 a merger or consolidation to which the Company is a party if the individuals and entities who were stockholders of the Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) of the total combined voting power for election of directors of the surviving corporation immediately following the effective date of such merger or consolidation; or 6.1.1.2 the direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), in the aggregate, of securities of the Company, representing twenty percent (20%) or more of the total combined voting power of the Company's then issued and outstanding securities, by any person or entity, or group of associated persons or entities acting in concert; or 6.1.1.3 the sale of all or substantially all of the assets of the Company to any person or entity which is not a subsidiary of the Company; or 6.1.1.4 the stockholders of the Company approve any plan or proposal for the liquidation of the Company; or 6.1.1.5 a change in the composition of the Board at any time during any consecutive 24-month period such that the Continuity Directors cease for any reason to constitute at least a seventy percent (70%) majority of the Board. For purposes of this clause, "Continuity Directors" means those members of the Board who either: 6.1.1.5.1 were directors at the beginning of such consecutive 24-month period; or 6.1.1.5.2 were elected by, or on the nomination or recommendation of, at least a two-thirds (2/3) majority of the then-existing Board. 6.1.2 "Change of Control Termination" shall mean, with respect to the Executive, any of the following events occurring within two (2) years after a Change of Control: 6.1.2.1 Termination of the Executive's employment by the Company for any reason other than for Cause, as Cause is defined in Section 4.2 of this Agreement. 6.1.2.2.Termination of employment with the Company by the Executive pursuant to Section 6.2 of this Article 6. A Change of Control Termination shall not, however, include termination by reason of death or Disability. 6.1.3 "Good Reason" shall mean a good faith determination by the Executive, in the Executive's reasonable judgment, that any one or more of the following events has occurred without the Executive's express written consent, after a Change of Control, and the Company's failure to correct such occurrence for a period of thirty (30) days following Executive's written notice to Company identifying the event alleged to provide Good Reason and stating Executive's intent to invoke Section 6.2 of this Article 6. 6.1.3.1 A change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change of Control, or any removal of the Executive from, or any failure to re-elect the Executive to, any of such positions, which has the effect of materially diminishing the Executive's responsibility or authority; 6.1.3.2 A reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change of Control; 6.1.3.3 A requirement by the Company that the Executive be based anywhere other than within twenty-five (25) miles of the Executive's job location at the time of the Change of Control; 6.1.3.4 A material diminishment of Executive's pension, bonus, incentive, stock ownership, purchase, option, life insurance, health, accident, disability, or any other employee compensation or benefit plan, program or arrangement and/or any membership (collectively, "Benefit Plans"), in which the Executive is participating immediately prior to a Change of Control; or the taking of any action by the Company that would materially adversely affect the Executive's participation or materially reduce the Executive's benefits under any Benefit Plans or Benefit Plan; 6.1.3.5 Any material breach of this Agreement by the Company. 6.1.4 "Internal Revenue Code" -- Any references to a section of the Internal Revenue Code shall mean that section of the Internal Revenue Code of 1986, or to the corresponding section of such Code, as from time to time amended. 6.2 CHANGE OF CONTROL TERMINATION RIGHT. For a period of two (2) years following a Change of Control, the Executive shall have the right, at any time, to terminate employment with the Company for Good Reason. Such termination shall be accomplished by, and effective upon, the Executive giving written notice to the Company of the Executive's decision to terminate. Except as otherwise expressly provided in this Agreement, upon the exercise of said right, all obligations and duties of the Executive under this Agreement shall be of no further force and effect. 6.2.1 Change of Control Termination Payment. In the event of a termination pursuant to Section 6.2, without further action by the Board, the Company shall, within thirty (30) days of such termination, make a lump sum payment to the Executive, equal to two (2) years' Base Salary. 6.2.2 In addition to the amounts paid pursuant to Section 6.2.1 the Company shall pay to the Executive an amount equal to (a) two (2) times what the Executive would have received in incentive plan bonus for the year in which termination occurs as if the "target" goals had been achieved for that fiscal year, or (b) the actual amount of the incentive bonus to which the Executive would have been entitled had he remained with the Company based on the Company's actual performance, for the fiscal year in which termination occurs, whichever is greater. The amount provided by this Section 6.2.2 shall be earned and payable on the date that is fifteen (15) days after the date Executive would have been paid an annual incentive bonus had he remained with the Company for the fiscal year in which termination occurs. 6.2.3 Notwithstanding anything in this Agreement to the contrary, in the event any of the payments to the Executive under this Agreement would constitute an excess parachute payment pursuant to Section 280 G of the Internal Revenue Code, the amount payable pursuant to Section 6.2.2 shall be reduced by the minimum amount necessary such that none of the compensation payable to Executive as a result of a Change in Control shall constitute an excess parachute payment. 6.3 INTEREST. In the event the Company does not make timely payment in full of the Change of Control Termination payment described in Section 6.2, the Executive shall be entitled to receive interest on any unpaid amount at the lower of: (a) prime rate of interest (or such comparable index as may be adopted) established from time to time by the Company's principal banking institution or (b) the maximum rate permitted under Section 280G(d)(4) of the Internal Revenue Code. 6.4 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment pursuant to Section 6.2 herein, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under COBRA and such payment shall continue for the period of time the Executive is entitled to continue such coverage under COBRA. 6.5 VESTING OF STOCK OPTIONS. All unvested stock options held by Executive, if any, shall vest immediately upon a Change in Control Termination as defined in paragraph 6.1.2.1. Executive may exercise such options in accordance with the terms and conditions of the stock option plan and the agreement pursuant to which such options were granted. ARTICLE 7 GENERAL PROVISIONS 7.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company and each subsidiary, whether by way of merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of the Company, and any such successor or assign shall absolutely and unconditionally assume all of the Company's obligations hereunder. 7.2 NOTICES. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be delivered or mailed to any such party at its address as set forth at the beginning of this Agreement. Either party may change its address, by notice to the other party given in the manner set forth in this Section. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the third business day thereafter or when it is actually received, whichever is sooner. 7.3 CAPTION. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 7.4 GOVERNING LAW. The validity, construction and performance of this Agreement shall be governed by the laws of the State of Oregon 7.5 MEDIATION. In case of any dispute arising under this Agreement which cannot be settled by reasonable discussion, the parties agree that, prior to commencing any arbitration proceeding as contemplated by Section 7.6 they will first engage the services of a professional mediator agreed upon by the parties and attempt in good faith to resolve the dispute through confidential non- binding mediation. Each party shall bear one-half (1/2) of the mediator's fees and expenses and shall pay all of its own attorneys' fees and expenses related to the mediation. 7.6 ARBITRATION. Any dispute concerning the interpretation, construction, breach or enforcement of this Agreement or arising in any way from Executive's employment with Company or termination of employment shall be submitted to final and binding arbitration. Such arbitration is to be before a single arbitrator in Portland, Oregon. In the event the parties are unable to agree upon an arbitrator, an arbitrator shall be appointed by the court pursuant to ORS 36.320. The arbitration shall be conducted pursuant to the rules of the American Arbitration Association ("AAA") Employment Dispute Resolution Rules. Executive and the Company agree that the procedures outlined in Section 7.5 and 7.6 are the exclusive method of dispute resolution. 7.7 ATTORNEY FEES. If any action at law, in equity or by arbitration is taken to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled, including fees and expenses on appeal. 7.8 CONSTRUCTION. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 7.9 WAIVERS. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law. 7.10 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon the Executive, his administrators, executors, legatees, and heirs. In that this Agreement is a personal services contract, it shall not be assigned by the Executive. 7.11 MODIFICATION. This Agreement may not be and shall not be modified or amended except by written instrument signed by the parties hereto. 7.12 ENTIRE AGREEMENT. This Agreement together with the Confidentiality Agreement constitutes the entire agreement and understanding between the parties hereto in reference to all the matters herein agreed upon. This Agreement replaces and supersedes all prior employment agreements or understandings of the parties hereto; provided, however, that the Confidentiality Agreement continues in full force and effect according to its terms. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. EXECUTIVE PROTOCOL SYSTEMS, INC. By - -------------------------- ------------------------------ Craig M. Swanson David Bolender, Chairman & CEO EX-10.5 6 Protocol Systems, Inc. EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ PARTIES: Protocol Systems, Inc. ("Company") 8500 SW Creekside Place Beaverton, OR 97008 JAMES P. FEE ("Executive") 13645 NW Lariat Court Portland, Oregon 97229 DATE: July 1, 1998 RECITALS: A. The Company wishes to obtain the services of the Executive for at least the duration of this Agreement, and the Executive wishes to provide his services for such period, all upon the terms and conditions set out in this Agreement. B. It is expressly recognized by the parties that the Executive's continuance in the Executive's position with the Company and agreement to be bound by the terms of this Agreement represents a substantial commitment to the Company in terms of the Executive's personal and professional career and a foregoing of present and future career options by the Executive, for all of which the Company receives substantial value. C. The parties recognize that a Change of Control (as defined below) may result in material alteration or diminishment of the Executive's position and responsibilities and substantially frustrate the purpose of the Executive's commitment to the Company and forbearance of career options. D. The parties recognize that in light of the above-described commitment and forbearance of career options, it is essential that, for the benefit of the Company and its stockholders, provision be made for a Change of Control Termination (as defined below) in order to enable the Executive to accept and effectively continue in the Executive's position in the face of inherently disruptive circumstances arising from the possibility of a Change of Control, although no such change is now contemplated or foreseen. NOW, THEREFORE, for valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments. 1.2 "Board" shall mean the Board of Directors of Protocol Systems, Inc. 1.3 "Disability" shall mean the inability of the Executive to perform the essential functions of his position under this Agreement with or without reasonable accommodation because of physical or mental incapacity for a continuous period of five (5) months, as reasonably determined by the Company after consultation with a qualified physician selected by the Company. 1.4 "Company" shall mean Protocol Systems, Inc. and, any successor in interest by way of consolidation, operation of law, merger or otherwise. 1.5 "Confidentiality Agreement" shall mean that certain Non-competition and Confidentiality Agreement dated 31 October 1988 by and between the Company and Executive. ARTICLE 2 EMPLOYMENT, DUTIES AND TERM 2.1 EMPLOYMENT. Upon the terms and conditions set forth in this Agreement, the Company hereby employs the Executive in the position of Vice President, Sales, Service & Communications, and the Executive accepts such employment. 2.2 DUTIES. The Executive shall devote his full-time and best efforts to the Company and to fulfilling the duties of his position which shall include such duties as may from time to time be assigned him by the Chief Executive Officer, provided that such duties are reasonably consistent with the Executive's position. The Executive shall comply with the Company's policies and procedures to the extent they are not inconsistent with this Agreement, in which case the provisions of this Agreement prevail. 2.3 TERM. This Agreement shall remain in effect until the earlier of (i) termination pursuant to Article 4 or Article 6 of this Agreement or (ii) two (2) years from the date of this Agreement, provided however that if a Change in Control occurs within two (2) years from the date of this Agreement, then this Agreement shall remain in effect for two (2) years from the date of the first Change in Control event described in Section 6.1.1. ARTICLE 3 COMPENSATION AND EXPENSES 3.1 BASE SALARY. For all services rendered under this Agreement, the Company shall pay Executive a Base Salary that is not less than Executive's Base Salary as of the date of this Agreement. If the Executive's salary is increased from time to time during the term of this Agreement, the increased amount shall be the Base Salary for the remainder of the term and any extensions. All amounts payable to the Executive under this Agreement shall be reduced by such amounts as are required to be withheld by law. 3.2 BONUS AND INCENTIVE. Bonus or incentive compensation shall be in the sole discretion of the Board. Except as otherwise provided in Article 6, the Company shall have the right in accordance with the terms of any bonus or incentive plan to alter, amend or eliminate all or any part of such plan, or the Executive's participation therein, without compensation to the Executive. 3.3 BUSINESS EXPENSES. The Company shall, in accordance with, and to the extent of, its policies in effect from time to time, reimburse all ordinary and necessary business expenses reasonably incurred by the Executive in performing his duties as an employee of the Company, provided that the Executive accounts promptly for such expenses to the Company in the manner prescribed from time to time by the Company. ARTICLE 4 EARLY TERMINATION 4.1 EARLY TERMINATION. This Article 4 governs termination of this Agreement at any time during the term of the Agreement; provided, however, that this Article shall not govern a "Change of Control Termination" as defined in Article 6. A Change in Control Termination is governed solely by the provisions of Article 6. 4.2 TERMINATION FOR CAUSE. The Company may terminate this Agreement and Executive's employment immediately for "Cause" as that term is defined herein, upon written notice to the Executive. 4.2.1 "Cause" means any one of the following: (a) fraud, (b) misrepresentation, (c) theft or embezzlement of the Company assets, (d) intentional violations of law involving moral turpitude, (e) the continued failure by the Executive to satisfactorily perform his duties as reasonably assigned to the Executive pursuant to Section 2.2 of this Agreement for a period of sixty (60) days after a written demand for such satisfactory performance which specifically and with reasonable detail identifies the manner in which it is alleged the Executive has not satisfactorily performed such duties, and (f) any material breach of the Confidentiality Agreement. 4.2.2 In the event of termination for Cause pursuant to this Section 4.2, the Executive shall be paid his Base Salary through the date of termination specified in any notice of termination. The Executive will not be entitled to any bonuses or incentives which are not earned and payable at the time of the termination. 4.3 TERMINATION WITHOUT CAUSE. Either the Executive or the Company may terminate this Agreement and the Executive's employment without Cause by providing at least seventy-five (75) days' written notice; provided, however, that the Company shall have the option of making termination of the Agreement and termination of the Executive's employment effective immediately upon notice, in which case Executive shall be paid his Base Salary through a notice period of seventy-five (75) days. This Section 4.3 shall not be applicable where Cause for termination exists. 4.3.1 If the notice of termination is given by the Company, in addition to any other amounts payable to Executive, under this Section 4.3, the Company shall pay Executive within fifteen (15) days following termination, a lump sum amount equal to one (1) year's Base Salary. 4.3.2 In the event that termination occurs pursuant to Section 4.3.1 then, in addition to the payments specified in said Section, the Company shall pay to the Executive bonuses, if any, as follows: 4.3.2.1 Company shall pay Executive an amount equal to the annual bonus or annual incentive, if any, to which the Executive would otherwise have become entitled under any Company bonus or incentive plan in effect at the time of termination of this Agreement had the Executive remained continuously employed for the full fiscal year in which termination occurred and continued to perform his duties in the same manner as they were performed immediately prior to termination; provided, however, that such bonus or incentive amount shall be pro-rated to the date of termination. The amount payable pursuant to this Section 4.3.2.1 shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year. 4.3.2.2 In the event Executive would have been entitled to a quarterly bonus or quarterly incentive payment had he remained employed for the entire quarter in which Executive was terminated, the Company shall pay Executive such quarterly bonus or incentive amount pro-rated to the date of termination, payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full quarter. 4.4 Termination in the Event of Death or Disability. This Agreement and Executive's employment shall terminate in the event of death or Disability of the Executive. 4.4.1 In the event of the Executive's death, the Company shall pay an amount equal to six (6) month's Base Salary to the executor, administrator or other personal representative of the Executive's estate. The amount shall be paid as a lump sum as soon as practicable following Company's receipt of notice of the Executive's death. All such payments shall be in addition to any payments due pursuant to Section 4.4.3 below. 4.4.2 In the event of termination due to Executive's Disability, Base Salary shall be terminated as of the final day of the fifth month referenced in the definition of "Disability." Unless otherwise disqualified by the disability benefit program provider, this Section is not intended to limit the Executive from qualifying for and claiming disability benefits from any other disability program in which the Executive may be enrolled or otherwise for which he is qualified at the time of disability. 4.4.3 In the event of termination by reason of the Executive's death or Disability, the Company shall pay to the Executive an amount equal to the amount the Executive would have received in incentive plan bonus for the year in which termination occurred had "target" goals been achieved, provided, however, that such amount shall be pro-rated to the date of termination. This amount shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year in which termination occurred. 4.5 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment by the Company pursuant to Section 4.3.1 or termination due to Disability, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") and shall continue such payment for the period of time the Executive is entitled to continue such coverage under COBRA. 4.6 ENTIRE TERMINATION PAYMENT. The compensation provided for in this Article 4 shall constitute the Executive's sole remedy for termination pursuant to this Article. The Executive shall not be entitled to any other termination or severance payment which may be payable to the Executive under any other agreement between the Executive and the Company preceding or following the date of termination. ARTICLE 5 CONFIDENTIALITY; CONFLICT OF INTEREST 5.1 PROPRIETARY INFORMATION. Executive shall keep confidential, except as the Company may otherwise consent in writing, and not disclose or make any use of except for the benefit of the Company, at any time either during or subsequent to his employment by the Company, any Proprietary Information which he may produce, obtain or otherwise acquire during the course of his employment. As used herein, "Proprietary Information" shall include any trade secrets, confidential information, knowledge, data, or other information of the Company relating to products, processes, know-how, designs, formulae, test procedures and results, customer lists, business plans, marketing plans and strategies, and pricing strategies, or other subject matter pertaining to any business of the Company for any of its clients, customers, consultants, licensees of affiliates, which information is not in the public domain at the time of the alleged breach. In the event of the termination of the Executive's employment for any reason whatsoever, Executive shall promptly return all records, materials, equipment, drawings and the like pertaining to any Proprietary Information. 5.2 COVENANT NOT TO COMPETE. Executive acknowledges that he will provide special skills, and acquire special information, regarding the activities of the Company. Executive agrees, therefore, that he will not, for a period of twelve (12) months from and after the date he ceases to be employed by the Company, join, control or participate in the ownership, management, operation or control of or be connected with, any business located in the United States of America whose commercial products are in direct competition with the Company or which is developing products which will be in direct competition with the Company, in such a manner and position that he would likely use Proprietary Information, unless released from such obligation by the Board of Directors of the Company. Executive agrees that he shall be deemed to be connected with a business if such a business is carried on by a partnership in which he is a general or limited partner or employee of a corporation or association of which he is a shareholder, officer, director, employee, member, consultant or agent; provided, that nothing herein shall prohibit the purchase or ownership by him of shares of less than five percent (5%) in a publicly or privately held corporation. Executive agrees to submit a list of such business interests in Exhibit A attached hereto and incorporated by reference herein. Notwithstanding the foregoing, this Section 5.2 shall not apply to the Executive if the Executive's employment was terminated pursuant to Section 4.3 or Section 6.1.2.1 of this agreement. 5.3 CONSENT TO INJUNCTION. Executive agrees that the Company will or would suffer an irreparable injury if Executive were to compete with the business of the Company or any of its subsidiaries in violation of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction and Executive stipulates to the entering of such injunctive relief prohibiting him from competing with the Company or any present affiliate of the Company in connection with the business of the Company, in violation of this Agreement. 5.4 SEVERABILITY. The parties intend that the covenants contained in Section 5.2 be deemed to be separate covenants as to each county and state, and that if in any judicial proceeding a court shall refuse to enforce all of the separate covenants included herein because, taken together, they cover too extensive a geographic area or because any one includes too large an area or because they cover too large a period of time, the parties intend that such covenants shall be reduced in scope to the extent required by law or, if necessary, eliminated from the provisions hereof, and that all of the remaining covenants hereof not so affected shall remain fully effective and enforceable. 5.5 ASSIGNMENT OF INVENTIONS. As used in this Agreement, "inventions" shall include, but not be limited to, ideas, improvements, designs, and discoveries. Executive hereby assigns and transfers to the Company entire right, title and interest in and to all inventions whether or not conceived by Executive (whether made solely by Executive or jointly with others) during the period of his employment with the Company which relate in any manner to the actual or demonstrably anticipated business, work, or research an development of the Company or its subsidiaries, or result from or are suggested by any tasks assigned to Executive or any work performed by Executive for or on behalf of the Company or its subsidiaries. Executive agrees that all such inventions are sole property of the Company, provided, however, that this Agreement does not require assignment of any invention if such assignment would contravene applicable state law. 5.6 DISCLOSURE OF INVENTIONS, PATENTS. Executive agrees that in connection with any invention as defined in Section 5.5, above: 5.6.1 Executive will disclose such invention promptly in writing to the Board of Directors of the Company, with a copy to the President, regardless of whether he believes the invention is protected by applicable state law, in order to permit the Company to claim rights to which it may be entitled under this Agreement. Such disclosure shall be received in confidence by the Company. 5.6.2 Executive will, at the Company's request, promptly execute a written assignment of title to the Company for any invention required to be assigned by Section 5.5 ("assignable invention") and Executive will preserve any such assignable invention as confidential information of the Company; and 5.6.3 Upon request, Executive agrees to assist the Company or its nominee (at its expense) during and at any time subsequent to his employment in every reasonable way to obtain for its own benefit patents and copyrights for such assignable inventions in any and all countries, which inventions shall be and remain the sole and exclusive property of the Company or its nominee, whether or not patented or copyrighted. Executive agrees to execute such papers and perform such lawful acts as the Company deems to be necessary to allow it to exercise all right, title, and interest in such patents and copyrights. 5.6.4 Executive agrees to submit a list of inventions made prior to his employment by the Company on Exhibit B attached hereto and incorporated by reference herein. 5.7 EXECUTION OF DOCUMENTATION. In connection with Section 5.5 and Section 5.6, Executive further agrees to execute, acknowledge and deliver to the Company or its nominee upon request and at its expense all such assignments of inventions, patents, and copyrights to be issued therefor, as the Company may determine necessary or desirable for which to apply. Executive agrees to obtain letters, patents, and copyrights on such assignable inventions in any and all countries and/or protect the interest of the Company or its nominee in such inventions, patents and copyrights and to vest title thereto in the Company or its nominee. 5.8 OTHER OBLIGATIONS. Executive acknowledges that the Company from time to time may have agreements with other persons or with the U.S. Government, or agencies thereof, which impose obligations or restrictions on the Company regarding inventions made during the course of work thereunder or regarding the confidential nature of such work. Executive agrees to be bound by all such obligations and restrictions and to take all action necessary to discharge the obligations of the Company thereunder. 5.9 TRADE SECRETS OF OTHERS. Executive represents that his performance of all the terms of this Agreement and as an employee of the Company such employment does not and will not breach any agreement to keep in confidence proprietary information, knowledge, or data acquired by Executive in confidence or in trust prior to his employment with the Company. Executive will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. Executive agrees not to enter into any agreement either written or oral in conflict herewith. 5.10 CONFLICT OF INTEREST. During Executive's employment with the Company, Executive will engage in no activity or employment which may conflict with the interest of the Company and will comply with the Company's policies and guidelines pertaining to business conduct and ethics. 5.11 PREVIOUS AGREEMENTS. Executive represents and warrants to the Company that as of the date of this Agreement, he has fully complied with the terms of the Confidentiality Agreement. Executive's obligations under this Agreement are in addition to, do not limit, and are not limited by, Executive's Confidentiality Agreement. To the extent any provision of the Confidentiality Agreement conflicts with the provisions of this Agreement, the provisions of this Agreement control. 5.12 SURVIVAL OF OBLIGATIONS. The provisions of this Article 5 shall survive termination of this Agreement. ARTICLE 6 CHANGE OF CONTROL 6.1 Definitions. For purposes of this Article 6, the following definitions shall be applied: 6.1.1 "Change of Control" shall mean any of the following events: 6.1.1.1 a merger or consolidation to which the Company is a party if the individuals and entities who were stockholders of the Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) of the total combined voting power for election of directors of the surviving corporation immediately following the effective date of such merger or consolidation; or 6.1.1.2 the direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), in the aggregate, of securities of the Company, representing twenty percent (20%) or more of the total combined voting power of the Company's then issued and outstanding securities, by any person or entity, or group of associated persons or entities acting in concert; or 6.1.1.3 the sale of all or substantially all of the assets of the Company to any person or entity which is not a subsidiary of the Company; or 6.1.1.4 the stockholders of the Company approve any plan or proposal for the liquidation of the Company; or 6.1.1.5 a change in the composition of the Board at any time during any consecutive 24-month period such that the Continuity Directors cease for any reason to constitute at least a seventy percent (70%) majority of the Board. For purposes of this clause, "Continuity Directors" means those members of the Board who either: 6.1.1.5.1 were directors at the beginning of such consecutive 24-month period; or 6.1.1.5.2 were elected by, or on the nomination or recommendation of, at least a two-thirds (2/3) majority of the then-existing Board. 6.1.2 "Change of Control Termination" shall mean, with respect to the Executive, any of the following events occurring within two (2) years after a Change of Control: 6.1.2.1 Termination of the Executive's employment by the Company for any reason other than for Cause, as Cause is defined in Section 4.2 of this Agreement. 6.1.2.2.Termination of employment with the Company by the Executive pursuant to Section 6.2 of this Article 6. A Change of Control Termination shall not, however, include termination by reason of death or Disability. 6.1.3 "Good Reason" shall mean a good faith determination by the Executive, in the Executive's reasonable judgment, that any one or more of the following events has occurred without the Executive's express written consent, after a Change of Control, and the Company's failure to correct such occurrence for a period of thirty (30) days following Executive's written notice to Company identifying the event alleged to provide Good Reason and stating Executive's intent to invoke Section 6.2 of this Article 6. 6.1.3.1 A change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change of Control, or any removal of the Executive from, or any failure to re-elect the Executive to, any of such positions, which has the effect of materially diminishing the Executive's responsibility or authority; 6.1.3.2 A reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change of Control; 6.1.3.3 A requirement by the Company that the Executive be based anywhere other than within twenty-five (25) miles of the Executive's job location at the time of the Change of Control; 6.1.3.4 A material diminishment of Executive's pension, bonus, incentive, stock ownership, purchase, option, life insurance, health, accident, disability, or any other employee compensation or benefit plan, program or arrangement and/or any membership (collectively, "Benefit Plans"), in which the Executive is participating immediately prior to a Change of Control; or the taking of any action by the Company that would materially adversely affect the Executive's participation or materially reduce the Executive's benefits under any Benefit Plans or Benefit Plan; 6.1.3.5 Any material breach of this Agreement by the Company. 6.1.4 "Internal Revenue Code" -- Any references to a section of the Internal Revenue Code shall mean that section of the Internal Revenue Code of 1986, or to the corresponding section of such Code, as from time to time amended. 6.2 CHANGE OF CONTROL TERMINATION RIGHT. For a period of two (2) years following a Change of Control, the Executive shall have the right, at any time, to terminate employment with the Company for Good Reason. Such termination shall be accomplished by, and effective upon, the Executive giving written notice to the Company of the Executive's decision to terminate. Except as otherwise expressly provided in this Agreement, upon the exercise of said right, all obligations and duties of the Executive under this Agreement shall be of no further force and effect. 6.2.1 Change of Control Termination Payment. In the event of a termination pursuant to Section 6.2, without further action by the Board, the Company shall, within thirty (30) days of such termination, make a lump sum payment to the Executive, equal to two (2) years' Base Salary. 6.2.2 In addition to the amounts paid pursuant to Section 6.2.1 the Company shall pay to the Executive an amount equal to (a) two (2) times what the Executive would have received in incentive plan bonus for the year in which termination occurs as if the "target" goals had been achieved for that fiscal year, or (b) the actual amount of the incentive bonus to which the Executive would have been entitled had he remained with the Company based on the Company's actual performance, for the fiscal year in which termination occurs, whichever is greater. The amount provided by this Section 6.2.2 shall be earned and payable on the date that is fifteen (15) days after the date Executive would have been paid an annual incentive bonus had he remained with the Company for the fiscal year in which termination occurs. 6.2.3 Notwithstanding anything in this Agreement to the contrary, in the event any of the payments to the Executive under this Agreement would constitute an excess parachute payment pursuant to Section 280 G of the Internal Revenue Code, the amount payable pursuant to Section 6.2.2 shall be reduced by the minimum amount necessary such that none of the compensation payable to Executive as a result of a Change in Control shall constitute an excess parachute payment. 6.3 INTEREST. In the event the Company does not make timely payment in full of the Change of Control Termination payment described in Section 6.2, the Executive shall be entitled to receive interest on any unpaid amount at the lower of: (a) prime rate of interest (or such comparable index as may be adopted) established from time to time by the Company's principal banking institution or (b) the maximum rate permitted under Section 280G(d)(4) of the Internal Revenue Code. 6.4 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment pursuant to Section 6.2 herein, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under COBRA and such payment shall continue for the period of time the Executive is entitled to continue such coverage under COBRA. 6.5 VESTING OF STOCK OPTIONS. All unvested stock options held by Executive, if any, shall vest immediately upon a Change in Control Termination as defined in paragraph 6.1.2.1. Executive may exercise such options in accordance with the terms and conditions of the stock option plan and the agreement pursuant to which such options were granted. ARTICLE 7 GENERAL PROVISIONS 7.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company and each subsidiary, whether by way of merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of the Company, and any such successor or assign shall absolutely and unconditionally assume all of the Company's obligations hereunder. 7.2 NOTICES. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be delivered or mailed to any such party at its address as set forth at the beginning of this Agreement. Either party may change its address, by notice to the other party given in the manner set forth in this Section. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the third business day thereafter or when it is actually received, whichever is sooner. 7.3 CAPTION. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 7.4 GOVERNING LAW. The validity, construction and performance of this Agreement shall be governed by the laws of the State of Oregon 7.5 MEDIATION. In case of any dispute arising under this Agreement which cannot be settled by reasonable discussion, the parties agree that, prior to commencing any arbitration proceeding as contemplated by Section 7.6 they will first engage the services of a professional mediator agreed upon by the parties and attempt in good faith to resolve the dispute through confidential non- binding mediation. Each party shall bear one-half (1/2) of the mediator's fees and expenses and shall pay all of its own attorneys' fees and expenses related to the mediation. 7.6 ARBITRATION. Any dispute concerning the interpretation, construction, breach or enforcement of this Agreement or arising in any way from Executive's employment with Company or termination of employment shall be submitted to final and binding arbitration. Such arbitration is to be before a single arbitrator in Portland, Oregon. In the event the parties are unable to agree upon an arbitrator, an arbitrator shall be appointed by the court pursuant to ORS 36.320. The arbitration shall be conducted pursuant to the rules of the American Arbitration Association ("AAA") Employment Dispute Resolution Rules. Executive and the Company agree that the procedures outlined in Section 7.5 and 7.6 are the exclusive method of dispute resolution. 7.7 ATTORNEY FEES. If any action at law, in equity or by arbitration is taken to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled, including fees and expenses on appeal. 7.8 CONSTRUCTION. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 7.9 WAIVERS. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law. 7.10 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon the Executive, his administrators, executors, legatees, and heirs. In that this Agreement is a personal services contract, it shall not be assigned by the Executive. 7.11 MODIFICATION. This Agreement may not be and shall not be modified or amended except by written instrument signed by the parties hereto. 7.12 ENTIRE AGREEMENT. This Agreement together with the Confidentiality Agreement constitutes the entire agreement and understanding between the parties hereto in reference to all the matters herein agreed upon. This Agreement replaces and supersedes all prior employment agreements or understandings of the parties hereto; provided, however, that the Confidentiality Agreement continues in full force and effect according to its terms. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. EXECUTIVE PROTOCOL SYSTEMS, INC. By - -------------------------- ------------------------------ James P. Fee David Bolender, Chairman & CEO EX-10.6 7 Protocol Systems, Inc. EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ PARTIES: Protocol Systems, Inc. ("Company") 8500 SW Creekside Place Beaverton, OR 97008 JAMES B. MOON ("Executive") 11280 SW Pintail Loop Beaverton, Oregon 97007 DATE: July 1, 1998 RECITALS: A. The Company wishes to obtain the services of the Executive for at least the duration of this Agreement, and the Executive wishes to provide his services for such period, all upon the terms and conditions set out in this Agreement. B. It is expressly recognized by the parties that the Executive's continuance in the Executive's position with the Company and agreement to be bound by the terms of this Agreement represents a substantial commitment to the Company in terms of the Executive's personal and professional career and a foregoing of present and future career options by the Executive, for all of which the Company receives substantial value. C. The parties recognize that a Change of Control (as defined below) may result in material alteration or diminishment of the Executive's position and responsibilities and substantially frustrate the purpose of the Executive's commitment to the Company and forbearance of career options. D. The parties recognize that in light of the above-described commitment and forbearance of career options, it is essential that, for the benefit of the Company and its stockholders, provision be made for a Change of Control Termination (as defined below) in order to enable the Executive to accept and effectively continue in the Executive's position in the face of inherently disruptive circumstances arising from the possibility of a Change of Control, although no such change is now contemplated or foreseen. NOW, THEREFORE, for valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments. 1.2 "Board" shall mean the Board of Directors of Protocol Systems, Inc. 1.3 "Disability" shall mean the inability of the Executive to perform the essential functions of his position under this Agreement with or without reasonable accommodation because of physical or mental incapacity for a continuous period of five (5) months, as reasonably determined by the Company after consultation with a qualified physician selected by the Company. 1.4 "Company" shall mean Protocol Systems, Inc. and, any successor in interest by way of consolidation, operation of law, merger or otherwise. 1.5 "Confidentiality Agreement" shall mean that certain Non-competition and Confidentiality Agreement dated 28 July 1987 by and between the Company and Executive. ARTICLE 2 EMPLOYMENT, DUTIES AND TERM 2.1 EMPLOYMENT. Upon the terms and conditions set forth in this Agreement, the Company hereby employs the Executive in the position of Senior Vice President and Chief Technology Officer, and the Executive accepts such employment. 2.2 DUTIES. The Executive shall devote his full-time and best efforts to the Company and to fulfilling the duties of his position which shall include such duties as may from time to time be assigned him by the Chief Executive Officer, provided that such duties are reasonably consistent with the Executive's position. The Executive shall comply with the Company's policies and procedures to the extent they are not inconsistent with this Agreement, in which case the provisions of this Agreement prevail. 2.3 TERM. This Agreement shall remain in effect until the earlier of (i) termination pursuant to Article 4 or Article 6 of this Agreement or (ii) two (2) years from the date of this Agreement, provided however that if a Change in Control occurs within two (2) years from the date of this Agreement, then this Agreement shall remain in effect for two (2) years from the date of the first Change in Control event described in Section 6.1.1. ARTICLE 3 COMPENSATION AND EXPENSES 3.1 BASE SALARY. For all services rendered under this Agreement, the Company shall pay Executive a Base Salary that is not less than Executive's Base Salary as of the date of this Agreement. If the Executive's salary is increased from time to time during the term of this Agreement, the increased amount shall be the Base Salary for the remainder of the term and any extensions. All amounts payable to the Executive under this Agreement shall be reduced by such amounts as are required to be withheld by law. 3.2 BONUS AND INCENTIVE. Bonus or incentive compensation shall be in the sole discretion of the Board. Except as otherwise provided in Article 6, the Company shall have the right in accordance with the terms of any bonus or incentive plan to alter, amend or eliminate all or any part of such plan, or the Executive's participation therein, without compensation to the Executive. 3.3 BUSINESS EXPENSES. The Company shall, in accordance with, and to the extent of, its policies in effect from time to time, reimburse all ordinary and necessary business expenses reasonably incurred by the Executive in performing his duties as an employee of the Company, provided that the Executive accounts promptly for such expenses to the Company in the manner prescribed from time to time by the Company. ARTICLE 4 EARLY TERMINATION 4.1 EARLY TERMINATION. This Article 4 governs termination of this Agreement at any time during the term of the Agreement; provided, however, that this Article shall not govern a "Change of Control Termination" as defined in Article 6. A Change in Control Termination is governed solely by the provisions of Article 6. 4.2 TERMINATION FOR CAUSE. The Company may terminate this Agreement and Executive's employment immediately for "Cause" as that term is defined herein, upon written notice to the Executive. 4.2.1 "Cause" means any one of the following: (a) fraud, (b) misrepresentation, (c) theft or embezzlement of the Company assets, (d) intentional violations of law involving moral turpitude, (e) the continued failure by the Executive to satisfactorily perform his duties as reasonably assigned to the Executive pursuant to Section 2.2 of this Agreement for a period of sixty (60) days after a written demand for such satisfactory performance which specifically and with reasonable detail identifies the manner in which it is alleged the Executive has not satisfactorily performed such duties, and (f) any material breach of the Confidentiality Agreement. 4.2.2 In the event of termination for Cause pursuant to this Section 4.2, the Executive shall be paid his Base Salary through the date of termination specified in any notice of termination. The Executive will not be entitled to any bonuses or incentives which are not earned and payable at the time of the termination. 4.3 TERMINATION WITHOUT CAUSE. Either the Executive or the Company may terminate this Agreement and the Executive's employment without Cause by providing at least seventy-five (75) days' written notice; provided, however, that the Company shall have the option of making termination of the Agreement and termination of the Executive's employment effective immediately upon notice, in which case Executive shall be paid his Base Salary through a notice period of seventy-five (75) days. This Section 4.3 shall not be applicable where Cause for termination exists. 4.3.1 If the notice of termination is given by the Company, in addition to any other amounts payable to Executive, under this Section 4.3, the Company shall pay Executive within fifteen (15) days following termination, a lump sum amount equal to one (1) year's Base Salary. 4.3.2 In the event that termination occurs pursuant to Section 4.3.1 then, in addition to the payments specified in said Section, the Company shall pay to the Executive bonuses, if any, as follows: 4.3.2.1 Company shall pay Executive an amount equal to the annual bonus or annual incentive, if any, to which the Executive would otherwise have become entitled under any Company bonus or incentive plan in effect at the time of termination of this Agreement had the Executive remained continuously employed for the full fiscal year in which termination occurred and continued to perform his duties in the same manner as they were performed immediately prior to termination; provided, however, that such bonus or incentive amount shall be pro-rated to the date of termination. The amount payable pursuant to this Section 4.3.2.1 shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year. 4.3.2.2 In the event Executive would have been entitled to a quarterly bonus or quarterly incentive payment had he remained employed for the entire quarter in which Executive was terminated, the Company shall pay Executive such quarterly bonus or incentive amount pro-rated to the date of termination, payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full quarter. 4.4 Termination in the Event of Death or Disability. This Agreement and Executive's employment shall terminate in the event of death or Disability of the Executive. 4.4.1 In the event of the Executive's death, the Company shall pay an amount equal to six (6) month's Base Salary to the executor, administrator or other personal representative of the Executive's estate. The amount shall be paid as a lump sum as soon as practicable following Company's receipt of notice of the Executive's death. All such payments shall be in addition to any payments due pursuant to Section 4.4.3 below. 4.4.2 In the event of termination due to Executive's Disability, Base Salary shall be terminated as of the final day of the fifth month referenced in the definition of "Disability." Unless otherwise disqualified by the disability benefit program provider, this Section is not intended to limit the Executive from qualifying for and claiming disability benefits from any other disability program in which the Executive may be enrolled or otherwise for which he is qualified at the time of disability. 4.4.3 In the event of termination by reason of the Executive's death or Disability, the Company shall pay to the Executive an amount equal to the amount the Executive would have received in incentive plan bonus for the year in which termination occurred had "target" goals been achieved, provided, however, that such amount shall be pro-rated to the date of termination. This amount shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year in which termination occurred. 4.5 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment by the Company pursuant to Section 4.3.1 or termination due to Disability, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") and shall continue such payment for the period of time the Executive is entitled to continue such coverage under COBRA. 4.6 ENTIRE TERMINATION PAYMENT. The compensation provided for in this Article 4 shall constitute the Executive's sole remedy for termination pursuant to this Article. The Executive shall not be entitled to any other termination or severance payment which may be payable to the Executive under any other agreement between the Executive and the Company preceding or following the date of termination. ARTICLE 5 CONFIDENTIALITY; CONFLICT OF INTEREST 5.1 PROPRIETARY INFORMATION. Executive shall keep confidential, except as the Company may otherwise consent in writing, and not disclose or make any use of except for the benefit of the Company, at any time either during or subsequent to his employment by the Company, any Proprietary Information which he may produce, obtain or otherwise acquire during the course of his employment. As used herein, "Proprietary Information" shall include any trade secrets, confidential information, knowledge, data, or other information of the Company relating to products, processes, know-how, designs, formulae, test procedures and results, customer lists, business plans, marketing plans and strategies, and pricing strategies, or other subject matter pertaining to any business of the Company for any of its clients, customers, consultants, licensees of affiliates, which information is not in the public domain at the time of the alleged breach. In the event of the termination of the Executive's employment for any reason whatsoever, Executive shall promptly return all records, materials, equipment, drawings and the like pertaining to any Proprietary Information. 5.2 COVENANT NOT TO COMPETE. Executive acknowledges that he will provide special skills, and acquire special information, regarding the activities of the Company. Executive agrees, therefore, that he will not, for a period of twelve (12) months from and after the date he ceases to be employed by the Company, join, control or participate in the ownership, management, operation or control of or be connected with, any business located in the United States of America whose commercial products are in direct competition with the Company or which is developing products which will be in direct competition with the Company, in such a manner and position that he would likely use Proprietary Information, unless released from such obligation by the Board of Directors of the Company. Executive agrees that he shall be deemed to be connected with a business if such a business is carried on by a partnership in which he is a general or limited partner or employee of a corporation or association of which he is a shareholder, officer, director, employee, member, consultant or agent; provided, that nothing herein shall prohibit the purchase or ownership by him of shares of less than five percent (5%) in a publicly or privately held corporation. Executive agrees to submit a list of such business interests in Exhibit A attached hereto and incorporated by reference herein. Notwithstanding the foregoing, this Section 5.2 shall not apply to the Executive if the Executive's employment was terminated pursuant to Section 4.3 or Section 6.1.2.1 of this agreement. 5.3 CONSENT TO INJUNCTION. Executive agrees that the Company will or would suffer an irreparable injury if Executive were to compete with the business of the Company or any of its subsidiaries in violation of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction and Executive stipulates to the entering of such injunctive relief prohibiting him from competing with the Company or any present affiliate of the Company in connection with the business of the Company, in violation of this Agreement. 5.4 SEVERABILITY. The parties intend that the covenants contained in Section 5.2 be deemed to be separate covenants as to each county and state, and that if in any judicial proceeding a court shall refuse to enforce all of the separate covenants included herein because, taken together, they cover too extensive a geographic area or because any one includes too large an area or because they cover too large a period of time, the parties intend that such covenants shall be reduced in scope to the extent required by law or, if necessary, eliminated from the provisions hereof, and that all of the remaining covenants hereof not so affected shall remain fully effective and enforceable. 5.5 ASSIGNMENT OF INVENTIONS. As used in this Agreement, "inventions" shall include, but not be limited to, ideas, improvements, designs, and discoveries. Executive hereby assigns and transfers to the Company entire right, title and interest in and to all inventions whether or not conceived by Executive (whether made solely by Executive or jointly with others) during the period of his employment with the Company which relate in any manner to the actual or demonstrably anticipated business, work, or research an development of the Company or its subsidiaries, or result from or are suggested by any tasks assigned to Executive or any work performed by Executive for or on behalf of the Company or its subsidiaries. Executive agrees that all such inventions are sole property of the Company, provided, however, that this Agreement does not require assignment of any invention if such assignment would contravene applicable state law. 5.6 DISCLOSURE OF INVENTIONS, PATENTS. Executive agrees that in connection with any invention as defined in Section 5.5, above: 5.6.1 Executive will disclose such invention promptly in writing to the Board of Directors of the Company, with a copy to the President, regardless of whether he believes the invention is protected by applicable state law, in order to permit the Company to claim rights to which it may be entitled under this Agreement. Such disclosure shall be received in confidence by the Company. 5.6.2 Executive will, at the Company's request, promptly execute a written assignment of title to the Company for any invention required to be assigned by Section 5.5 ("assignable invention") and Executive will preserve any such assignable invention as confidential information of the Company; and 5.6.3 Upon request, Executive agrees to assist the Company or its nominee (at its expense) during and at any time subsequent to his employment in every reasonable way to obtain for its own benefit patents and copyrights for such assignable inventions in any and all countries, which inventions shall be and remain the sole and exclusive property of the Company or its nominee, whether or not patented or copyrighted. Executive agrees to execute such papers and perform such lawful acts as the Company deems to be necessary to allow it to exercise all right, title, and interest in such patents and copyrights. 5.6.4 Executive agrees to submit a list of inventions made prior to his employment by the Company on Exhibit B attached hereto and incorporated by reference herein. 5.7 EXECUTION OF DOCUMENTATION. In connection with Section 5.5 and Section 5.6, Executive further agrees to execute, acknowledge and deliver to the Company or its nominee upon request and at its expense all such assignments of inventions, patents, and copyrights to be issued therefor, as the Company may determine necessary or desirable for which to apply. Executive agrees to obtain letters, patents, and copyrights on such assignable inventions in any and all countries and/or protect the interest of the Company or its nominee in such inventions, patents and copyrights and to vest title thereto in the Company or its nominee. 5.8 OTHER OBLIGATIONS. Executive acknowledges that the Company from time to time may have agreements with other persons or with the U.S. Government, or agencies thereof, which impose obligations or restrictions on the Company regarding inventions made during the course of work thereunder or regarding the confidential nature of such work. Executive agrees to be bound by all such obligations and restrictions and to take all action necessary to discharge the obligations of the Company thereunder. 5.9 TRADE SECRETS OF OTHERS. Executive represents that his performance of all the terms of this Agreement and as an employee of the Company such employment does not and will not breach any agreement to keep in confidence proprietary information, knowledge, or data acquired by Executive in confidence or in trust prior to his employment with the Company. Executive will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. Executive agrees not to enter into any agreement either written or oral in conflict herewith. 5.10 CONFLICT OF INTEREST. During Executive's employment with the Company, Executive will engage in no activity or employment which may conflict with the interest of the Company and will comply with the Company's policies and guidelines pertaining to business conduct and ethics. 5.11 PREVIOUS AGREEMENTS. Executive represents and warrants to the Company that as of the date of this Agreement, he has fully complied with the terms of the Confidentiality Agreement. Executive's obligations under this Agreement are in addition to, do not limit, and are not limited by, Executive's Confidentiality Agreement. To the extent any provision of the Confidentiality Agreement conflicts with the provisions of this Agreement, the provisions of this Agreement control. 5.12 SURVIVAL OF OBLIGATIONS. The provisions of this Article 5 shall survive termination of this Agreement. ARTICLE 6 CHANGE OF CONTROL 6.1 Definitions. For purposes of this Article 6, the following definitions shall be applied: 6.1.1 "Change of Control" shall mean any of the following events: 6.1.1.1 a merger or consolidation to which the Company is a party if the individuals and entities who were stockholders of the Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) of the total combined voting power for election of directors of the surviving corporation immediately following the effective date of such merger or consolidation; or 6.1.1.2 the direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), in the aggregate, of securities of the Company, representing twenty percent (20%) or more of the total combined voting power of the Company's then issued and outstanding securities, by any person or entity, or group of associated persons or entities acting in concert; or 6.1.1.3 the sale of all or substantially all of the assets of the Company to any person or entity which is not a subsidiary of the Company; or 6.1.1.4 the stockholders of the Company approve any plan or proposal for the liquidation of the Company; or 6.1.1.5 a change in the composition of the Board at any time during any consecutive 24-month period such that the Continuity Directors cease for any reason to constitute at least a seventy percent (70%) majority of the Board. For purposes of this clause, "Continuity Directors" means those members of the Board who either: 6.1.1.5.1 were directors at the beginning of such consecutive 24-month period; or 6.1.1.5.2 were elected by, or on the nomination or recommendation of, at least a two-thirds (2/3) majority of the then-existing Board. 6.1.2 "Change of Control Termination" shall mean, with respect to the Executive, any of the following events occurring within two (2) years after a Change of Control: 6.1.2.1 Termination of the Executive's employment by the Company for any reason other than for Cause, as Cause is defined in Section 4.2 of this Agreement. 6.1.2.2.Termination of employment with the Company by the Executive pursuant to Section 6.2 of this Article 6. A Change of Control Termination shall not, however, include termination by reason of death or Disability. 6.1.3 "Good Reason" shall mean a good faith determination by the Executive, in the Executive's reasonable judgment, that any one or more of the following events has occurred without the Executive's express written consent, after a Change of Control, and the Company's failure to correct such occurrence for a period of thirty (30) days following Executive's written notice to Company identifying the event alleged to provide Good Reason and stating Executive's intent to invoke Section 6.2 of this Article 6. 6.1.3.1 A change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change of Control, or any removal of the Executive from, or any failure to re-elect the Executive to, any of such positions, which has the effect of materially diminishing the Executive's responsibility or authority; 6.1.3.2 A reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change of Control; 6.1.3.3 A requirement by the Company that the Executive be based anywhere other than within twenty-five (25) miles of the Executive's job location at the time of the Change of Control; 6.1.3.4 A material diminishment of Executive's pension, bonus, incentive, stock ownership, purchase, option, life insurance, health, accident, disability, or any other employee compensation or benefit plan, program or arrangement and/or any membership (collectively, "Benefit Plans"), in which the Executive is participating immediately prior to a Change of Control; or the taking of any action by the Company that would materially adversely affect the Executive's participation or materially reduce the Executive's benefits under any Benefit Plans or Benefit Plan; 6.1.3.5 Any material breach of this Agreement by the Company. 6.1.4 "Internal Revenue Code" -- Any references to a section of the Internal Revenue Code shall mean that section of the Internal Revenue Code of 1986, or to the corresponding section of such Code, as from time to time amended. 6.2 CHANGE OF CONTROL TERMINATION RIGHT. For a period of two (2) years following a Change of Control, the Executive shall have the right, at any time, to terminate employment with the Company for Good Reason. Such termination shall be accomplished by, and effective upon, the Executive giving written notice to the Company of the Executive's decision to terminate. Except as otherwise expressly provided in this Agreement, upon the exercise of said right, all obligations and duties of the Executive under this Agreement shall be of no further force and effect. 6.2.1 Change of Control Termination Payment. In the event of a termination pursuant to Section 6.2, without further action by the Board, the Company shall, within thirty (30) days of such termination, make a lump sum payment to the Executive, equal to two (2) years' Base Salary. 6.2.2 In addition to the amounts paid pursuant to Section 6.2.1 the Company shall pay to the Executive an amount equal to (a) two (2) times what the Executive would have received in incentive plan bonus for the year in which termination occurs as if the "target" goals had been achieved for that fiscal year, or (b) the actual amount of the incentive bonus to which the Executive would have been entitled had he remained with the Company based on the Company's actual performance, for the fiscal year in which termination occurs, whichever is greater. The amount provided by this Section 6.2.2 shall be earned and payable on the date that is fifteen (15) days after the date Executive would have been paid an annual incentive bonus had he remained with the Company for the fiscal year in which termination occurs. 6.2.3 Notwithstanding anything in this Agreement to the contrary, in the event any of the payments to the Executive under this Agreement would constitute an excess parachute payment pursuant to Section 280 G of the Internal Revenue Code, the amount payable pursuant to Section 6.2.2 shall be reduced by the minimum amount necessary such that none of the compensation payable to Executive as a result of a Change in Control shall constitute an excess parachute payment. 6.3 INTEREST. In the event the Company does not make timely payment in full of the Change of Control Termination payment described in Section 6.2, the Executive shall be entitled to receive interest on any unpaid amount at the lower of: (a) prime rate of interest (or such comparable index as may be adopted) established from time to time by the Company's principal banking institution or (b) the maximum rate permitted under Section 280G(d)(4) of the Internal Revenue Code. 6.4 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment pursuant to Section 6.2 herein, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under COBRA and such payment shall continue for the period of time the Executive is entitled to continue such coverage under COBRA. 6.5 VESTING OF STOCK OPTIONS. All unvested stock options held by Executive, if any, shall vest immediately upon a Change in Control Termination as defined in paragraph 6.1.2.1. Executive may exercise such options in accordance with the terms and conditions of the stock option plan and the agreement pursuant to which such options were granted. ARTICLE 7 GENERAL PROVISIONS 7.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company and each subsidiary, whether by way of merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of the Company, and any such successor or assign shall absolutely and unconditionally assume all of the Company's obligations hereunder. 7.2 NOTICES. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be delivered or mailed to any such party at its address as set forth at the beginning of this Agreement. Either party may change its address, by notice to the other party given in the manner set forth in this Section. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the third business day thereafter or when it is actually received, whichever is sooner. 7.3 CAPTION. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 7.4 GOVERNING LAW. The validity, construction and performance of this Agreement shall be governed by the laws of the State of Oregon 7.5 MEDIATION. In case of any dispute arising under this Agreement which cannot be settled by reasonable discussion, the parties agree that, prior to commencing any arbitration proceeding as contemplated by Section 7.6 they will first engage the services of a professional mediator agreed upon by the parties and attempt in good faith to resolve the dispute through confidential non- binding mediation. Each party shall bear one-half (1/2) of the mediator's fees and expenses and shall pay all of its own attorneys' fees and expenses related to the mediation. 7.6 ARBITRATION. Any dispute concerning the interpretation, construction, breach or enforcement of this Agreement or arising in any way from Executive's employment with Company or termination of employment shall be submitted to final and binding arbitration. Such arbitration is to be before a single arbitrator in Portland, Oregon. In the event the parties are unable to agree upon an arbitrator, an arbitrator shall be appointed by the court pursuant to ORS 36.320. The arbitration shall be conducted pursuant to the rules of the American Arbitration Association ("AAA") Employment Dispute Resolution Rules. Executive and the Company agree that the procedures outlined in Section 7.5 and 7.6 are the exclusive method of dispute resolution. 7.7 ATTORNEY FEES. If any action at law, in equity or by arbitration is taken to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled, including fees and expenses on appeal. 7.8 CONSTRUCTION. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 7.9 WAIVERS. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law. 7.10 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon the Executive, his administrators, executors, legatees, and heirs. In that this Agreement is a personal services contract, it shall not be assigned by the Executive. 7.11 MODIFICATION. This Agreement may not be and shall not be modified or amended except by written instrument signed by the parties hereto. 7.12 ENTIRE AGREEMENT. This Agreement together with the Confidentiality Agreement constitutes the entire agreement and understanding between the parties hereto in reference to all the matters herein agreed upon. This Agreement replaces and supersedes all prior employment agreements or understandings of the parties hereto; provided, however, that the Confidentiality Agreement continues in full force and effect according to its terms. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. EXECUTIVE PROTOCOL SYSTEMS, INC. By - -------------------------- ------------------------------ James B. Moon David Bolender, Chairman & CEO EX-10.7 8 Protocol Systems, Inc. EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ PARTIES: Protocol Systems, Inc. ("Company") 8500 SW Creekside Place Beaverton, OR 97008 JAMES P. WELCH ("Executive") 14340 SW Hazelhill Tigard, Oregon 97224 DATE: July 1, 1998 RECITALS: A. The Company wishes to obtain the services of the Executive for at least the duration of this Agreement, and the Executive wishes to provide his services for such period, all upon the terms and conditions set out in this Agreement. B. It is expressly recognized by the parties that the Executive's continuance in the Executive's position with the Company and agreement to be bound by the terms of this Agreement represents a substantial commitment to the Company in terms of the Executive's personal and professional career and a foregoing of present and future career options by the Executive, for all of which the Company receives substantial value. C. The parties recognize that a Change of Control (as defined below) may result in material alteration or diminishment of the Executive's position and responsibilities and substantially frustrate the purpose of the Executive's commitment to the Company and forbearance of career options. D. The parties recognize that in light of the above-described commitment and forbearance of career options, it is essential that, for the benefit of the Company and its stockholders, provision be made for a Change of Control Termination (as defined below) in order to enable the Executive to accept and effectively continue in the Executive's position in the face of inherently disruptive circumstances arising from the possibility of a Change of Control, although no such change is now contemplated or foreseen. NOW, THEREFORE, for valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ARTICLE 1 DEFINITIONS ----------- 1.1 "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments. 1.2 "Board" shall mean the Board of Directors of Protocol Systems, Inc. 1.3 "Disability" shall mean the inability of the Executive to perform the essential functions of his position under this Agreement with or without reasonable accommodation because of physical or mental incapacity for a continuous period of five (5) months, as reasonably determined by the Company after consultation with a qualified physician selected by the Company. 1.4 "Company" shall mean Protocol Systems, Inc. and, any successor in interest by way of consolidation, operation of law, merger or otherwise. 1.5 "Confidentiality Agreement" shall mean that certain Non-competition and Confidentiality Agreement dated 18 March 1991 by and between the Company and Executive. ARTICLE 2 EMPLOYMENT, DUTIES AND TERM --------------------------- 2.1 EMPLOYMENT. Upon the terms and conditions set forth in this Agreement, the Company hereby employs the Executive in the position of Vice President Systems, Marketing & Business Development,, and the Executive accepts such employment. 2.2 DUTIES. The Executive shall devote his full-time and best efforts to the Company and to fulfilling the duties of his position which shall include such duties as may from time to time be assigned him by the Chief Executive Officer, provided that such duties are reasonably consistent with the Executive's position. The Executive shall comply with the Company's policies and procedures to the extent they are not inconsistent with this Agreement, in which case the provisions of this Agreement prevail. 2.3 TERM. This Agreement shall remain in effect until the earlier of (i) termination pursuant to Article 4 or Article 6 of this Agreement or (ii) two (2) years from the date of this Agreement, provided however that if a Change in Control occurs within two (2) years from the date of this Agreement, then this Agreement shall remain in effect for two (2) years from the date of the first Change in Control event described in Section 6.1.1. ARTICLE 3 COMPENSATION AND EXPENSES ------------------------- 3.1 BASE SALARY. For all services rendered under this Agreement, the Company shall pay Executive a Base Salary that is not less than Executive's Base Salary as of the date of this Agreement. If the Executive's salary is increased from time to time during the term of this Agreement, the increased amount shall be the Base Salary for the remainder of the term and any extensions. All amounts payable to the Executive under this Agreement shall be reduced by such amounts as are required to be withheld by law. 3.2 BONUS AND INCENTIVE. Bonus or incentive compensation shall be in the sole discretion of the Board. Except as otherwise provided in Article 6, the Company shall have the right in accordance with the terms of any bonus or incentive plan to alter, amend or eliminate all or any part of such plan, or the Executive's participation therein, without compensation to the Executive. 3.3 BUSINESS EXPENSES. The Company shall, in accordance with, and to the extent of, its policies in effect from time to time, reimburse all ordinary and necessary business expenses reasonably incurred by the Executive in performing his duties as an employee of the Company, provided that the Executive accounts promptly for such expenses to the Company in the manner prescribed from time to time by the Company. ARTICLE 4 EARLY TERMINATION ----------------- 4.1 EARLY TERMINATION. This Article 4 governs termination of this Agreement at any time during the term of the Agreement; provided, however, that this Article shall not govern a "Change of Control Termination" as defined in Article 6. A Change in Control Termination is governed solely by the provisions of Article 6. 4.2 TERMINATION FOR CAUSE. The Company may terminate this Agreement and Executive's employment immediately for "Cause" as that term is defined herein, upon written notice to the Executive. 4.2.1 "Cause" means any one of the following: (a) fraud, (b)misrepresentation, (c) theft or embezzlement of the Company assets, (d) intentional violations of law involving moral turpitude, (e) the continued failure by the Executive to satisfactorily perform his duties as reasonably assigned to the Executive pursuant to Section 2.2 of this Agreement for a period of sixty (60) days after a written demand for such satisfactory performance which specifically and with reasonable detail identifies the manner in which it is alleged the Executive has not satisfactorily performed such duties, and (f) any material breach of the Confidentiality Agreement. 4.2.2 In the event of termination for Cause pursuant to this Section 4.2, the Executive shall be paid his Base Salary through the date of termination specified in any notice of termination. The Executive will not be entitled to any bonuses or incentives which are not earned and payable at the time of the termination. 4.3 Termination Without Cause. Either the Executive or the Company may terminate this Agreement and the Executive's employment without Cause by providing at least seventy-five (75) days' written notice; provided, however, that the Company shall have the option of making termination of the Agreement and termination of the Executive's employment effective immediately upon notice, in which case Executive shall be paid his Base Salary through a notice period of seventy-five (75) days. This Section 4.3 shall not be applicable where Cause for termination exists. 4.3.1 If the notice of termination is given by the Company, in addition to any other amounts payable to Executive, under this Section 4.3, the Company shall pay Executive within fifteen (15) days following termination, a lump sum amount equal to one (1) year's Base Salary. 4.3.2 In the event that termination occurs pursuant to Section 4.3.1 then, in addition to the payments specified in said Section, the Company shall pay to the Executive bonuses, if any, as follows: 4.3.2.1 Company shall pay Executive an amount equal to the annual bonus or annual incentive, if any, to which the Executive would otherwise have become entitled under any Company bonus or incentive plan in effect at the time of termination of this Agreement had the Executive remained continuously employed for the full fiscal year in which termination occurred and continued to perform his duties in the same manner as they were performed immediately prior to termination; provided, however, that such bonus or incentive amount shall be pro-rated to the date of termination. The amount payable pursuant to this Section 4.3.2.1 shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year. 4.3.2.2 In the event Executive would have been entitled to a quarterly bonus or quarterly incentive payment had he remained employed for the entire quarter in which Executive was terminated, the Company shall pay Executive such quarterly bonus or incentive amount pro-rated to the date of termination, payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full quarter. 4.4 TERMINATION IN THE EVENT OF DEATH OR DISABILITY. This Agreement and Executive's employment shall terminate in the event of death or Disability of the Executive. 4.4.1 In the event of the Executive's death, the Company shall pay an amount equal to six (6) month's Base Salary to the executor, administrator or other personal representative of the Executive's estate. The amount shall be paid as a lump sum as soon as practicable following Company's receipt of notice of the Executive's death. All such payments shall be in addition to any payments due pursuant to Section 4.4.3 below. 4.4.2 In the event of termination due to Executive's Disability, Base Salary shall be terminated as of the final day of the fifth month referenced in the definition of "Disability." Unless otherwise disqualified by the disability benefit program provider, this Section is not intended to limit the Executive from qualifying for and claiming disability benefits from any other disability program in which the Executive may be enrolled or otherwise for which he is qualified at the time of disability. 4.4.3 In the event of termination by reason of the Executive's death or Disability, the Company shall pay to the Executive an amount equal to the amount the Executive would have received in incentive plan bonus for the year in which termination occurred had "target" goals been achieved, provided, however, that such amount shall be pro-rated to the date of termination. This amount shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year in which termination occurred. 4.5 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment by the Company pursuant to Section 4.3.1 or termination due to Disability, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") and shall continue such payment for the period of time the Executive is entitled to continue such coverage under COBRA. 4.6 ENTIRE TERMINATION PAYMENT. The compensation provided for in this Article 4 shall constitute the Executive's sole remedy for termination pursuant to this Article. The Executive shall not be entitled to any other termination or severance payment which may be payable to the Executive under any other agreement between the Executive and the Company preceding or following the date of termination. ARTICLE 5 CONFIDENTIALITY; CONFLICT OF INTEREST ------------------------------------- PROPRIETARY INFORMATION. Executive shall keep confidential, except as the Company may otherwise consent in writing, and not disclose or make any use of except for the benefit of the Company, at any time either during or subsequent to his employment by the Company, any Proprietary Information which he may produce, obtain or otherwise acquire during the course of his employment. As used herein, "Proprietary Information" shall include any trade secrets, confidential information, knowledge, data, or other information of the Company relating to products, processes, know-how, designs, formulae, test procedures and results, customer lists, business plans, marketing plans and strategies, and pricing strategies, or other subject matter pertaining to any business of the Company for any of its clients, customers, consultants, licensees of affiliates, which information is not in the public domain at the time of the alleged breach. In the event of the termination of the Executive's employment for any reason whatsoever, Executive shall promptly return all records, materials, equipment, drawings and the like pertaining to any Proprietary Information. Notwithstanding the foregoing, this Section 5.2 shall not apply to the Executive if the Executive's employment was terminated pursuant to Section 4.3 or Section 6.1.2.1 of this agreement. 5.2 COVENANT NOT TO COMPETE. Executive acknowledges that he will provide special skills, and acquire special information, regarding the activities of the Company. Executive agrees, therefore, that he will not, for a period of twelve (12) months from and after the date he ceases to be employed by the Company, join, control or participate in the ownership, management, operation or control of or be connected with, any business located in the United States of America whose commercial products are in direct competition with the Company or which is developing products which will be in direct competition with the Company, in such a manner and position that he would likely use Proprietary Information, unless released from such obligation by the Board of Directors of the Company. Executive agrees that he shall be deemed to be connected with a business if such a business is carried on by a partnership in which he is a general or limited partner or employee of a corporation or association of which he is a shareholder, officer, director, employee, member, consultant or agent; provided, that nothing herein shall prohibit the purchase or ownership by him of shares of less than five percent (5%) in a publicly or privately held corporation. Executive agrees to submit a list of such business interests in Exhibit A attached hereto and incorporated by reference herein. 5.3 CONSENT TO INJUNCTION. Executive agrees that the Company will or would suffer an irreparable injury if Executive were to compete with the business of the Company or any of its subsidiaries in violation of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction and Executive stipulates to the entering of such injunctive relief prohibiting him from competing with the Company or any present affiliate of the Company in connection with the business of the Company, in violation of this Agreement. 5.4 SEVERABILITY. The parties intend that the covenants contained in Section 5.2 be deemed to be separate covenants as to each county and state, and that if in any judicial proceeding a court shall refuse to enforce all of the separate covenants included herein because, taken together, they cover too extensive a geographic area or because any one includes too large an area or because they cover too large a period of time, the parties intend that such covenants shall be reduced in scope to the extent required by law or, if necessary, eliminated from the provisions hereof, and that all of the remaining covenants hereof not so affected shall remain fully effective and enforceable. 5.5 ASSIGNMENT OF INVENTIONS. As used in this Agreement, "inventions" shall include, but not be limited to, ideas, improvements, designs, and discoveries. Executive hereby assigns and transfers to the Company entire right, title and interest in and to all inventions whether or not conceived by Executive (whether made solely by Executive or jointly with others) during the period of his employment with the Company which relate in any manner to the actual or demonstrably anticipated business, work, or research an development of the Company or its subsidiaries, or result from or are suggested by any tasks assigned to Executive or any work performed by Executive for or on behalf of the Company or its subsidiaries. Executive agrees that all such inventions are sole property of the Company, provided, however, that this Agreement does not require assignment of any invention if such assignment would contravene applicable state law. 5.6 DISCLOSURE OF INVENTIONS, PATENTS. Executive agrees that in connection with any invention as defined in Section 5.5, above: 5.6.1 Executive will disclose such invention promptly in writing to the Board of Directors of the Company, with a copy to the President, regardless of whether he believes the invention is protected by applicable state law, in order to permit the Company to claim rights to which it may be entitled under this Agreement. Such disclosure shall be received in confidence by the Company. 5.6.2 Executive will, at the Company's request, promptly execute a written assignment of title to the Company for any invention required to be assigned by Section 5.5 ("assignable invention") and Executive will preserve any such assignable invention as confidential information of the Company; and 5.6.3 Upon request, Executive agrees to assist the Company or its nominee (at its expense) during and at any time subsequent to his employment in every reasonable way to obtain for its own benefit patents and copyrights for such assignable inventions in any and all countries, which inventions shall be and remain the sole and exclusive property of the Company or its nominee, whether or not patented or copyrighted. Executive agrees to execute such papers and perform such lawful acts as the Company deems to be necessary to allow it to exercise all right, title, and interest in such patents and copyrights. 5.6.4 Executive agrees to submit a list of inventions made prior to his employment by the Company on Exhibit B attached hereto and incorporated by reference herein. 5.7 EXECUTION OF DOCUMENTATION. In connection with Section 5.5 and Section 5.6, Executive further agrees to execute, acknowledge and deliver to the Company or its nominee upon request and at its expense all such assignments of inventions, patents, and copyrights to be issued therefor, as the Company may determine necessary or desirable for which to apply. Executive agrees to obtain letters, patents, and copyrights on such assignable inventions in any and all countries and/or protect the interest of the Company or its nominee in such inventions, patents and copyrights and to vest title thereto in the Company or its nominee. 5.8 OTHER OBLIGATIONS. Executive acknowledges that the Company from time to time may have agreements with other persons or with the U.S. Government, or agencies thereof, which impose obligations or restrictions on the Company regarding inventions made during the course of work thereunder or regarding the confidential nature of such work. Executive agrees to be bound by all such obligations and restrictions and to take all action necessary to discharge the obligations of the Company thereunder. 5.9 TRADE SECRETS OF OTHERS. Executive represents that his performance of all the terms of this Agreement and as an employee of the Company such employment does not and will not breach any agreement to keep in confidence proprietary information, knowledge, or data acquired by Executive in confidence or in trust prior to his employment with the Company. Executive will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. Executive agrees not to enter into any agreement either written or oral in conflict herewith. 5.10 CONFLICT OF INTEREST. During Executive's employment with the Company, Executive will engage in no activity or employment which may conflict with the interest of the Company and will comply with the Company's policies and guidelines pertaining to business conduct and ethics. 5.11 PREVIOUS AGREEMENTS. Executive represents and warrants to the Company that as of the date of this Agreement, he has fully complied with the terms of the Confidentiality Agreement. Executive's obligations under this Agreement are in addition to, do not limit, and are not limited by, Executive's Confidentiality Agreement. To the extent any provision of the Confidentiality Agreement conflicts with the provisions of this Agreement, the provisions of this Agreement control. 5.12 SURVIVAL OF OBLIGATIONS. The provisions of this Article 5 shall survive termination of this Agreement. ARTICLE 6 CHANGE OF CONTROL ----------------- 6.1 DEFINITIONS. For purposes of this Article 6, the following definitions shall be applied: 6.1.1 "Change of Control" shall mean any of the following events: 6.1.1.1 a merger or consolidation to which the Company is a party if the individuals and entities who were stockholders of the Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) of the total combined voting power for election of directors of the surviving corporation immediately following the effective date of such merger or consolidation; or 6.1.1.2 the direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), in the aggregate, of securities of the Company, representing twenty percent (20%) or more of the total combined voting power of the Company's then issued and outstanding securities, by any person or entity, or group of associated persons or entities acting in concert; or 6.1.1.3 the sale of all or substantially all of the assets of the Company to any person or entity which is not a subsidiary of the Company; or 6.1.1.4 the stockholders of the Company approve any plan or proposal for the liquidation of the Company; or 6.1.1.5 a change in the composition of the Board at any time during any consecutive 24-month period such that the Continuity Directors cease for any reason to constitute at least a seventy percent (70%) majority of the Board. For purposes of this clause, "Continuity Directors" means those members of the Board who either: 6.1.1.5.1 were directors at the beginning of such consecutive 24-month period; or 6.1.1.5.2 were elected by, or on the nomination or recommendation of, at least a two-thirds (2/3) majority of the then-existing Board. 6.1.2 "Change of Control Termination" shall mean, with respect to the Executive, any of the following events occurring within two (2) years after a Change of Control: 6.1.2.1 Termination of the Executive's employment by the Company for any reason other than for Cause, as Cause is defined in Section 4.2 of this Agreement. 6.1.2.2 Termination of employment with the Company by the Executive pursuant to Section 6.2 of this Article 6. A Change of Control Termination shall not, however, include termination by reason of death or Disability. 6.1.3 "Good Reason" shall mean a good faith determination by the Executive, in the Executive's reasonable judgment, that any one or more of the following events has occurred without the Executive's express written consent, after a Change of Control, and the Company's failure to correct such occurrence for a period of thirty (30) days following Executive's written notice to Company identifying the event alleged to provide Good Reason and stating Executive's intent to invoke Section 6.2 of this Article 6. 6.1.3.1 A change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change of Control, or any removal of the Executive from, or any failure to re-elect the Executive to, any of such positions, which has the effect of materially diminishing the Executive's responsibility or authority; 6.1.3.2 A reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change of Control; 6.1.3.3 A requirement by the Company that the Executive be based anywhere other than within twenty-five (25) miles of the Executive's job location at the time of the Change of Control; 6.1.3.4 A material diminishment of Executive's pension, bonus, incentive, stock ownership, purchase, option, life insurance, health, accident, disability, or any other employee compensation or benefit plan, program or arrangement and/or any membership (collectively, "Benefit Plans"), in which the Executive is participating immediately prior to a Change of Control; or the taking of any action by the Company that would materially adversely affect the Executive's participation or materially reduce the Executive's benefits under any Benefit Plans or Benefit Plan; 6.1.3.5 Any material breach of this Agreement by the Company. 6.1.4 "Internal Revenue Code" -- Any references to a section of the Internal Revenue Code shall mean that section of the Internal Revenue Code of 1986, or to the corresponding section of such Code, as from time to time amended. 6.2 CHANGE OF CONTROL TERMINATION RIGHT. For a period of two (2) years following a Change of Control, the Executive shall have the right, at any time, to terminate employment with the Company for Good Reason. Such termination shall be accomplished by, and effective upon, the Executive giving written notice to the Company of the Executive's decision to terminate. Except as otherwise expressly provided in this Agreement, upon the exercise of said right, all obligations and duties of the Executive under this Agreement shall be of no further force and effect. 6.2.1 CHANGE OF CONTROL TERMINATION PAYMENT. In the event of a termination pursuant to Section 6.2, without further action by the Board, the Company shall, within thirty (30) days of such termination, make a lump sum payment to the Executive, equal to two (2) years' Base Salary. 6.2.2 In addition to the amounts paid pursuant to Section 6.2.1 the Company shall pay to the Executive an amount equal to (a) two (2) times what the Executive would have received in incentive plan bonus for the year in which termination occurs as if the "target" goals had been achieved for that fiscal year, or (b) the actual amount of the incentive bonus to which the Executive would have been entitled had he remained with the Company based on the Company's actual performance, for the fiscal year in which termination occurs, whichever is greater. The amount provided by this Section 6.2.2 shall be earned and payable on the date that is fifteen (15) days after the date Executive would have been paid an annual incentive bonus had he remained with the Company for the fiscal year in which termination occurs. 6.2.3 Notwithstanding anything in this Agreement to the contrary, in the event any of the payments to the Executive under this Agreement would constitute an excess parachute payment pursuant to Section 280 G of the Internal Revenue Code, the amount payable pursuant to Section 6.2.2 shall be reduced by the minimum amount necessary such that none of the compensation payable to Executive as a result of a Change in Control shall constitute an excess parachute payment. 6.3 INTEREST. In the event the Company does not make timely payment in full of the Change of Control Termination payment described in Section 6.2, the Executive shall be entitled to receive interest on any unpaid amount at the lower of: (a) prime rate of interest (or such comparable index as may be adopted) established from time to time by the Company's principal banking institution or (b) the maximum rate permitted under Section 280G(d)(4) of the Internal Revenue Code. 6.4 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment pursuant to Section 6.2 herein, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under COBRA and such payment shall continue for the period of time the Executive is entitled to continue such coverage under COBRA. 6.5 VESTING OF STOCK OPTIONS. All unvested stock options held by Executive, if any, shall vest immediately upon a Change in Control Termination as defined in paragraph 6.1.2.1. Executive may exercise such options in accordance with the terms and conditions of the stock option plan and the agreement pursuant to which such options were granted. ARTICLE 7 GENERAL PROVISIONS ------------------ 7.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company and each subsidiary, whether by way of merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of the Company, and any such successor or assign shall absolutely and unconditionally assume all of the Company's obligations hereunder. 7.2 NOTICES. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be delivered or mailed to any such party at its address as set forth at the beginning of this Agreement. Either party may change its address, by notice to the other party given in the manner set forth in this Section. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the third business day thereafter or when it is actually received, whichever is sooner. 7.3 CAPTION. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 7.4 GOVERNING LAW. The validity, construction and performance of this Agreement shall be governed by the laws of the State of Oregon 7.5 MEDIATION. In case of any dispute arising under this Agreement which cannot be settled by reasonable discussion, the parties agree that, prior to commencing any arbitration proceeding as contemplated by Section 7.6 they will first engage the services of a professional mediator agreed upon by the parties and attempt in good faith to resolve the dispute through confidential non- binding mediation. Each party shall bear one-half (1/2) of the mediator's fees and expenses and shall pay all of its own attorneys' fees and expenses related to the mediation. 7.6 ARBITRATION. Any dispute concerning the interpretation, construction, breach or enforcement of this Agreement or arising in any way from Executive's employment with Company or termination of employment shall be submitted to final and binding arbitration. Such arbitration is to be before a single arbitrator in Portland, Oregon. In the event the parties are unable to agree upon an arbitrator, an arbitrator shall be appointed by the court pursuant to ORS 36.320. The arbitration shall be conducted pursuant to the rules of the American Arbitration Association ("AAA") Employment Dispute Resolution Rules. Executive and the Company agree that the procedures outlined in Section 7.5 and 7.6 are the exclusive method of dispute resolution. 7.7 ATTORNEY FEES. If any action at law, in equity or by arbitration is taken to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled, including fees and expenses on appeal. 7.8 CONSTRUCTION. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 7.9 WAIVERS. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law. 7.10 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon the Executive, his administrators, executors, legatees, and heirs. In that this Agreement is a personal services contract, it shall not be assigned by the Executive. 7.11 MODIFICATION. This Agreement may not be and shall not be modified or amended except by written instrument signed by the parties hereto. 7.12 ENTIRE AGREEMENT. This Agreement together with the Confidentiality Agreement constitutes the entire agreement and understanding between the parties hereto in reference to all the matters herein agreed upon. This Agreement replaces and supersedes all prior employment agreements or understandings of the parties hereto; provided, however, that the Confidentiality Agreement continues in full force and effect according to its terms. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. EXECUTIVE PROTOCOL SYSTEMS, INC. By - ---------------------- ---------------------------- James P. Welch David Bolender, Chairman & CEO EX-10.8 9 Protocol Systems, Inc. EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ PARTIES: Protocol Systems, Inc. ("Company") 8500 SW Creekside Place Beaverton, OR 97008 RICHARD ROA ("Executive") 7918 SW 189th Ave Beaverton, OR 97007 DATE: July 13, 1998 RECITALS: A. The Company wishes to obtain the services of the Executive for at least the duration of this Agreement, and the Executive wishes to provide his services for such period, all upon the terms and conditions set out in this Agreement. B. It is expressly recognized by the parties that the Executive's continuance in the Executive's position with the Company and agreement to be bound by the terms of this Agreement represents a substantial commitment to the Company in terms of the Executive's personal and professional career and a foregoing of present and future career options by the Executive, for all of which the Company receives substantial value. C. The parties recognize that a Change of Control (as defined below) may result in material alteration or diminishment of the Executive's position and responsibilities and substantially frustrate the purpose of the Executive's commitment to the Company and forbearance of career options. D. The parties recognize that in light of the above-described commitment and forbearance of career options, it is essential that, for the benefit of the Company and its stockholders, provision be made for a Change of Control Termination (as defined below) in order to enable the Executive to accept and effectively continue in the Executive's position in the face of inherently disruptive circumstances arising from the possibility of a Change of Control, although no such change is now contemplated or foreseen. NOW, THEREFORE, for valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments. 1.2 "Board" shall mean the Board of Directors of Protocol Systems, Inc. 1.3 "Disability" shall mean the inability of the Executive to perform the essential functions of his position under this Agreement with or without reasonable accommodation because of physical or mental incapacity for a continuous period of five (5) months, as reasonably determined by the Company after consultation with a qualified physician selected by the Company. 1.4 "Company" shall mean Protocol Systems, Inc. and, any successor in interest by way of consolidation, operation of law, merger or otherwise. 1.5 "Confidentiality Agreement" shall mean that certain Non-competition and Confidentiality Agreement dated 13 July 1998 by and between the Company and Executive. ARTICLE 2 EMPLOYMENT, DUTIES AND TERM 2.1 EMPLOYMENT. Upon the terms and conditions set forth in this Agreement, the Company hereby employs the Executive in the position of Vice President - Engineering, and the Executive accepts such employment. 2.2 DUTIES. The Executive shall devote his full-time and best efforts to the Company and to fulfilling the duties of his position which shall include such duties as may from time to time be assigned him by the Chief Executive Officer, provided that such duties are reasonably consistent with the Executive's position. The Executive shall comply with the Company's policies and procedures to the extent they are not inconsistent with this Agreement, in which case the provisions of this Agreement prevail. 2.3 TERM. This Agreement shall remain in effect until the earlier of (i) termination pursuant to Article 4 or Article 6 of this Agreement or (ii) two (2) years from the date of this Agreement, provided however that if a Change in Control occurs within two (2) years from the date of this Agreement, then this Agreement shall remain in effect for two (2) years from the date of the first Change in Control event described in Section 6.1.1. ARTICLE 3 COMPENSATION AND EXPENSES 3.1 BASE SALARY. For all services rendered under this Agreement, the Company shall pay Executive a Base Salary that is not less than Executive's Base Salary as of the date of this Agreement. If the Executive's salary is increased from time to time during the term of this Agreement, the increased amount shall be the Base Salary for the remainder of the term and any extensions. All amounts payable to the Executive under this Agreement shall be reduced by such amounts as are required to be withheld by law. 3.2 BONUS AND INCENTIVE. Bonus or incentive compensation shall be in the sole discretion of the Board. Except as otherwise provided in Article 6, the Company shall have the right in accordance with the terms of any bonus or incentive plan to alter, amend or eliminate all or any part of such plan, or the Executive's participation therein, without compensation to the Executive. 3.3 BUSINESS EXPENSES. The Company shall, in accordance with, and to the extent of, its policies in effect from time to time, reimburse all ordinary and necessary business expenses reasonably incurred by the Executive in performing his duties as an employee of the Company, provided that the Executive accounts promptly for such expenses to the Company in the manner prescribed from time to time by the Company. ARTICLE 4 EARLY TERMINATION 4.1 EARLY TERMINATION. This Article 4 governs termination of this Agreement at any time during the term of the Agreement; provided, however, that this Article shall not govern a "Change of Control Termination" as defined in Article 6. A Change in Control Termination is governed solely by the provisions of Article 6. 4.2 TERMINATION FOR CAUSE. The Company may terminate this Agreement and Executive's employment immediately for "Cause" as that term is defined herein, upon written notice to the Executive. 4.2.1 "Cause" means any one of the following: (a) fraud, (b) misrepresentation, (c) theft or embezzlement of the Company assets, (d) intentional violations of law involving moral turpitude, (e) the continued failure by the Executive to satisfactorily perform his duties as reasonably assigned to the Executive pursuant to Section 2.2 of this Agreement for a period of sixty (60) days after a written demand for such satisfactory performance which specifically and with reasonable detail identifies the manner in which it is alleged the Executive has not satisfactorily performed such duties, and (f) any material breach of the Confidentiality Agreement. 4.2.2 In the event of termination for Cause pursuant to this Section 4.2, the Executive shall be paid his Base Salary through the date of termination specified in any notice of termination. The Executive will not be entitled to any bonuses or incentives which are not earned and payable at the time of the termination. 4.3 TERMINATION WITHOUT CAUSE. Either the Executive or the Company may terminate this Agreement and the Executive's employment without Cause by providing at least seventy-five (75) days' written notice; provided, however, that the Company shall have the option of making termination of the Agreement and termination of the Executive's employment effective immediately upon notice, in which case Executive shall be paid his Base Salary through a notice period of seventy-five (75) days. This Section 4.3 shall not be applicable where Cause for termination exists. 4.3.1 If the notice of termination is given by the Company, in addition to any other amounts payable to Executive, under this Section 4.3, the Company shall pay Executive within fifteen (15) days following termination, a lump sum amount equal to six (6) month's Base Salary. 4.3.2 In the event that termination occurs pursuant to Section 4.3.1 then, in addition to the payments specified in said Section, the Company shall pay to the Executive bonuses, if any, as follows: 4.3.2.1 Company shall pay Executive an amount equal to the annual bonus or annual incentive, if any, to which the Executive would otherwise have become entitled under any Company bonus or incentive plan in effect at the time of termination of this Agreement had the Executive remained continuously employed for the full fiscal year in which termination occurred and continued to perform his duties in the same manner as they were performed immediately prior to termination; provided, however, that such bonus or incentive amount shall be pro-rated to the date of termination. The amount payable pursuant to this Section 4.3.2.1 shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year. 4.3.2.2 In the event Executive would have been entitled to a quarterly bonus or quarterly incentive payment had he remained employed for the entire quarter in which Executive was terminated, the Company shall pay Executive such quarterly bonus or incentive amount pro-rated to the date of termination, payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full quarter. 4.4 Termination in the Event of Death or Disability. This Agreement and Executive's employment shall terminate in the event of death or Disability of the Executive. 4.4.1 In the event of the Executive's death, the Company shall pay an amount equal to three (3) month's Base Salary to the executor, administrator or other personal representative of the Executive's estate. The amount shall be paid as a lump sum as soon as practicable following Company's receipt of notice of the Executive's death. All such payments shall be in addition to any payments due pursuant to Section 4.4.3 below. 4.4.2 In the event of termination due to Executive's Disability, Base Salary shall be terminated as of the final day of the fifth month referenced in the definition of "Disability." Unless otherwise disqualified by the disability benefit program provider, this Section is not intended to limit the Executive from qualifying for and claiming disability benefits from any other disability program in which the Executive may be enrolled or otherwise for which he is qualified at the time of disability. 4.4.3 In the event of termination by reason of the Executive's death or Disability, the Company shall pay to the Executive an amount equal to the amount the Executive would have received in incentive plan bonus for the year in which termination occurred had "target" goals been achieved, provided, however, that such amount shall be pro-rated to the date of termination. This amount shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year in which termination occurred. 4.5 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment by the Company pursuant to Section 4.3.1 or termination due to Disability, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") and shall continue such payment for the period of time the Executive is entitled to continue such coverage under COBRA. 4.6 ENTIRE TERMINATION PAYMENT. The compensation provided for in this Article 4 shall constitute the Executive's sole remedy for termination pursuant to this Article. The Executive shall not be entitled to any other termination or severance payment which may be payable to the Executive under any other agreement between the Executive and the Company preceding or following the date of termination. ARTICLE 5 CONFIDENTIALITY; CONFLICT OF INTEREST 5.1 PROPRIETARY INFORMATION. Executive shall keep confidential, except as the Company may otherwise consent in writing, and not disclose or make any use of except for the benefit of the Company, at any time either during or subsequent to his employment by the Company, any Proprietary Information which he may produce, obtain or otherwise acquire during the course of his employment. As used herein, "Proprietary Information" shall include any trade secrets, confidential information, knowledge, data, or other information of the Company relating to products, processes, know-how, designs, formulae, test procedures and results, customer lists, business plans, marketing plans and strategies, and pricing strategies, or other subject matter pertaining to any business of the Company for any of its clients, customers, consultants, licensees of affiliates, which information is not in the public domain at the time of the alleged breach. In the event of the termination of the Executive's employment for any reason whatsoever, Executive shall promptly return all records, materials, equipment, drawings and the like pertaining to any Proprietary Information. 5.2 COVENANT NOT TO COMPETE. Executive acknowledges that he will provide special skills, and acquire special information, regarding the activities of the Company. Executive agrees, therefore, that he will not, for a period of twelve (12) months from and after the date he ceases to be employed by the Company, join, control or participate in the ownership, management, operation or control of or be connected with, any business located in the United States of America whose commercial products are in direct competition with the Company or which is developing products which will be in direct competition with the Company, in such a manner and position that he would likely use Proprietary Information, unless released from such obligation by the Board of Directors of the Company. Executive agrees that he shall be deemed to be connected with a business if such a business is carried on by a partnership in which he is a general or limited partner or employee of a corporation or association of which he is a shareholder, officer, director, employee, member, consultant or agent; provided, that nothing herein shall prohibit the purchase or ownership by him of shares of less than five percent (5%) in a publicly or privately held corporation. Executive agrees to submit a list of such business interests in Exhibit A attached hereto and incorporated by reference herein. Notwithstanding the foregoing, this Section 5.2 shall not apply to the Executive if the Executive's employment was terminated pursuant to Section 4.3 or Section 6.1.2.1 of this agreement. 5.3 CONSENT TO INJUNCTION. Executive agrees that the Company will or would suffer an irreparable injury if Executive were to compete with the business of the Company or any of its subsidiaries in violation of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction and Executive stipulates to the entering of such injunctive relief prohibiting him from competing with the Company or any present affiliate of the Company in connection with the business of the Company, in violation of this Agreement. 5.4 SEVERABILITY. The parties intend that the covenants contained in Section 5.2 be deemed to be separate covenants as to each county and state, and that if in any judicial proceeding a court shall refuse to enforce all of the separate covenants included herein because, taken together, they cover too extensive a geographic area or because any one includes too large an area or because they cover too large a period of time, the parties intend that such covenants shall be reduced in scope to the extent required by law or, if necessary, eliminated from the provisions hereof, and that all of the remaining covenants hereof not so affected shall remain fully effective and enforceable. 5.5 ASSIGNMENT OF INVENTIONS. As used in this Agreement, "inventions" shall include, but not be limited to, ideas, improvements, designs, and discoveries. Executive hereby assigns and transfers to the Company entire right, title and interest in and to all inventions whether or not conceived by Executive (whether made solely by Executive or jointly with others) during the period of his employment with the Company which relate in any manner to the actual or demonstrably anticipated business, work, or research an development of the Company or its subsidiaries, or result from or are suggested by any tasks assigned to Executive or any work performed by Executive for or on behalf of the Company or its subsidiaries. Executive agrees that all such inventions are sole property of the Company, provided, however, that this Agreement does not require assignment of any invention if such assignment would contravene applicable state law. 5.6 DISCLOSURE OF INVENTIONS, PATENTS. Executive agrees that in connection with any invention as defined in Section 5.5, above: 5.6.1 Executive will disclose such invention promptly in writing to the Board of Directors of the Company, with a copy to the President, regardless of whether he believes the invention is protected by applicable state law, in order to permit the Company to claim rights to which it may be entitled under this Agreement. Such disclosure shall be received in confidence by the Company. 5.6.2 Executive will, at the Company's request, promptly execute a written assignment of title to the Company for any invention required to be assigned by Section 5.5 ("assignable invention") and Executive will preserve any such assignable invention as confidential information of the Company; and 5.6.3 Upon request, Executive agrees to assist the Company or its nominee (at its expense) during and at any time subsequent to his employment in every reasonable way to obtain for its own benefit patents and copyrights for such assignable inventions in any and all countries, which inventions shall be and remain the sole and exclusive property of the Company or its nominee, whether or not patented or copyrighted. Executive agrees to execute such papers and perform such lawful acts as the Company deems to be necessary to allow it to exercise all right, title, and interest in such patents and copyrights. 5.6.4 Executive agrees to submit a list of inventions made prior to his employment by the Company on Exhibit B attached hereto and incorporated by reference herein. 5.7 EXECUTION OF DOCUMENTATION. In connection with Section 5.5 and Section 5.6, Executive further agrees to execute, acknowledge and deliver to the Company or its nominee upon request and at its expense all such assignments of inventions, patents, and copyrights to be issued therefor, as the Company may determine necessary or desirable for which to apply. Executive agrees to obtain letters, patents, and copyrights on such assignable inventions in any and all countries and/or protect the interest of the Company or its nominee in such inventions, patents and copyrights and to vest title thereto in the Company or its nominee. 5.8 OTHER OBLIGATIONS. Executive acknowledges that the Company from time to time may have agreements with other persons or with the U.S. Government, or agencies thereof, which impose obligations or restrictions on the Company regarding inventions made during the course of work thereunder or regarding the confidential nature of such work. Executive agrees to be bound by all such obligations and restrictions and to take all action necessary to discharge the obligations of the Company thereunder. 5.9 TRADE SECRETS OF OTHERS. Executive represents that his performance of all the terms of this Agreement and as an employee of the Company such employment does not and will not breach any agreement to keep in confidence proprietary information, knowledge, or data acquired by Executive in confidence or in trust prior to his employment with the Company. Executive will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. Executive agrees not to enter into any agreement either written or oral in conflict herewith. 5.10 CONFLICT OF INTEREST. During Executive's employment with the Company, Executive will engage in no activity or employment which may conflict with the interest of the Company and will comply with the Company's policies and guidelines pertaining to business conduct and ethics. 5.11 PREVIOUS AGREEMENTS. Executive represents and warrants to the Company that as of the date of this Agreement, he has fully complied with the terms of the Confidentiality Agreement. Executive's obligations under this Agreement are in addition to, do not limit, and are not limited by, Executive's Confidentiality Agreement. To the extent any provision of the Confidentiality Agreement conflicts with the provisions of this Agreement, the provisions of this Agreement control. 5.12 SURVIVAL OF OBLIGATIONS. The provisions of this Article 5 shall survive termination of this Agreement. ARTICLE 6 CHANGE OF CONTROL 6.1 DEFINITIONS. For purposes of this Article 6, the following definitions shall be applied: 6.1.1 "Change of Control" shall mean any of the following events: 6.1.1.1 a merger or consolidation to which the Company is a party if the individuals and entities who were stockholders of the Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) of the total combined voting power for election of directors of the surviving corporation immediately following the effective date of such merger or consolidation; or 6.1.1.2 the direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), in the aggregate, of securities of the Company, representing twenty percent (20%) or more of the total combined voting power of the Company's then issued and outstanding securities, by any person or entity, or group of associated persons or entities acting in concert; or 6.1.1.3 the sale of all or substantially all of the assets of the Company to any person or entity which is not a subsidiary of the Company; or 6.1.1.4 the stockholders of the Company approve any plan or proposal for the liquidation of the Company; or 6.1.1.5 a change in the composition of the Board at any time during any consecutive 24-month period such that the Continuity Directors cease for any reason to constitute at least a seventy percent (70%) majority of the Board. For purposes of this clause, "Continuity Directors" means those members of the Board who either: 6.1.1.5.1 were directors at the beginning of such consecutive 24-month period; or 6.1.1.5.2 were elected by, or on the nomination or recommendation of, at least a two-thirds (2/3) majority of the then-existing Board. 6.1.2 "Change of Control Termination" shall mean, with respect to the Executive, any of the following events occurring within two (2) years after a Change of Control: 6.1.2.1 Termination of the Executive's employment by the Company for any reason other than for Cause, as Cause is defined in Section 4.2 of this Agreement. 6.1.2.2.Termination of employment with the Company by the Executive pursuant to Section 6.2 of this Article 6. A Change of Control Termination shall not, however, include termination by reason of death or Disability. 6.1.3 "Good Reason" shall mean a good faith determination by the Executive, in the Executive's reasonable judgment, that any one or more of the following events has occurred without the Executive's express written consent, after a Change of Control, and the Company's failure to correct such occurrence for a period of thirty (30) days following Executive's written notice to Company identifying the event alleged to provide Good Reason and stating Executive's intent to invoke Section 6.2 of this Article 6. 6.1.3.1 A change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change of Control, or any removal of the Executive from, or any failure to re-elect the Executive to, any of such positions, which has the effect of materially diminishing the Executive's responsibility or authority; 6.1.3.2 A reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change of Control; 6.1.3.3 A requirement by the Company that the Executive be based anywhere other than within twenty-five (25) miles of the Executive's job location at the time of the Change of Control; 6.1.3.4 A material diminishment of Executive's pension, bonus, incentive, stock ownership, purchase, option, life insurance, health, accident, disability, or any other employee compensation or benefit plan, program or arrangement and/or any membership (collectively, "Benefit Plans"), in which the Executive is participating immediately prior to a Change of Control; or the taking of any action by the Company that would materially adversely affect the Executive's participation or materially reduce the Executive's benefits under any Benefit Plans or Benefit Plan; 6.1.3.5 Any material breach of this Agreement by the Company. 6.1.4 "Internal Revenue Code" -- Any references to a section of the Internal Revenue Code shall mean that section of the Internal Revenue Code of 1986, or to the corresponding section of such Code, as from time to time amended. 6.2 CHANGE OF CONTROL TERMINATION RIGHT. For a period of two (2) years following a Change of Control, the Executive shall have the right, at any time, to terminate employment with the Company for Good Reason. Such termination shall be accomplished by, and effective upon, the Executive giving written notice to the Company of the Executive's decision to terminate. Except as otherwise expressly provided in this Agreement, upon the exercise of said right, all obligations and duties of the Executive under this Agreement shall be of no further force and effect. 6.2.1 Change of Control Termination Payment. In the event of a termination pursuant to Section 6.2, without further action by the Board, the Company shall, within thirty (30) days of such termination, make a lump sum payment to the Executive, equal to one (1) year's Base Salary. 6.2.2 In addition to the amounts paid pursuant to Section 6.2.1 the Company shall pay to the Executive an amount equal to (a) one (1) time what the Executive would have received in incentive plan bonus for the year in which termination occurs as if the "target" goals had been achieved for that fiscal year, or (b) the actual amount of the incentive bonus to which the Executive would have been entitled had he remained with the Company based on the Company's actual performance, for the fiscal year in which termination occurs, whichever is greater. The amount provided by this Section 6.2.2 shall be earned and payable on the date that is fifteen (15) days after the date Executive would have been paid an annual incentive bonus had he remained with the Company for the fiscal year in which termination occurs. 6.2.3 Notwithstanding anything in this Agreement to the contrary, in the event any of the payments to the Executive under this Agreement would constitute an excess parachute payment pursuant to Section 280 G of the Internal Revenue Code, the amount payable pursuant to Section 6.2.2 shall be reduced by the minimum amount necessary such that none of the compensation payable to Executive as a result of a Change in Control shall constitute an excess parachute payment. 6.3 INTEREST. In the event the Company does not make timely payment in full of the Change of Control Termination payment described in Section 6.2, the Executive shall be entitled to receive interest on any unpaid amount at the lower of: (a) prime rate of interest (or such comparable index as may be adopted) established from time to time by the Company's principal banking institution or (b) the maximum rate permitted under Section 280G(d)(4) of the Internal Revenue Code. 6.4 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment pursuant to Section 6.2 herein, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under COBRA and such payment shall continue for the period of time the Executive is entitled to continue such coverage under COBRA. 6.5 VESTING OF STOCK OPTIONS. All unvested stock options held by Executive, if any, shall vest immediately upon a Change in Control Termination as defined in paragraph 6.1.2.1. Executive may exercise such options in accordance with the terms and conditions of the stock option plan and the agreement pursuant to which such options were granted. ARTICLE 7 GENERAL PROVISIONS 7.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company and each subsidiary, whether by way of merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of the Company, and any such successor or assign shall absolutely and unconditionally assume all of the Company's obligations hereunder. 7.2 NOTICES. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be delivered or mailed to any such party at its address as set forth at the beginning of this Agreement. Either party may change its address, by notice to the other party given in the manner set forth in this Section. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the third business day thereafter or when it is actually received, whichever is sooner. 7.3 CAPTION. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 7.4 GOVERNING LAW. The validity, construction and performance of this Agreement shall be governed by the laws of the State of Oregon 7.5 MEDIATION. In case of any dispute arising under this Agreement which cannot be settled by reasonable discussion, the parties agree that, prior to commencing any arbitration proceeding as contemplated by Section 7.6 they will first engage the services of a professional mediator agreed upon by the parties and attempt in good faith to resolve the dispute through confidential non- binding mediation. Each party shall bear one-half (1/2) of the mediator's fees and expenses and shall pay all of its own attorneys' fees and expenses related to the mediation. 7.6 ARBITRATION. Any dispute concerning the interpretation, construction, breach or enforcement of this Agreement or arising in any way from Executive's employment with Company or termination of employment shall be submitted to final and binding arbitration. Such arbitration is to be before a single arbitrator in Portland, Oregon. In the event the parties are unable to agree upon an arbitrator, an arbitrator shall be appointed by the court pursuant to ORS 36.320. The arbitration shall be conducted pursuant to the rules of the American Arbitration Association ("AAA") Employment Dispute Resolution Rules. Executive and the Company agree that the procedures outlined in Section 7.5 and 7.6 are the exclusive method of dispute resolution. 7.7 ATTORNEY FEES. If any action at law, in equity or by arbitration is taken to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled, including fees and expenses on appeal. 7.8 CONSTRUCTION. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 7.9 WAIVERS. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law. 7.10 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon the Executive, his administrators, executors, legatees, and heirs. In that this Agreement is a personal services contract, it shall not be assigned by the Executive. 7.11 MODIFICATION. This Agreement may not be and shall not be modified or amended except by written instrument signed by the parties hereto. 7.12 ENTIRE AGREEMENT. This Agreement together with the Confidentiality Agreement constitutes the entire agreement and understanding between the parties hereto in reference to all the matters herein agreed upon. This Agreement replaces and supersedes all prior employment agreements or understandings of the parties hereto; provided, however, that the Confidentiality Agreement continues in full force and effect according to its terms. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. EXECUTIVE PROTOCOL SYSTEMS, INC. By - -------------------------- ------------------------------ Richard Roa David Bolender, Chairman & CEO EX-10.9 10 Protocol Systems, Inc. EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ PARTIES: Protocol Systems, Inc. ("Company") 8500 SW Creekside Place Beaverton, OR 97008 DON ABBEY ("Executive") 13975 SW Chinn Lane #236 Tigard, OR 97224 DATE: June 29, 1998 RECITALS: A. The Company wishes to obtain the services of the Executive for at least the duration of this Agreement, and the Executive wishes to provide his services for such period, all upon the terms and conditions set out in this Agreement. B. It is expressly recognized by the parties that the Executive's continuance in the Executive's position with the Company and agreement to be bound by the terms of this Agreement represents a substantial commitment to the Company in terms of the Executive's personal and professional career and a foregoing of present and future career options by the Executive, for all of which the Company receives substantial value. C. The parties recognize that a Change of Control (as defined below) may result in material alteration or diminishment of the Executive's position and responsibilities and substantially frustrate the purpose of the Executive's commitment to the Company and forbearance of career options. D. The parties recognize that in light of the above-described commitment and forbearance of career options, it is essential that, for the benefit of the Company and its stockholders, provision be made for a Change of Control Termination (as defined below) in order to enable the Executive to accept and effectively continue in the Executive's position in the face of inherently disruptive circumstances arising from the possibility of a Change of Control, although no such change is now contemplated or foreseen. NOW, THEREFORE, for valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments. 1.2 "Board" shall mean the Board of Directors of Protocol Systems, Inc. 1.3 "Disability" shall mean the inability of the Executive to perform the essential functions of his position under this Agreement with or without reasonable accommodation because of physical or mental incapacity for a continuous period of five (5) months, as reasonably determined by the Company after consultation with a qualified physician selected by the Company. 1.4 "Company" shall mean Protocol Systems, Inc. and, any successor in interest by way of consolidation, operation of law, merger or otherwise. 1.5 "Confidentiality Agreement" shall mean that certain Non-competition and Confidentiality Agreement dated 29 June 1998 by and between the Company and Executive. ARTICLE 2 EMPLOYMENT, DUTIES AND TERM 2.1 EMPLOYMENT. Upon the terms and conditions set forth in this Agreement, the Company hereby employs the Executive in the position of Vice President - Quality Systems, and the Executive accepts such employment. 2.2 DUTIES. The Executive shall devote his full-time and best efforts to the Company and to fulfilling the duties of his position which shall include such duties as may from time to time be assigned him by the Chief Executive Officer, provided that such duties are reasonably consistent with the Executive's position. The Executive shall comply with the Company's policies and procedures to the extent they are not inconsistent with this Agreement, in which case the provisions of this Agreement prevail. 2.3 TERM. This Agreement shall remain in effect until the earlier of (i) termination pursuant to Article 4 or Article 6 of this Agreement or (ii) two (2) years from the date of this Agreement, provided however that if a Change in Control occurs within two (2) years from the date of this Agreement, then this Agreement shall remain in effect for two (2) years from the date of the first Change in Control event described in Section 6.1.1. ARTICLE 3 COMPENSATION AND EXPENSES 3.1 BASE SALARY. For all services rendered under this Agreement, the Company shall pay Executive a Base Salary that is not less than Executive's Base Salary as of the date of this Agreement. If the Executive's salary is increased from time to time during the term of this Agreement, the increased amount shall be the Base Salary for the remainder of the term and any extensions. All amounts payable to the Executive under this Agreement shall be reduced by such amounts as are required to be withheld by law. 3.2 BONUS AND INCENTIVE. Bonus or incentive compensation shall be in the sole discretion of the Board. Except as otherwise provided in Article 6, the Company shall have the right in accordance with the terms of any bonus or incentive plan to alter, amend or eliminate all or any part of such plan, or the Executive's participation therein, without compensation to the Executive. 3.3 BUSINESS EXPENSES. The Company shall, in accordance with, and to the extent of, its policies in effect from time to time, reimburse all ordinary and necessary business expenses reasonably incurred by the Executive in performing his duties as an employee of the Company, provided that the Executive accounts promptly for such expenses to the Company in the manner prescribed from time to time by the Company. ARTICLE 4 EARLY TERMINATION 4.1 EARLY TERMINATION. This Article 4 governs termination of this Agreement at any time during the term of the Agreement; provided, however, that this Article shall not govern a "Change of Control Termination" as defined in Article 6. A Change in Control Termination is governed solely by the provisions of Article 6. 4.2 TERMINATION FOR CAUSE. The Company may terminate this Agreement and Executive's employment immediately for "Cause" as that term is defined herein, upon written notice to the Executive. 4.2.1 "Cause" means any one of the following: (a) fraud, (b) misrepresentation, (c) theft or embezzlement of the Company assets, (d) intentional violations of law involving moral turpitude, (e) the continued failure by the Executive to satisfactorily perform his duties as reasonably assigned to the Executive pursuant to Section 2.2 of this Agreement for a period of sixty (60) days after a written demand for such satisfactory performance which specifically and with reasonable detail identifies the manner in which it is alleged the Executive has not satisfactorily performed such duties, and (f) any material breach of the Confidentiality Agreement. 4.2.2 In the event of termination for Cause pursuant to this Section 4.2, the Executive shall be paid his Base Salary through the date of termination specified in any notice of termination. The Executive will not be entitled to any bonuses or incentives which are not earned and payable at the time of the termination. 4.3 TERMINATION WITHOUT CAUSE. Either the Executive or the Company may terminate this Agreement and the Executive's employment without Cause by providing at least seventy-five (75) days' written notice; provided, however, that the Company shall have the option of making termination of the Agreement and termination of the Executive's employment effective immediately upon notice, in which case Executive shall be paid his Base Salary through a notice period of seventy-five (75) days. This Section 4.3 shall not be applicable where Cause for termination exists. 4.3.1 If the notice of termination is given by the Company, in addition to any other amounts payable to Executive, under this Section 4.3, the Company shall pay Executive within fifteen (15) days following termination, a lump sum amount equal to six (6) month's Base Salary. 4.3.2 In the event that termination occurs pursuant to Section 4.3.1 then, in addition to the payments specified in said Section, the Company shall pay to the Executive bonuses, if any, as follows: 4.3.2.1 Company shall pay Executive an amount equal to the annual bonus or annual incentive, if any, to which the Executive would otherwise have become entitled under any Company bonus or incentive plan in effect at the time of termination of this Agreement had the Executive remained continuously employed for the full fiscal year in which termination occurred and continued to perform his duties in the same manner as they were performed immediately prior to termination; provided, however, that such bonus or incentive amount shall be pro-rated to the date of termination. The amount payable pursuant to this Section 4.3.2.1 shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year. 4.3.2.2 In the event Executive would have been entitled to a quarterly bonus or quarterly incentive payment had he remained employed for the entire quarter in which Executive was terminated, the Company shall pay Executive such quarterly bonus or incentive amount pro-rated to the date of termination, payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full quarter. 4.4 Termination in the Event of Death or Disability. This Agreement and Executive's employment shall terminate in the event of death or Disability of the Executive. 4.4.1 In the event of the Executive's death, the Company shall pay an amount equal to three (3) month's Base Salary to the executor, administrator or other personal representative of the Executive's estate. The amount shall be paid as a lump sum as soon as practicable following Company's receipt of notice of the Executive's death. All such payments shall be in addition to any payments due pursuant to Section 4.4.3 below. 4.4.2 In the event of termination due to Executive's Disability, Base Salary shall be terminated as of the final day of the fifth month referenced in the definition of "Disability." Unless otherwise disqualified by the disability benefit program provider, this Section is not intended to limit the Executive from qualifying for and claiming disability benefits from any other disability program in which the Executive may be enrolled or otherwise for which he is qualified at the time of disability. 4.4.3 In the event of termination by reason of the Executive's death or Disability, the Company shall pay to the Executive an amount equal to the amount the Executive would have received in incentive plan bonus for the year in which termination occurred had "target" goals been achieved, provided, however, that such amount shall be pro-rated to the date of termination. This amount shall be earned and payable as of the date that is fifteen (15) days after the date such bonus would have been paid had the Executive remained employed for the full fiscal year in which termination occurred. 4.5 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment by the Company pursuant to Section 4.3.1 or termination due to Disability, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") and shall continue such payment for the period of time the Executive is entitled to continue such coverage under COBRA. 4.6 ENTIRE TERMINATION PAYMENT. The compensation provided for in this Article 4 shall constitute the Executive's sole remedy for termination pursuant to this Article. The Executive shall not be entitled to any other termination or severance payment which may be payable to the Executive under any other agreement between the Executive and the Company preceding or following the date of termination. ARTICLE 5 CONFIDENTIALITY; CONFLICT OF INTEREST 5.1 PROPRIETARY INFORMATION. Executive shall keep confidential, except as the Company may otherwise consent in writing, and not disclose or make any use of except for the benefit of the Company, at any time either during or subsequent to his employment by the Company, any Proprietary Information which he may produce, obtain or otherwise acquire during the course of his employment. As used herein, "Proprietary Information" shall include any trade secrets, confidential information, knowledge, data, or other information of the Company relating to products, processes, know-how, designs, formulae, test procedures and results, customer lists, business plans, marketing plans and strategies, and pricing strategies, or other subject matter pertaining to any business of the Company for any of its clients, customers, consultants, licensees of affiliates, which information is not in the public domain at the time of the alleged breach. In the event of the termination of the Executive's employment for any reason whatsoever, Executive shall promptly return all records, materials, equipment, drawings and the like pertaining to any Proprietary Information. 5.2 COVENANT NOT TO COMPETE. Executive acknowledges that he will provide special skills, and acquire special information, regarding the activities of the Company. Executive agrees, therefore, that he will not, for a period of twelve (12) months from and after the date he ceases to be employed by the Company, join, control or participate in the ownership, management, operation or control of or be connected with, any business located in the United States of America whose commercial products are in direct competition with the Company or which is developing products which will be in direct competition with the Company, in such a manner and position that he would likely use Proprietary Information, unless released from such obligation by the Board of Directors of the Company. Executive agrees that he shall be deemed to be connected with a business if such a business is carried on by a partnership in which he is a general or limited partner or employee of a corporation or association of which he is a shareholder, officer, director, employee, member, consultant or agent; provided, that nothing herein shall prohibit the purchase or ownership by him of shares of less than five percent (5%) in a publicly or privately held corporation. Executive agrees to submit a list of such business interests in Exhibit A attached hereto and incorporated by reference herein. Notwithstanding the foregoing, this Section 5.2 shall not apply to the Executive if the Executive's employment was terminated pursuant to Section 4.3 or Section 6.1.2.1 of this agreement. 5.3 CONSENT TO INJUNCTION. Executive agrees that the Company will or would suffer an irreparable injury if Executive were to compete with the business of the Company or any of its subsidiaries in violation of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction and Executive stipulates to the entering of such injunctive relief prohibiting him from competing with the Company or any present affiliate of the Company in connection with the business of the Company, in violation of this Agreement. 5.4 SEVERABILITY. The parties intend that the covenants contained in Section 5.2 be deemed to be separate covenants as to each county and state, and that if in any judicial proceeding a court shall refuse to enforce all of the separate covenants included herein because, taken together, they cover too extensive a geographic area or because any one includes too large an area or because they cover too large a period of time, the parties intend that such covenants shall be reduced in scope to the extent required by law or, if necessary, eliminated from the provisions hereof, and that all of the remaining covenants hereof not so affected shall remain fully effective and enforceable. 5.5 ASSIGNMENT OF INVENTIONS. As used in this Agreement, "inventions" shall include, but not be limited to, ideas, improvements, designs, and discoveries. Executive hereby assigns and transfers to the Company entire right, title and interest in and to all inventions whether or not conceived by Executive (whether made solely by Executive or jointly with others) during the period of his employment with the Company which relate in any manner to the actual or demonstrably anticipated business, work, or research an development of the Company or its subsidiaries, or result from or are suggested by any tasks assigned to Executive or any work performed by Executive for or on behalf of the Company or its subsidiaries. Executive agrees that all such inventions are sole property of the Company, provided, however, that this Agreement does not require assignment of any invention if such assignment would contravene applicable state law. 5.6 DISCLOSURE OF INVENTIONS, PATENTS. Executive agrees that in connection with any invention as defined in Section 5.5, above: 5.6.1 Executive will disclose such invention promptly in writing to the Board of Directors of the Company, with a copy to the President, regardless of whether he believes the invention is protected by applicable state law, in order to permit the Company to claim rights to which it may be entitled under this Agreement. Such disclosure shall be received in confidence by the Company. 5.6.2 Executive will, at the Company's request, promptly execute a written assignment of title to the Company for any invention required to be assigned by Section 5.5 ("assignable invention") and Executive will preserve any such assignable invention as confidential information of the Company; and 5.6.3 Upon request, Executive agrees to assist the Company or its nominee (at its expense) during and at any time subsequent to his employment in every reasonable way to obtain for its own benefit patents and copyrights for such assignable inventions in any and all countries, which inventions shall be and remain the sole and exclusive property of the Company or its nominee, whether or not patented or copyrighted. Executive agrees to execute such papers and perform such lawful acts as the Company deems to be necessary to allow it to exercise all right, title, and interest in such patents and copyrights. 5.6.4 Executive agrees to submit a list of inventions made prior to his employment by the Company on Exhibit B attached hereto and incorporated by reference herein. 5.7 EXECUTION OF DOCUMENTATION. In connection with Section 5.5 and Section 5.6, Executive further agrees to execute, acknowledge and deliver to the Company or its nominee upon request and at its expense all such assignments of inventions, patents, and copyrights to be issued therefor, as the Company may determine necessary or desirable for which to apply. Executive agrees to obtain letters, patents, and copyrights on such assignable inventions in any and all countries and/or protect the interest of the Company or its nominee in such inventions, patents and copyrights and to vest title thereto in the Company or its nominee. 5.8 Other Obligations. Executive acknowledges that the Company from time to time may have agreements with other persons or with the U.S. Government, or agencies thereof, which impose obligations or restrictions on the Company regarding inventions made during the course of work thereunder or regarding the confidential nature of such work. Executive agrees to be bound by all such obligations and restrictions and to take all action necessary to discharge the obligations of the Company thereunder. 5.9 TRADE SECRETS OF OTHERS. Executive represents that his performance of all the terms of this Agreement and as an employee of the Company such employment does not and will not breach any agreement to keep in confidence proprietary information, knowledge, or data acquired by Executive in confidence or in trust prior to his employment with the Company. Executive will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. Executive agrees not to enter into any agreement either written or oral in conflict herewith. 5.10 CONFLICT OF INTEREST. During Executive's employment with the Company, Executive will engage in no activity or employment which may conflict with the interest of the Company and will comply with the Company's policies and guidelines pertaining to business conduct and ethics. 5.11 PREVIOUS AGREEMENTS. Executive represents and warrants to the Company that as of the date of this Agreement, he has fully complied with the terms of the Confidentiality Agreement. Executive's obligations under this Agreement are in addition to, do not limit, and are not limited by, Executive's Confidentiality Agreement. To the extent any provision of the Confidentiality Agreement conflicts with the provisions of this Agreement, the provisions of this Agreement control. 5.12 SURVIVAL OF OBLIGATIONS. The provisions of this Article 5 shall survive termination of this Agreement. ARTICLE 6 CHANGE OF CONTROL 6.1 Definitions. For purposes of this Article 6, the following definitions shall be applied: 6.1.1 "Change of Control" shall mean any of the following events: 6.1.1.1 a merger or consolidation to which the Company is a party if the individuals and entities who were stockholders of the Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) of the total combined voting power for election of directors of the surviving corporation immediately following the effective date of such merger or consolidation; or 6.1.1.2 the direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), in the aggregate, of securities of the Company, representing twenty percent (20%) or more of the total combined voting power of the Company's then issued and outstanding securities, by any person or entity, or group of associated persons or entities acting in concert; or 6.1.1.3 the sale of all or substantially all of the assets of the Company to any person or entity which is not a subsidiary of the Company; or 6.1.1.4 the stockholders of the Company approve any plan or proposal for the liquidation of the Company; or 6.1.1.5 a change in the composition of the Board at any time during any consecutive 24-month period such that the Continuity Directors cease for any reason to constitute at least a seventy percent (70%) majority of the Board. For purposes of this clause, "Continuity Directors" means those members of the Board who either: 6.1.1.5.1 were directors at the beginning of such consecutive 24-month period; or 6.1.1.5.2 were elected by, or on the nomination or recommendation of, at least a two-thirds (2/3) majority of the then-existing Board. 6.1.2 "Change of Control Termination" shall mean, with respect to the Executive, any of the following events occurring within two (2) years after a Change of Control: 6.1.2.1 Termination of the Executive's employment by the Company for any reason other than for Cause, as Cause is defined in Section 4.2 of this Agreement. 6.1.2.2.Termination of employment with the Company by the Executive pursuant to Section 6.2 of this Article 6. A Change of Control Termination shall not, however, include termination by reason of death or Disability. 6.1.3 "Good Reason" shall mean a good faith determination by the Executive, in the Executive's reasonable judgment, that any one or more of the following events has occurred without the Executive's express written consent, after a Change of Control, and the Company's failure to correct such occurrence for a period of thirty (30) days following Executive's written notice to Company identifying the event alleged to provide Good Reason and stating Executive's intent to invoke Section 6.2 of this Article 6. 6.1.3.1 A change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change of Control, or any removal of the Executive from, or any failure to re-elect the Executive to, any of such positions, which has the effect of materially diminishing the Executive's responsibility or authority; 6.1.3.2 A reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change of Control; 6.1.3.3 A requirement by the Company that the Executive be based anywhere other than within twenty-five (25) miles of the Executive's job location at the time of the Change of Control; 6.1.3.4 A material diminishment of Executive's pension, bonus, incentive, stock ownership, purchase, option, life insurance, health, accident, disability, or any other employee compensation or benefit plan, program or arrangement and/or any membership (collectively, "Benefit Plans"), in which the Executive is participating immediately prior to a Change of Control; or the taking of any action by the Company that would materially adversely affect the Executive's participation or materially reduce the Executive's benefits under any Benefit Plans or Benefit Plan; 6.1.3.5 Any material breach of this Agreement by the Company. 6.1.4 "Internal Revenue Code" -- Any references to a section of the Internal Revenue Code shall mean that section of the Internal Revenue Code of 1986, or to the corresponding section of such Code, as from time to time amended. 6.2 CHANGE OF CONTROL TERMINATION RIGHT. For a period of two (2) years following a Change of Control, the Executive shall have the right, at any time, to terminate employment with the Company for Good Reason. Such termination shall be accomplished by, and effective upon, the Executive giving written notice to the Company of the Executive's decision to terminate. Except as otherwise expressly provided in this Agreement, upon the exercise of said right, all obligations and duties of the Executive under this Agreement shall be of no further force and effect. 6.2.1 Change of Control Termination Payment. In the event of a termination pursuant to Section 6.2, without further action by the Board, the Company shall, within thirty (30) days of such termination, make a lump sum payment to the Executive, equal to one (1) year's Base Salary. 6.2.2 In addition to the amounts paid pursuant to Section 6.2.1 the Company shall pay to the Executive an amount equal to (a) one (1) time what the Executive would have received in incentive plan bonus for the year in which termination occurs as if the "target" goals had been achieved for that fiscal year, or (b) the actual amount of the incentive bonus to which the Executive would have been entitled had he remained with the Company based on the Company's actual performance, for the fiscal year in which termination occurs, whichever is greater. The amount provided by this Section 6.2.2 shall be earned and payable on the date that is fifteen (15) days after the date Executive would have been paid an annual incentive bonus had he remained with the Company for the fiscal year in which termination occurs. 6.2.3 Notwithstanding anything in this Agreement to the contrary, in the event any of the payments to the Executive under this Agreement would constitute an excess parachute payment pursuant to Section 280 G of the Internal Revenue Code, the amount payable pursuant to Section 6.2.2 shall be reduced by the minimum amount necessary such that none of the compensation payable to Executive as a result of a Change in Control shall constitute an excess parachute payment. 6.3 INTEREST. In the event the Company does not make timely payment in full of the Change of Control Termination payment described in Section 6.2, the Executive shall be entitled to receive interest on any unpaid amount at the lower of: (a) prime rate of interest (or such comparable index as may be adopted) established from time to time by the Company's principal banking institution or (b) the maximum rate permitted under Section 280G(d)(4) of the Internal Revenue Code. 6.4 CONTINUATION OF BENEFITS. In the event of termination of Executive's employment pursuant to Section 6.2 herein, the Company shall pay the applicable premiums for such group health plan continuation as Executive is entitled to under COBRA and such payment shall continue for the period of time the Executive is entitled to continue such coverage under COBRA. 6.5 VESTING OF STOCK OPTIONS. All unvested stock options held by Executive, if any, shall vest immediately upon a Change in Control Termination as defined in paragraph 6.1.2.1. Executive may exercise such options in accordance with the terms and conditions of the stock option plan and the agreement pursuant to which such options were granted. ARTICLE 7 GENERAL PROVISIONS 7.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company and each subsidiary, whether by way of merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of the Company, and any such successor or assign shall absolutely and unconditionally assume all of the Company's obligations hereunder. 7.2 NOTICES. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be delivered or mailed to any such party at its address as set forth at the beginning of this Agreement. Either party may change its address, by notice to the other party given in the manner set forth in this Section. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the third business day thereafter or when it is actually received, whichever is sooner. 7.3 CAPTION. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 7.4 GOVERNING LAW. The validity, construction and performance of this Agreement shall be governed by the laws of the State of Oregon 7.5 MEDIATION. In case of any dispute arising under this Agreement which cannot be settled by reasonable discussion, the parties agree that, prior to commencing any arbitration proceeding as contemplated by Section 7.6 they will first engage the services of a professional mediator agreed upon by the parties and attempt in good faith to resolve the dispute through confidential non- binding mediation. Each party shall bear one-half (1/2) of the mediator's fees and expenses and shall pay all of its own attorneys' fees and expenses related to the mediation. 7.6 ARBITRATION. Any dispute concerning the interpretation, construction, breach or enforcement of this Agreement or arising in any way from Executive's employment with Company or termination of employment shall be submitted to final and binding arbitration. Such arbitration is to be before a single arbitrator in Portland, Oregon. In the event the parties are unable to agree upon an arbitrator, an arbitrator shall be appointed by the court pursuant to ORS 36.320. The arbitration shall be conducted pursuant to the rules of the American Arbitration Association ("AAA") Employment Dispute Resolution Rules. Executive and the Company agree that the procedures outlined in Section 7.5 and 7.6 are the exclusive method of dispute resolution. 7.7 ATTORNEY FEES. If any action at law, in equity or by arbitration is taken to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled, including fees and expenses on appeal. 7.8 CONSTRUCTION. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 7.9 WAIVERS. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law. 7.10 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and shall be binding upon the Executive, his administrators, executors, legatees, and heirs. In that this Agreement is a personal services contract, it shall not be assigned by the Executive. 7.11 MODIFICATION. This Agreement may not be and shall not be modified or amended except by written instrument signed by the parties hereto. 7.12 ENTIRE AGREEMENT. This Agreement together with the Confidentiality Agreement constitutes the entire agreement and understanding between the parties hereto in reference to all the matters herein agreed upon. This Agreement replaces and supersedes all prior employment agreements or understandings of the parties hereto; provided, however, that the Confidentiality Agreement continues in full force and effect according to its terms. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. EXECUTIVE PROTOCOL SYSTEMS, INC. By - -------------------------- ------------------------------ Don Abbey David Bolender, Chairman & CEO EX-27.1 11
5 This schedule contains summary financial information extracted from Protocol Systems, Inc. Condensed Consolidated Balance Sheet as of September 30, 1998 and Condensed Consolidated Statement of Operations for the nine months ended September 30, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 6,458 14,015 16,555 418 13,160 47,330 14,058 10,090 58,134 7,952 0 0 0 83 49,686 58,134 49,410 49,410 24,052 24,052 24,920 0 0 438 92 346 0 0 0 346 0.04 0.04 Net of allowance The amount of loss provision is not significant and has been included with other expenses.
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