-----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, L92Iyte1TpLA/rjLuUjpGG4AgH9kPCBTiF6pLHkJFQpbTEz6tVBg0yehm7zg+IUn p1D1LYVMrk4am/S3CtiNGQ== 0000912057-99-005012.txt : 19991115 0000912057-99-005012.hdr.sgml : 19991115 ACCESSION NUMBER: 0000912057-99-005012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99747716 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 10-Q 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, 1999 Commission File Number 0-19943 PROTOCOL SYSTEMS, INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Oregon 93-0913130 - ------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8500 SW Creekside Place, Beaverton, OR 97008 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (503) 526-8500 - ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Number of shares of common stock outstanding as of November 08, 1999: 8,025,293 shares, $.01 par value per share ------------------------------------------ PROTOCOL SYSTEMS, INC. INDEX TO FORM 10-Q
PART I FINANCIAL INFORMATION PAGE NO. - ----------------------------- -------- Item 1. Financial Statements Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 1999 and 1998 3 Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 PART II OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 - ----------
ITEM 1. FINANCIAL STATEMENTS PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three months ended Nine months ended September 30, September 30, 1999 1998 1999 1998 ------- -------- ------- -------- Sales $16,528 $17,530 $47,580 $49,410 Cost of sales 8,248 8,052 24,296 24,052 ------- -------- ------- -------- Gross profit 8,280 9,478 23,284 25,358 Operating expenses: Research and development 1,886 2,514 4,964 6,425 Selling, general and administrative 4,896 5,759 14,583 16,967 Relocation costs 0 2,246 0 2,246 ------- -------- ------- -------- Total operating expenses 6,782 10,519 19,547 25,638 ------- -------- ------- -------- Income (loss) from operations 1,498 (1,041) 3,737 (280) Other income 1,739 225 2,230 718 ------- -------- ------- -------- Income (loss) before income taxes 3,237 (816) 5,967 438 Provision for income taxes 809 (259) 1,491 92 ------- -------- ------- -------- Net income (loss) $ 2,428 $ (557) $ 4,476 $ 346 ======= ======== ======= ======== Comprehensive income (loss) $ 2,623 $ (372) $ 4,326 $ 520 ======= ======== ======= ======== Basic earnings (loss) per share $ 0.30 $ (0.07) $ 0.54 $ 0.04 ======= ======== ======= ======== Diluted earnings (loss)per share $ 0.29 $ (0.07) $ 0.53 $ 0.04 ======= ======== ======= ======== Weighted average number of shares used in the computation of: Basic earnings per share 8,214 8,389 8,256 8,562 Diluted earnings per share 8,388 8,389 8,409 8,886
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
September 30, December 31, 1999 1998 ------ ------ ASSETS Current assets: Cash and cash equivalents $15,389 $ 8,023 Short-term investments 1,000 6,680 Accounts receivable - net 13,915 17,971 Inventories - net 10,321 12,218 Prepaid expenses and other current assets 2,127 2,469 ------- ------- Total current assets 42,752 47,361 Long-term investments 10,280 4,045 Property and equipment - net 3,976 4,041 Other assets 1,224 404 ------- ------- $58,232 $55,851 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,249 $ 2,584 Accrued liabilities 4,768 5,481 ------- ------- Total current liabilities 8,017 8,065 Deferred taxes 0 40 Commitments and contingencies Shareholders' equity: Common stock, $.01 par value. Authorized 30,000 shares; issued and outstanding 8,023 at 1999 and 8,207 at 1998 80 82 Additional paid-in capital 26,274 28,105 Unearned compensation (72) (48) Accumulated other comprehensive income 55 205 Retained earnings 23,878 19,402 ------- ------- Total shareholders' equity 50,215 47,746 ------- ------- $58,232 $55,851 ======= =======
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine months ended September 30, 1999 1998 ------ ------ Cash flows from operating activities: Net income $ 4,476 $ 346 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,537 1,743 Write-off of assets 50 719 Gain on litigation settlement (1,594) 0 Amortization of bond premium 95 77 Deferred taxes (240) 23 Other non-cash items 79 96 Changes in operating assets and liabilities: Accounts receivable 4,884 (409) Inventories 1,838 391 Prepaid expenses and other assets 93 (113) Accounts payable and accrued liabilities (967) 1,131 Income taxes payable 1,640 (1,038) ------- ------- Net cash provided by operating activities 11,891 2,966 Cash flows from investing activities: Purchase of investments (13,234) (8,855) Proceeds from maturity of investments 12,488 8,115 Acquisition of property and equipment (1,362) (1,410) Capitalization of software development costs (250) (191) Acquisition of intangible assets 0 (74) ------- ------- Net cash used in investing activities (2,358) (2,415) Cash flows from financing activities: Proceeds from exercise of stock options and stock purchase plan 1,156 974 Repurchase of common stock (3,094) (7,498) -------- -------- Net cash used in financing activities (1,938) (6,524) -------- -------- Effect of exchange rates on cash and cash equivalents (229) 174 -------- ------- Net increase (decrease) in cash and cash equivalents 7,366 (5,799) Cash and cash equivalents at beginning of period 8,023 12,257 -------- -------- Cash and cash equivalents at end of period $15,389 $ 6,458 ======== ======== Supplemental disclosure of cash flow information: Cash paid for income taxes $ 362 $ 1,024
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 PROTOCOL SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared by the Company without audit and in conformity with generally accepted accounting principles for interim financial information. Accordingly, certain financial information and footnotes have been omitted or condensed. In the opinion of management, the condensed consolidated financial statements include all necessary adjustments (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1998. The results of operations for the interim period shown in this report are not necessarily indicative of results for any future interim period or the entire fiscal year. INVENTORIES Inventories are valued at the lower of cost or market with cost determined on the first-in, first-out basis (FIFO). The components of inventories, net of reserve, are as follows:
September 30, December 31, (in thousands) 1999 1998 - ------------------------------------------------------------------------- Raw materials $ 4,192 $ 4,939 Work in process 1,949 2,838 Finished goods 2,485 2,207 Demonstration instruments 1,695 2,234 ------- ------- Total inventories $10,321 $12,218 ======= =======
PROPERTY AND EQUIPMENT Property and equipment is stated at cost and includes the following:
September 30, December 31, (in thousands) 1999 1998 - ------------------------------------------------------------------------- Equipment $13,398 $12,111 Furniture and fixtures 1,931 1,910 Leasehold improvements 475 551 ------- ------- 15,804 14,572 Less accumulated depreciation and amortization 11,828 10,531 ------- ------- Property and equipment - net $ 3,976 $ 4,041 ======= =======
6 ACCRUED LIABILITIES The components of accrued liabilities are as follows:
September 30, December 31, (in thousands) 1999 1998 - ------------------------------------------------------------------------- Accrued salaries, wages and related liabilities $2,286 $2,588 Income taxes payable 1,238 - Reserve for warranties 849 915 Other liabilities 305 336 Accrual for special charges 90 1,642 ------ ------ $4,768 $5,481 ====== ======
During the third quarter of 1998, the Company incurred special charges of $2,246,000 to relocate its wholly owned subsidiary, Pryon Corporation ("Pryon"), from Menomonee Falls, Wisconsin to the Company's Beaverton, Oregon facility in order to improve operating efficiencies. During the fourth quarter of 1998, the Company incurred additional special charges of $3,188,000 as it discontinued the development of its defibrillator project and restructured its worldwide operations. This restructuring included the closure of its subsidiary offices and direct sales organizations in France and Germany, elimination of 14 positions at the Company's headquarters in Beaverton, Oregon and the resignation of the founder and Chief Technical Officer. Cash payments during the first nine months of 1999 related to these special charges totaled $1,552,000 and consisted primarily of employee severance benefits and lease termination costs. As of September 30, 1999, special charges of $90,000, related primarily to certain contract terminations, had not been disbursed. These remaining balances are expected to be expended by the end of 2000. OTHER INCOME - LITIGATION SETTLEMENT On August 2, 1999 the Company reached a settlement with SICOR, Inc. (formerly Gensia SICOR, Inc.) relating to litigation the Company commenced against Gensia SICOR, Inc. and Gensia Automedics in July 1998 alleging they breached a development and supply agreement to develop and supply a closed-loop drug delivery and monitoring device. Under terms of this settlement, SICOR, Inc. and Gensia Automedics have agreed to pay the Company a total of $3.7 million over the next two years. In the third quarter of 1999, the Company recognized in other income $1,611,000 related to this settlement. 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 and the benefits from utilization of federal net operating loss carryovers, research and experimentation tax credits, the Company's foreign sales corporation and tax-exempt interest income earned on investments. 7 BASIC AND DILUTED EARNINGS PER SHARE In accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", basic earnings per share is computed using the weighted average number of common shares outstanding and diluted earnings per share is computed using the weighted average number of common shares outstanding and dilutive potential common shares assumed to be outstanding during the period using the treasury stock method. Dilutive potential common shares consist of options to purchase common stock. COMPREHENSIVE INCOME
Three months ended September 30, Nine months ended September 30, (in thousands) 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------- Net income (loss) $ 2,428 $ (557) $ 4,476 $ 346 Other comprehensive income (loss); net of tax Foreign currency translation adjustments 182 147 (54) 136 Unrealized holding gain (loss) 13 38 (96) 38 ------- ------- ------- ------- Other comprehensive income (loss) 195 185 (150) 174 ------- ------- ------- ------- Comprehensive income (loss) $ 2,623 $ (372) $ 4,326 $ 520 ======= ======= ======= =======
SEGMENT INFORMATION In accordance with SFAS 131 "Disclosures about Segments of an Enterprise and Related Information" the Company functions as a single operating segment: the design, manufacture, sale and servicing of medical instruments and systems. Sales are made primarily to hospitals and other health-care related customers. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THIRD QUARTER 1999 VS. THIRD QUARTER 1998 Sales. Sales for the third quarter of 1999 decreased 5.7% to $16.5 million from $17.5 million for the third quarter of 1998. Domestic sales, excluding Original Equipment Manufacturer ("OEM") sales, decreased 7.0% to $11.7 million (71.0% of total sales) in the third quarter of 1999 from $12.6 million (72.1% of total sales) in the third quarter of 1998 primarily as a result of a decrease in the number of new Acuity central stations and related monitors sold. International sales, excluding international sales of OEM products, decreased 5.9% to $3.0 million (18.2% of total sales) in the third quarter of 1999 from $3.2 million (18.3% of total sales) in the third quarter of 1998. This decrease was principally due to lower sales to the Company's Japanese distributor, reflecting continued soft international markets, particularly in Asia. Sales of OEM products increased 4.7% to $1.8 million (10.7% of total sales) in the third quarter of 1999 from $1.7 million (9.7% of total sales) in the third quarter of 1998 primarily due to an increase in CO2 product shipments. Gross profit. As a percentage of sales, gross profit decreased to 50.1% in the third quarter of 1999 from 54.1% in the third quarter of 1998. The decrease in gross profit was due in part to an increase in the proportion of sales of products which carry lower gross margins, such as OEM products, accessories, services and QuikSign monitors, combined with slightly higher sales price discounts and unfavorable manufacturing variances. Research and development. Research and development expenses decreased 25.0% to $1.9 million in the third quarter of 1999 from $2.5 million in the third quarter of 1998. This decrease was primarily the result of the relocation of the Pryon operations in the third quarter of 1998, which resulted in a reduction in the total number of research and development employees. As a percentage of sales, research and development decreased to 11.4% in the third quarter of 1999 from 14.3% in the third quarter of 1998. Selling, general and administrative. Selling, general and administrative decreased 15.0% to $4.9 million in the third quarter of 1999 from $5.8 million in the third quarter of 1998. This decrease resulted primarily from the closure of the Company's subsidiary offices and direct sales organizations in Germany and France at the end of 1998 and the reduction in the number of administrative employees as a result of the relocation of the Pryon operations in the third quarter of 1998. As a percentage of sales, selling, general and administrative decreased to 29.6% in the third quarter of 1999 from 32.9% in the third quarter of 1998. Relocation costs. In the third quarter of 1998, the Company incurred $2.2 million ($1.8 million after tax) of costs related to the relocation of the Pryon operations. These relocation costs included employee severance, write-off of assets that would not be utilized in Oregon, lease and other 9 contract terminations, and costs to relocate key employees as well as inventory and equipment. No such costs were incurred in the 1999 period. Other income. Other income increased to $1,739,000 in the third quarter of 1999 from $225,000 in the third quarter of 1998 primarily due to the 1999 SICOR litigation settlement, partially offset by foreign exchange losses related to the liquidation of the Company's French and German subsidiaries. Provision for income taxes. The provision for income taxes increased to $809,000 in the third quarter of 1999 from ($259,000) in the third quarter of 1998, representing effective tax rates of 25.0% and 31.7%, respectively. The effective tax rate, which reflects the estimate of the Company's annual effective tax rate, was lower in the third quarter of 1999 than in the third quarter of 1998 primarily due to the expected utilization of Pryon Corporation net operating loss carryovers in 1999 and the effects of annual rate adjustments made in the third quarter of 1998. Net income. Net income in the third quarter of 1999 was $2.4 million or $0.29 per diluted share compared to net loss of $557,000 or ($0.07) per diluted share in the third quarter of 1998. The increase in net income was primarily due to a reduction of operating expenses and special charges which was a direct result of the relocation of the Pryon operations and the worldwide restructuring in 1998, and other income reported in the third quarter of 1999 relating primarily to the SICOR litigation settlement. Excluding unusual items consisting of $1,611,000 of SICOR settlement income and $125,000 of foreign exchange losses (net $1,114,000 after tax, or $.13 per diluted share), net income in the third quarter of 1999 was $1,314,000, or $.16 per diluted share. Excluding unusual items consisting of Pryon relocation charges of $2,246,000 ($1,774,000 after tax loss, or $.22 loss per diluted share), net income in the third quarter of 1998 was $1,217,000, or $.15 per diluted share. Net income exclusive of unusual items is a non-GAAP measure and investors should not rely on it as a substitute for GAAP measures. Because the items noted were unusual in nature, management believes that a measure of net income excluding such items is meaningful and useful as an alternative basis with which management and investors can assess the profitability of the Company's core operations. NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30, 1998 Sales. Sales for the first nine months of 1999 decreased 3.7% to $47.6 million from $49.4 million for the first nine months of 1998. Domestic sales, excluding Original Equipment Manufacturer ("OEM") sales of Pryon OEM products and GenESA devices, decreased 3.1% to $32.2 million (67.7% of total sales) in the first nine months of 1999 from $33.3 million (67.3% of total sales) in the first nine months of 1998 primarily as a result of a decrease in the number of Acuity central stations and related monitors sold. This decrease was partially offset by a $1.9 million increase in U.S. military revenues. International sales, excluding international sales of OEM products, decreased 9.9% to $9.7 million (20.3% of total sales) in the first nine months of 1999 from $10.7 million (21.8% of total sales) in the first nine months of 1998. This decrease in international sales was primarily due to a decline in the 10 number of units sold, reflecting continued soft international markets, particularly in Europe and Asia, and the effects of reorganization and transition from the Company's direct sales organization in Europe. OEM sales of Pryon OEM products and GenESA devices increased 5.2% to $5.7 million (11.9% of total sales) in the first nine months of 1999 from $5.4 million (10.9% of total sales) in the first nine months of 1998 primarily due to a $774,000 increase in OEM CO2 product shipments. This increase was partially offset by a $496,000 decrease in sales of GenESA devices to Gensia Automedics, Inc. Gross profit. As a percentage of sales, gross profit decreased to 48.9% in the first nine months of 1999 from 51.3% in the first nine months of 1998. The decrease in gross profit was due in part to an increase in the proportion of sales of products which carry lower gross margins, such as OEM products, accessories, services, and QuikSign monitors, combined with slightly higher sales price discounts and unfavorable manufacturing variances. Research and development. Research and development expenses decreased 22.7% to $5.0 million in the first nine months of 1999 from $6.4 million in the first nine months of 1998. This decrease was primarily the result of the relocation of the Pryon operations in the third quarter of 1998, which resulted in a reduction in the total number of employees in research and development. As a percentage of sales, research and development decreased to 10.4% in the first nine months of 1999 from 13.0% in the first nine months of 1998. Selling, general and administrative. Selling, general and administrative decreased 14.1% to $14.6 million in the first nine months of 1999 from $17.0 million in the first nine months of 1998. This decrease resulted primarily from the closure of the Company's subsidiary offices and the direct sales organizations in Germany and France initiated at the end of 1998 and the reduction in the number of administrative employees as a result of the relocation of the Pryon operations in the third quarter of 1998. As a percentage of sales, selling, general and administrative decreased to 30.6% in the first nine months of 1999 from 34.3% in the first nine months of 1998. Relocation costs. In first nine months of 1998, the Company incurred $2.2 million ($1.8 million after tax) of costs related to the relocation of the Pryon operations in the third quarter of 1998. These costs include employee severance, write-off of assets that would not be utilized in Oregon, lease and other contract terminations, and costs to relocate key employees as well as inventory and equipment. No such costs were incurred in the 1999 period. Other income. Other income increased to $2,230,000 in the first nine months of 1999 from $718,000 in the first nine months of 1998, primarily due to the 1999 SICOR litigation settlement, partially offset by foreign exchange losses related to the liquidation of the Company's French and German subsidiaries. Provision for income taxes. The provision for income taxes increased to $1,491,000 in the first nine months of 1999 from $92,000 in the first nine months of 1998 representing effective tax rates of 25.0% and 21.0%, respectively. The effective tax rate, which reflects the estimate of the Company's annual effective tax rate, was higher in the first nine months of 1999 than in the first nine months of 1998 primarily due to higher operating earnings, causing reduced percentage benefits from the Company's research 11 credits, foreign sales corporation and tax-exempt interest, partially offset by the expected utilization of Pryon Corporation net operating loss carryovers in 1999. Net income. Net income in the first nine months of 1999 was $4.5 million or $0.53 per diluted share compared to net income of $346,000 or $0.04 per diluted share in the first nine months of 1998. The increase in net income was primarily due to reduced operating expenses and special charges as a result of the relocation of the Pryon manufacturing facility and the worldwide restructuring in 1998, and increased 1999 other income primarily related to the SICOR litigation settlement. Excluding unusual items consisting of $1,611,000 of SICOR settlement income and $125,000 of foreign exchange losses (net $1,114,000 after tax, or $.13 per diluted share), net income in the first nine months of 1999 was $3,362,000, or $.40 per diluted share. Excluding unusual items consisting of Pryon relocation charges of $2,246,000 ($1,774,000 after tax loss, or $.22 loss per diluted share), net income in the first nine months of 1998 was $2,120,000, or $.24 per diluted share. Net income exclusive of unusual items is a non-GAAP measure and investors should not rely on it as a substitute for GAAP measures. Because the items noted were unusual in nature, management believes that a measure of net income excluding such items is meaningful and useful as an alternative basis with which management and investors can assess the profitability of the Company's core operations. LIQUIDITY AND CAPITAL RESOURCES The Company improved its strong financial position as of September 30, 1999 with its cash and investments, both long and short term, increasing to $26.7 million from $18.7 million at December 31, 1998. Working capital at September 30, 1999 was $34.7 million and the current ratio was 5.3:1, compared to working capital of $39.3 million and current ratio of 5.9:1 at December 31, 1998. Cash flows from operating activities for the first nine months of 1999 were $11.9 million as compared to $3.0 million for the first nine months of 1998. This increase was primarily due to an improvement in collections of accounts receivable, cash settlement proceeds from SICOR, as well as an increase in net income. Cash of $1.4 million was used for the acquisition of property and equipment in the first nine months of 1999. Proceeds and related tax benefits from stock option and stock purchase plans were $1.2 million in the first nine months of 1999. In May 1999 the Company's Board of Directors adopted a resolution authorizing the repurchase of up to 500,000 outstanding shares of the Company's common stock. As of November 8, 1999, the Company has repurchased 389,300 shares during 1999. Management believes that current cash and investment balances and future cash flows from operations will be sufficient to meet the Company's liquidity and capital needs for the foreseeable future. YEAR 2000 ISSUES The Company has substantially completed its assessment of its computer software programs and operating systems used in its internal operations, including applications used in its financial systems, manufacturing equipment, and engineering design tools to determine its readiness for the Year 2000. The inability of computer software programs and operating systems to accurately recognize, interpret and process date codes designating the Year 2000 and beyond could result in a system failure or miscalculations which could have a material impact on the Company's ability to conduct its business. 12 Costs incurred by the Company to date in its assessment of internal systems were not material. The Company has completed its assessment of Year 2000 compliance of each of its product lines. All configurations of instruments (instruments include Propaq and Propaq Encore monitors and all options) and their component parts have been tested and are Year 2000 compliant. Acuity software versions 3.15.05 and all Networked Acuity software versions have been tested and are Year 2000 compliant. Acuity software versions prior to 3.15.05 have a minor connectivity issue related to the Year 2000 between the Acuity central station and the monitors that can be fixed through an upgrade to the Acuity central station provided by the Company. This connectivity issue should not adversely affect the operation of the Acuity central station and the Propaq monitors in the Year 2000 and beyond. The Company has also contacted critical suppliers of products and services to determine that the suppliers' operations and the products and services they provide are Year 2000 compliant. The Company has received responses from approximately 95% of the suppliers contacted, all of which have indicated that their products and operations either are, or expect to be, Year 2000 compliant. The Company will continue to follow up with suppliers who have not yet responded to determine if there are any critical suppliers who may not be Year 2000 compliant. Based on its assessments to date, the Company believes it will not experience any material disruption as a result of Year 2000 issues in its computer software programs and other systems used in its operations. However, there can be no assurances that unanticipated Year 2000 issues will not have a material adverse effect on the Company's business, financial condition or results of operations. Furthermore, there can be no assurance that Year 2000 issues of certain critical third party suppliers, including those supplying electricity, water or telephone service will not experience difficulties resulting in the disruption of service or delivery of supplies to the Company, which could adversely affect the Company's business, financial condition or results of operations. The Company will finalize 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 during the fourth quarter of 1999. FORWARD-LOOKING STATEMENTS This Quarterly Report contains statements, including the anticipated effects of the Year 2000 issue that are forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates and projections about the Company's business, management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to factors discussed in this Quarterly Report and from time to time in the Company's other Securities and Exchange Commission filings and reports, by 13 general industry and market conditions and growth rates and by general domestic and international economic conditions. The Company's quarterly operating results have fluctuated in the past and may continue to fluctuate in the future depending on factors such as increased competition, timing of new product announcements, pricing changes by the Company or its competitors, length of sales cycles, market acceptance or delays in the introduction of new products or enhanced versions of existing products, timing of significant orders, regulatory approval requirements, product mix and economic factors and conditions generally and in the market for the Company's products specifically. In particular, the Company's quarterly operating results have fluctuated as a result of the unpredictable size and timing of military patient monitoring equipment procurements, and seasonal or other changes in customer buying patterns. A substantial portion of the Company's revenue in each quarter results from orders booked in that quarter. Accordingly, revenue from quarter to quarter is difficult to forecast. The Company's expense levels are based, in part, on its expectations as to future revenue. If revenue levels are below expectations, operating results are likely to be adversely affected. In particular, net income may be disproportionately affected by a reduction in revenue because only a small portion of expenses varies 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to the impact of foreign currency fluctuations due to a small portion of its international sales. The Company minimizes its risk to foreign currency fluctuations as international sales through independent distributors are made in U.S. dollars, which has helped reduce any foreign currency risk. As of September 30, 1999, the Company had an investment portfolio of fixed income securities, including those classified as cash and cash equivalents, short-term investments and long-term investments of $24.4 million. These securities are subject to interest rate fluctuations. An increase in interest rates could adversely affect the market value of the Company's fixed income securities. The Company does not use derivative financial instruments in its investment portfolio to manage interest rate risk. The Company does, however, limit its exposure to interest rate and credit risk by establishing and strictly monitoring clear policies and guidelines for its investment portfolio. The weighted average maturity of the investment portfolio may not exceed 360 days and no single investment may have a maturity date of greater than two years. The guidelines also establish credit quality standards and limit the exposure to one issue, issuer, or type of instrument. Due to these factors the exposure to market and credit risk is not expected to be material. 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On August 2, 1999 the Company reached a settlement with SICOR, Inc. (formerly Gensia SICOR, Inc.) relating to litigation the Company commenced against Gensia SICOR, Inc. and Gensia Automedics in July 1998 alleging they breached a development and supply agreement to develop and supply a closed-loop drug delivery and monitoring device (U.S. District Court for the District of Oregon (Case No. CV98-1006-AA)). Under terms of this settlement, SICOR, Inc. and Gensia Automedics have agreed to pay the Company a total of $3.7 million over the next two years and the lawsuit was dismissed with prejudice. ITEM 2. CHANGES IN SECURITIES During the quarter ended September 30, 1999, the Company sold securities without registration under the Securities Act of 1933, as amended (the "Securities Act") upon the exercise of certain stock options granted under the Company's 1987 stock option plan. An aggregate of 480 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 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 10.1 Protocol Systems, Inc. Nonqualified Stock Option Agreement dated August 6, 1999 (incorporated by reference to Exhibit 99.1 to Registration Statement on Form S-8 filed on October 19, 1999 (File No. 333-89315)) 10.2 Protocol Systems, Inc. Executive Employment Agreement with Robert F. Adrion dated August 1, 1999 27.1 Financial Data Schedule (b) No reports were filed on Form 8-K during the quarter for which this report is filed. 15 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 08, 1999 By --------------------- Robert F. Adrion President and Chief Executive Officer By --------------------- Edward M. Kolasinski Vice-President and Interim Chief Financial Officer 16 EX-10.2 2 EX-10.2 PROTOCOL SYSTEMS, INC. EXECUTIVE EMPLOYMENT AGREEMENT PARTIES: Protocol Systems, Inc. ("Company") 8500 SW Creekside Place Beaverton, OR 97008 ROBERT F. ADRION ("Executive") 3029 Carrigan Canyon Salt Lake City, Utah 84109 DATE OF AGREEMENT: August 1, 1999 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. 1-EXECUTIVE EMPLOYMENT AGREEMENT 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 1 AUGUST 1999 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 PRESIDENT AND CHIEF EXECUTIVE 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 Chairman of the Board and the Board, 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 years and five months from the date of this Agreement. Thereafter, this agreement will be renewed automatically for successive one-year terms unless six (6) months notice of non-renewal is given by either party to the other. 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 2-EXECUTIVE EMPLOYMENT AGREEMENT 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. Executive has signed a Relocation Agreement. Said Agreement will not apply in the event of a termination without cause as defined in Article 4 or a change in control as defined in Article 6. 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 that 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 thirty (30) days' 3-EXECUTIVE EMPLOYMENT AGREEMENT 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 thirty (30) 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 the Base Salary for the remaining term of the Agreement. The remaining term of the Agreement is defined as the difference between the last day of the Agreement as defined in Section 2.3(ii) and the date the Agreement was terminated as defined by the written notice. 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, if any, would have been paid had the Executive remained employed for the full fiscal year. 4.3.3 The Board authorized the issuance of an option to purchase 200,000 shares of stock as part of the original offer of employment. In the event of a Termination Without Cause as defined in paragraph 4.3, any unvested shares from that option will be handled as follows. If the Termination occurs on or before December 31, 2000, Executive shall be entitled to a total of 100,000 shares of the above mentioned option. Any unvested shares necessary to make up the difference between the 100,000 shares and any shares already vested will vest immediately. If the Termination occurs after December 31, 2000, all unvested shares, if any, of said option will vest immediately. 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 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-EXECUTIVE EMPLOYMENT AGREEMENT 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, 5-EXECUTIVE EMPLOYMENT AGREEMENT 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 and 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, regardless of whether he believes the invention is protected by applicable state law, in order to permit 6-EXECUTIVE EMPLOYMENT AGREEMENT 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. 7-EXECUTIVE EMPLOYMENT 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 during the term of the Agreement: 8-EXECUTIVE EMPLOYMENT AGREEMENT 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. During the term of the Agreement and 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. 9-EXECUTIVE EMPLOYMENT AGREEMENT 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 the Base Salary for the remaining term of the Agreement. The remaining term of the Agreement is defined as the difference between the last day of the Agreement as defined in Section 2.3 and the date the Agreement was terminated as defined by the written notice. 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 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 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. The Board authorized the issuance of an option to purchase 200,000 shares of stock as part of the original offer of employment. In the event of a Change in Control Termination as defined in paragraph 6.1.2.1, any unvested shares from that option will be handled as follows. If the Change in Control Termination occurs on or before December 31, 2000, Executive shall be entitled to a total of 100,000 shares of the above mentioned option. Any unvested shares necessary to make up the difference between the 100,000 shares and any shares already vested will vest immediately. If the Change in Control Termination occurs after 10-EXECUTIVE EMPLOYMENT AGREEMENT December 31, 2000, all unvested shares, if any, of said option will vest immediately. 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. 11-EXECUTIVE EMPLOYMENT AGREEMENT 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, the June 16 offer of employment letter, and the Relocation Agreement referred to in the offer of employment 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 - ----------------------------------- --------------------------------- Robert F. Adrion David Bolender, Chairman & CEO Date: Date ------------------------------ ------------------------------- 12-EXECUTIVE EMPLOYMENT AGREEMENT EX-27.1 3 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PROTOCOL SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 15,389 11,280 13,915 450 10,321 42,752 15,804 11,828 58,232 8,017 0 0 0 80 50,135 58,232 47,580 47,580 24,296 24,296 17,317 0 0 5,967 1,491 4,476 0 0 0 4,476 .54 .53 NET OF ALLOWANCE THE AMOUNT OF LOSS PROVISION IS INSIGNIFICANT AND HAS BEEN INCLUDED IN OTHER EXPENSES.
-----END PRIVACY-ENHANCED MESSAGE-----