SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 26, 1996
INTEGRATED SYSTEMS, INC.
------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California
---------------------------------------------------
(State or other jurisdiction of incorporation)
0-18268 94-2658153
------------- ------------------
(Commission (IRS Employer
File Number) Identification No.)
3260 Jay Street, Santa Clara, California 95054-3309
----------------------------------------------------
(Address of principal executive offices) (Zip code)
(408) 980-1500
-----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2: ACQUISITION OR DISPOSITION OF ASSETS.
On January 26, 1996, Integrated Systems, Inc., a California
corporation ("Registrant" or "ISI"), acquired control of Doctor Design, Inc., a
California corporation ("DDI"), pursuant to the merger (the "Merger") of ISI
Purchasing Corporation, a Delaware corporation and a wholly owned subsidiary of
ISI ("Sub") with and into DDI. The Merger was effected pursuant to an Agreement
of Merger dated as of January 26, 1996 by and between Sub and DDI and an
Agreement and Plan of Reorganization dated as of December 14, 1995, as amended
January 26, 1996 (the "Plan"), by and among ISI, Sub and DDI. The Merger was
accounted for as a pooling of interests and was structured to be a "tax-free"
reorganization for federal income tax purposes. The directors and executive
officers of Registrant were not changed as a result of the Merger. Prior to the
Merger, DDI was a provider of high-end design services to the computer and
communications industries, specializing in the area of embedded multimedia.
After completion of the Merger, DDI will continue its historical business as a
wholly owned subsidiary of ISI.
Pursuant to the terms of the Plan, each share of DDI Common
Stock ("DDI Common Stock") issued and outstanding immediately before the
effective time of the Merger was exchanged for approximately .148612 shares of
Registrant's Common Stock. Pursuant to this exchange ratio, in the Merger a
total of 371,607 shares of Registrant's Common Stock were issued in exchange for
all of the outstanding DDI Common Stock. In addition, Registrant assumed each
option to purchase DDI Common Stock outstanding immediately before the effective
time of the Merger. Each DDI option is exercisable for that number of shares of
Registrant's Common Stock equal to .148612 multiplied by the number of shares of
DDI Common Stock purchasable under the DDI options immediately before the
effective time of the Merger. Pursuant to this exchange ratio, Registrant may
issue up to 131,862 shares of its Common Stock upon exercise of the assumed
options. Assuming exercise of all assumed options, Registrant may ultimately
issue a total of up to 503,469 shares of its Common Stock. The exchange ratio
was determined on the basis of, among other things (i) a comparison of certain
financial and stock market information for Registrant and certain financial
information for DDI with similar types of information for certain other
companies in businesses similar to those of Registrant and DDI and (ii)
discussions between senior management of Registrant and DDI regarding the
business and prospects of their respective companies.
The shares of Registrant's Common Stock received by the former
DDI shareholders have not been registered under the Securities Act of 1933, as
amended (the "1933 Act"), in reliance upon the exemption from registration
provided by Section 3(a)(10) thereof.
In connection with the Merger, ISI, Chemical Trust Company of
California, as escrow agent, and the former DDI shareholders entered into an
escrow agreement (the "Escrow Agreement") under which ISI deposited into escrow
stock certificates representing 10% of the shares of Registrant's Common Stock
issuable pursuant to the Merger and will deposit 10% of the shares of
Registrant's Common Stock issued upon exercise of the DDI options assumed by
Registrant (the "Escrow Shares"). The Escrow Shares will be held in escrow as
collateral for the indemnification obligations of DDI under the Plan. The
indemnification obligations of DDI will expire (i) for items expected to be
encountered in the audit process, when ISI receives audited financial statements
together with a report thereon from its independent auditors covering the
combined results of ISI and DDI for the ISI fiscal year ending February 29, 1996
(but no later than one year from the closing of the Merger), provided that ISI
has a reasonable period of time, not to exceed 90 days, to review the audit
results to determine if any claim exists and must provide notice of any claim
within the 90 day period and (ii) for all other items, 12 months after the
closing of the Merger.
Contemporaneously with the Merger, Marco Thompson, the
President and Chief Executive Officer of DDI, entered into employment and
noncompetition agreements with Registrant. The employment agreement provides for
a three-year term of employment at a minimum salary of $150,000 per year and a
target bonus of $125,000, payable upon achievement of certain agreed upon goals.
Upon termination of the employment agreement by ISI for cause as defined in the
agreement, all compensation and benefits payable under the employment agreement
are payable through the date of termination. The noncompetition agreement
provides that Mr. Thompson will not compete with Registrant for a period of
three years following the Merger.
- 2 -
<PAGE>
In connection with the Merger, Mr. Thompson also transferred
to ISI ownership of the building in which a portion of the DDI business is
located and terminated DDI's lease of the premises, in consideration of ISI
paying the outstanding debt on the property. The number of shares issued to Mr.
Thompson in the Merger in exchange for his DDI Common Stock was reduced by 8,199
shares or $280,406, which is the amount that the outstanding debt on the
property exceeded the appraised current fair market value of the property.
ITEM 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
The following Financial Statements of Doctor Design, Inc. are filed
herewith:
Report of Independent Auditors
Balance Sheets as of June 30, 1995 and 1994
Statements of Income for the years ended June 30, 1995 and 1994
Statements of Shareholders' Equity for the years ended June 30, 1995
and 1994
Statements of Cash Flows for the years ended June 30, 1995 and 1994
Notes to Financial Statements
Note to Unaudited Financial information
Unaudited Balance Sheets as of September 30, 1995 and June 30, 1995
Unaudited Statements of Income for the three-month period ended
September 30, 1995 and 1994
Unaudited Statements of Cash Flows for the three-month period ended
September 30, 1995 and 1994
(b) Pro Forma Financial Information.
The following unaudited pro forma combined financial information is
filed herewith:
Pro Forma Combined Balance Sheet as of November 30, 1995
Pro Forma Combined Statements of Income for the nine-month period ended
November 30, 1995 and 1994 and the years ended February 28, 1995, 1994
and 1993
Notes to Unaudited Pro Forma Combined Financial Statements
(c) Exhibits.
The following exhibits are filed herewith:
2.01 Agreement and Plan of Reorganization dated as of December 14, 1995, as
amended as of January 26, 1996, by and among Registrant, ISI Purchasing
Corporation and Dr. Design, Inc. and related documents.
2.02 Agreement of Merger dated as of January 26, 1996 by and between ISI
Purchasing Corporation and Dr. Design, Inc.
23.01 Consent of McGladrey & Pullen, LLP
- 3 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRATED SYSTEMS, INC.
Date: February 8, 1996 By: /s/ Steven Sipowicz
---------------------
Steven Sipowicz
Chief Financial Officer
- 4 -
<PAGE>
ITEM 7(A): FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Report of Independent Auditors
To the Board of Directors
Doctor Design, Inc.
San Diego, California
We have audited the accompanying balance sheets of Doctor Design, Inc. as of
June 30, 1995 and 1994, and the related statements of income, shareholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Doctor Design, Inc. as of June
30, 1995 and 1994, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
San Diego, California
November 17, 1995
<PAGE>
<TABLE>
DOCTOR DESIGN, INC.
BALANCE SHEETS
JUNE 30, 1995 AND 1994
<CAPTION>
ASSETS (NOTE 5) 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 104,182 $ 10,566
Contract receivables, net of allowance for doubtful
accounts of $14,000 in 1995 and $14,609 in 1994 (Note 7) 1,982,061 499,933
Royalty receivables (Note 11) 190,337 95,938
Costs and estimated earnings in excess of billings
on uncompleted contracts (Note 2) 234,782 107,476
Prepaid expenses and other 95,494 61,942
------------------------
Total current assets 2,606,856 775,855
------------------------
Property and Equipment, net (Note 3) 562,715 196,803
------------------------
Software Development Costs, net of accumulated
amortization of $735,486 in 1994 213,677
------------------------
$3,169,571 $1,186,335
========================
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS EQUITY 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Current maturities of long-term debt (Note 5) $ 116,688 $ 180,113
Accounts payable 539,811 56,811
Accrued liabilities (Note 4) 419,566 211,598
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 2) 31,840 81,800
Income taxes payable 73,200
Deferred income taxes (Note 6) 627,000 40,000
---------------------------
Total current liabilities 1,808,105 570,322
---------------------------
Deferred Revenue (Note 7) 77,942
---------------------------
Deferred Income Taxes (Note 6) 65,000
---------------------------
Long-term Debt, less current maturities (Note 5) 115,253
---------------------------
Commitments (Note 9)
Shareholders' Equity (Note 8)
Preferred, no par value, 3,000,000 shares authorized;
no shares issued and outstanding
Common:
Class A, voting common stock, no par value, 5,000,000
shares authorized; 2,555,720 shares issued and outstanding 173,942 173,942
Class B, nonvoting common stock, no par value, 1,000,000 shares
authorized; no shares issued and outstanding
Note receivable from shareholder (15,320) (15,320)
Retained earnings 1,202,844 199,196
---------------------------
1,361,466 357,818
---------------------------
$ 3,169,571 $ 1,186,335
===========================
</TABLE>
-3-
<PAGE>
<TABLE>
DOCTOR DESIGN, INC.
STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1995 AND 1994
<CAPTION>
1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C>
Contract revenue (Note 7) $ 8,814,615 $ 4,280,969
Royalty and other revenue (Note 11) 684,103 210,281
--------------------------
Total revenue 9,498,718 4,491,250
--------------------------
Cost of revenue 5,744,878 2,808,217
--------------------------
Gross profit 3,753,840 1,683,033
--------------------------
Selling, general and administrative expenses:
General and administrative (including related party
rental payments of $144,000 for 1995 and 1994) 1,520,752 703,905
Selling and marketing 507,068 230,345
Research and development 26,556 55,930
--------------------------
2,054,376 990,180
--------------------------
Operating income 1,699,464 692,853
--------------------------
Nonoperating income (expense):
Interest income 22,218 3,076
Interest expense (including related party payments
of $10,000 for 1994) (22,034) (55,175)
Other 15,332
--------------------------
184 (36,767)
--------------------------
Income before provision for income taxes 1,699,648 656,086
Provision for income taxes (Note 6) 696,000 100,784
--------------------------
Net income $ 1,003,648 $ 555,302
==========================
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
DOCTOR DESIGN, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995 AND 1994
<CAPTION>
Common Stock Note
Class A Voting Receivable Retained
------------------------------- from Earnings
Shares Amount Shareholder (Deficit) Totals
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1993 2,079,618 $ 78,722 $ $ (356,106) $(277,384)
Net income 555,302 555,302
Stock options exercised 476,102 95,220 (15,320) 79,900
--------------------------------------------------------------------------------------
Balance, June 30, 1994 2,555,720 173,942 (15,320) 199,196 357,818
Net income 1,003,648 1,003,648
--------------------------------------------------------------------------------------
Balance, June 30, 1995 2,555,720 $173,942 $(15,320) $1,202,844 $1,361,466
======================================================================================
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
-5-
<PAGE>
<TABLE>
DOCTOR DESIGN, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995 AND 1994
<CAPTION>
1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $1,003,648 $555,302
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 404,019 293,958
Gain on lease assignment (10,208)
Deferred income taxes 522,000 99,984
(Increase) decrease in:
Contract receivables (1,482,128) (354,300)
Royalty receivables (94,399) (95,938)
Costs and estimated earnings in excess of billings on
uncompleted contracts (127,306) (77,592)
Prepaid expenses and other (33,552) 7,354
Increase (decrease) in:
Accounts payable 483,000 (205,754)
Accrued liabilities 207,968 (51,430)
Income taxes payable 73,200
Billings in excess of costs and estimated earnings on
uncompleted contracts (49,960) 62,211
Deferred revenue (77,942) (53,978)
-------------------------------------
Net cash provided by operating activities 828,548 169,609
-------------------------------------
Cash Flows from (used in) Investing Activities
Purchases of property and equipment (556,254) (108,571)
-------------------------------------
Cash (used in) investing activities (556,254) (108,571)
-------------------------------------
Cash Flows from (used in) Financing Activities
Principal payments on long-term debt (178,678) (231,526)
Proceeds from exercise of stock options 79,900
-------------------------------------
Net cash (used in) investing activities (178,678) (151,626)
-------------------------------------
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
-6-
<PAGE>
<TABLE>
DOCTOR DESIGN, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1995 AND 1994
<CAPTION>
1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents $ 93,616 $ (90,588)
Cash and cash equivalents:
Beginning 10,566 101,154
-------------------------------------
Ending $104,182 $ 10,566
=====================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 23,820 $ 59,257
Income taxes $100,800 $ 42,800
Supplemental Schedule of Noncash Investing and
Financing Activities
Capital lease obligations incurred for the use of equipment $ $ 19,737
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
-7-
<PAGE>
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Doctor Design, Inc. (the "Company") provides engineering design services to
manufacturers of high technology products. For certain design service contracts,
the Company retains commercialization or proprietary rights to the technology it
has developed for the customer. The Company is also involved in the sale of high
technology products to design service customers which include internally
developed software applications.
A summary of the Company's significant accounting policies follows:
REVENUE RECOGNITION
Revenue is recognized based on the type of contract. Revenue earned under time
and material contracts is recognized on the basis of hours of work performed and
hourly rates provided under the contract. Revenue from fixed-price contracts is
recognized on the percentage-of-completion method, measured by the percentage of
total hours incurred to date to estimated total hours of each contract.
Management believes that these methods provide the best available measure of
progress on these contracts.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor and supplies.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in contract performance, contract
conditions, and estimated profitability may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenue recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings on uncompleted
contracts," represents billings in excess of revenue recognized.
Revenue is deferred for future recognition when a contractual obligation to
provide services or a third party's right to developed assets exists. Such
revenue is recognized as the contractual obligation or third party right is
satisfied.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less.
The Company maintains its cash accounts in two commercial banks and a brokerage
account located in San Diego, California. The two commercial bank accounts are
insured by Federal Deposit Insurance Corporation (FDIC) up to $100,000 each. At
June 30, 1995, the Company had balances of approximately $422,000 that were
either uninsured or in excess of the FDIC insurance limit.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation of property and equipment
used in production of the Company's hand-held computer product is computed using
the units-of-production method over the estimated number of units which can be
produced with the assets. Depreciation of other property and equipment is
computed using the straight-line method over estimated useful lives of three to
five years. Maintenance and repair costs are expensed as incurred.
-8-
<PAGE>
SOFTWARE DEVELOPMENT COSTS
Software development costs, as an integral part of the development of the
Company's hand-held computer and graphics display controller, were capitalized
once the technological feasibility of the specific software projects was
established. Capitalization of such costs ceased when the final product was
fully tested and available for general distribution to customers. Amortization
of capitalized software development costs began when the product was ready for
general distribution to customers. Amortization is computed based on the number
of units delivered compared with the number of estimated units to be delivered
or the straight-line method over the remaining estimated economic life of the
product, whichever provides a shorter amortization period. The estimated
economic life of the hand-held computer was five years. All software development
costs have been fully amortized at June 30, 1995.
Other research and development costs are charged to expense when incurred.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
<TABLE>
NOTE 2. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts at June 30, 1995 and 1994
consist of the following:
<CAPTION>
1995 1994
---------------------------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 587,877 $ 2,462,776
Estimated earnings 250,782 947,960
---------------------------
838,659 3,410,736
Less billings to date (748,399) (3,385,060)
---------------------------
90,260 25,676
Net under billings on time and material prototype contracts 112,682
---------------------------
$ 202,942 $ 25,676
===========================
Included in the accompanying balance sheets under
the following captions:
Cost and estimated earnings in excess of billings on
uncompleted contracts $ 234,782 $ 107,476
Billings in excess of costs and estimated earnings on
uncompleted contracts (31,840) (81,800)
---------------------------
$ 202,942 $ 25,676
===========================
</TABLE>
-9-
<PAGE>
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1995 and 1994 consist of the following:
1995 1994
------------------------------
Computer equipment $ 766,136 $ 257,256
Office furniture and equipment 232,651 185,277
Product tooling and molds 166,990
------------------------------
998,787 609,523
Less accumulated depreciation and amort 436,072 412,720
------------------------------
$ 562,715 $ 196,803
==============================
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities at June 30, 1995 and 1994 consist of the following:
1995 1994
------------------------------------
Accrued employee costs and benefits $191,115 $166,379
Accrued contract losses 138,321 5,600
Customer advances 16,700 16,885
Sales tax payable 35,545 15,426
Other 37,885 7,308
------------------------------------
$419,566 211,598
====================================
NOTE 5. LONG-TERM DEBT
The Company has a note payable to a bank, $30,773 and $128,227 at June 30, 1995
and 1994, respectively, due in monthly principal payments of $8,120 plus
interest at the bank's prime rate (9.0% at June 30, 1995) plus 3.75% through
September 1995. The note is collateralized by the Company's assets and
guaranteed by the majority shareholder.
The Company has a note payable to a bank, $12,908 and $48,471 at June 30, 1995
and 1994, respectively, due in monthly payments of $3,315, including interest at
13.0%, through November 1995. The note is collateralized by the Company's assets
and guaranteed by the majority shareholder.
The Company has a note payable $73,007 and $66,771 at June 30, 1995 and 1994,
respectively, bearing interest at 8.5%, principal and interest payments based
upon 50% of certain royalties received by the Company. Subsequent to year-end,
the note was renegotiated and the remaining balance due of $45,000 was paid in
full by October 31, 1995.
The Company also had various other arrangements, totaling $51,897 at June 30,
1994 which were paid off during the year ended June 30, 1995.
NOTE 6. INCOME TAXES
The income tax provision charged to continuing operations for the years ended
June 30, 1995 and 1994 was as follows:
1995 1994
-------------------------------
Current:
U.S. federal $ 132,000 $ 24,000
State 42,000 15,000
Deferred:
U.S. federal 400,000 48,000
State 122,000 13,784
-------------------------------
$ 696,000 $ 100,784
===============================
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<PAGE>
<TABLE>
The income tax provision differs from the amount of income tax determined by
applying the U.S federal income tax rate to pretax income from continuing
operations for the years ended June 30, 1995 and 1994 due to the following:
<CAPTION>
1995 1994
-------------------------------
<S> <C> <C>
Computed "expected" tax expense $ 578,000 $ 223,000
Increase (decrease) in income taxes resulting from:
Reduction in valuation allowance (153,000)
Nondeductible expenses 5,000 3,000
State income taxes, net of federal tax benefit 104,000 40,000
Other 9,000 (12,216)
-------------------------------
$ 696,000 $ 100,784
===============================
</TABLE>
Net deferred tax liabilities consist of the following components as of June 30,
1995 and 1994:
1995 1994
------------------------------
Deferred tax liabilities:
Accrual to cash basis $ 635,000 $ 167,000
Software development costs 86,000
Deferred tax assets:
Allowance for doubtful accounts (6,000)
Depreciation (8,000) (20,000)
Net operating loss carryforward (38,000)
Tax credits (84,000)
------------------------------
$ 627,000 $ 105,000
==============================
The components giving rise to the net deferred tax liabilities described above
have been included in the accompanying balance sheets as of June 30, 1995 and
1994 as follows:
1995 1994
---------------------------------
Current (liabilities) $ (627,000) $ (40,000)
Noncurrent (liabilities) (65,000)
---------------------------------
$ (627,000) $(105,000)
=================================
<TABLE>
NOTE 7. MAJOR CUSTOMERS
Contract revenue and receivables for the years ended June 30, 1995 and 1994
include revenue and receivables from the following major customers, each of
which accounted for 10% or more of total contract revenue of the Company during
at least one of the years.
<CAPTION>
1995 1994
- ----------------------------------------------------------------------------------------
Contract Contract
Contract Receivables Contract Receivables
Revenue Balance Revenue Balance
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Customer A $ 2,495,000 $ 443,000 $ * $ *
Customer B 2,324,000 564,000 1,850,000 71,000
Customer C 1,183,000 239,000 * *
Customer D 964,000 389,000 * *
-----------------------------------------------------------------------
$ 6,966,000 $1,635,000 $1,850,000 $ 71,000
=======================================================================
<FN>
*Contract revenue accounted for less than 10% of total contract revenue for
1994.
</FN>
</TABLE>
-11-
<PAGE>
Customer B also provided funding for and holds certain contractual rights to
assets developed by the Company, consisting mainly of tooling and molds for the
production of its hand-held computer. Accordingly, the Company had deferred
recognition of revenue representing the depreciated value of the associated
assets. At June 30, 1995, the assets were fully depreciated and all revenue has
been recognized.
The Company retains the right to further commercialize the software technology
developed in connection with this arrangement for application in certain other
industries.
NOTE 8. EMPLOYEE STOCK OPTIONS
The Company has a stock option plan (the "Plan") which provides for the granting
of both qualified and non-qualified options to employees, directors and outside
consultants of the Company. Options are exercisable at various dates through
June 2003. The terms of the Plan provide for the granting of options at an
exercise price approximating the fair market value of the Company's common
stock, as determined by the Option Committee of the Board of Directors, on the
date of the grant of such options. Under the Plan options for 1,500,000 shares
may be granted. The options vest over periods ranging from 0 to 4 years and at
June 30, 1995 and 1994, options for 431,959 and 347,925 shares, respectively,
were exercisable and options for 234,205 and 530,705 shares, respectively, were
available for future grant. Subsequent to June 30, 1995, an additional 134,000
options were granted at $0.40 per share.
In November 1993, the Company accepted a nonrecourse note receivable as payment
for stock options exercised. This note is non interest bearing and is due and
payable on December 31, 1996. At June 30, 1995, the 76,602 shares related to the
exercise were issuable and included in the shares outstanding.
Transactions for the years ended June 30, 1995 and 1994 comprise the following:
1995 1994
------------------------------
Options outstanding, beginning of year 456,943 832,553
Granted 308,500 357,000
Exercised (476,102)
Expired (12,000) (256,508)
------------------------------
Options outstanding, end of year 753,443 456,943
==============================
Options price range at June 30, 1995 and 1994 $.20 to 0.40 0.20
NOTE 9. COMMITMENTS
OPERATING LEASES
The Company leases its main office facility from the majority shareholder under
a noncancelable operating lease agreement. The term of the lease, which
commenced in January 1989, is ten years with two five-year options. The Company
has guaranteed the payment of the majority shareholder's note payable to a bank;
balance of $403,538 at June 30, 1995, which is secured by the second trust deed
on this facility. The balance of the debt subject to the guaranty is included in
the minimum lease payments shown below for 1999.
The Company also leases four other office facilities under separate operating
lease agreements. The aggregate monthly rental payment for these leases is
approximately $8,800. The lease agreements expire in September 1996 and include
options to extend the terms of the leases. Rental expense was $189,000 and
$144,000 for the years ended June 30, 1995 and 1994, respectively.
-12-
<PAGE>
Future minimum lease payments for operating leases at June 30, 1995 are as
follows:
YEAR ENDING JUNE 30,
- -------------------------------------------------------------
1996 $ 247,836
1997 185,803
1998 144,000
1999 417,500
--------------------
Total minimum lease payments $ 995,139
====================
NOTE 10. PROFIT SHARING PLAN
The Company has a deferred compensation and profit sharing plan as defined under
section 401(k) of the Internal Revenue Code. Under the terms of the Plan,
employees may defer a portion of their compensation each year based on
provisions as outlined in the Plan. The Plan was amended in the current year to
implement an employer matching contribution equal to a discretionary percentage
to be determined by the employer. Current matching contributions are $0.50 for
every $1.00 contributed by all eligible participants beginning January 1, 1995
and ending September 30, 1995. Total employer contributions for the year ended
June 30, 1995 were $15,372.
NOTE 11. ROYALTY AGREEMENTS
The Company has entered into a royalty agreement with a customer for the design
and development of certain products. Under the terms of the agreement, the
Company receives a percentage of the net selling price of products sold to
third-parties utilizing this technology Royalties are calculated on a sliding
scale as a percentage of total revenues ranging from 4% to 2%. In addition, the
Company has numerous other royalty agreements with other customers under similar
arrangements. Royalty revenue totaled $606,161 and $163,361, respectively, for
the years ending June 30, 1995 and 1994.
NOTE 12. SUBSEQUENT EVENT
On November 10, 1995, Integrated Systems, Inc. (ISI) and the Company signed a
Letter of Intent for the acquisition of the Company by ISI. The principal terms
of the Letter of Intent stipulate that the Company will become a wholly-owned
subsidiary of ISI as the Company will exchange all of its outstanding capital
stock and stock options for ISI common stock.
The Letter of Intent does not constitute an offer, it is not binding and is not
a definitive agreement. All rights and obligations of the parties are subject to
execution of definitive mutually satisfactory agreements and obtaining all
required corporate and regulatory approvals. The Letter of Intent will
automatically terminate if a definitive agreement is not entered into by
December 25, 1995.
-13-
<PAGE>
UNAUDITED FINANCIAL STATEMENTS.
Note to Unaudited Financial Information
The condensed interim financial statements included herein have been
prepared by Doctor Design, Inc. without audit. The June 30, 1995 condensed
balance sheet data was derived from the audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles.
The accompanying condensed interim financial statements have been
prepared in all material respects in conformity with the standards of accounting
measurements set forth in Accounting Principles Board Opinion No. 28 and, in the
opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary to summarize fairly the financial position,
results of operations, and cash flows for the periods indicated. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for the full year.
<PAGE>
<TABLE>
DOCTOR DESIGN INCORPORATED
UNAUDITED BALANCE SHEETS
AS OF SEPTEMBER 30, 1995 AND JUNE 30, 1995
<CAPTION>
September 30, June 30,
1995 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 950,366 $ 104,182
Accounts receivable, net of reserve 1,345,991 2,172,398
Costs and profits in excess of billings 490,328 234,782
Other current assets 78,660 95,494
----------- -----------
Total current assets 2,865,345 2,606,856
Property and equipment, net 609,913 562,715
----------- -----------
$ 3,475,258 $ 3,169,571
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 644,562 $ 539,811
Billings in excess of costs and profits 16,173 31,840
Notes payable 18,278 116,688
Income taxes payable 458,000 73,200
Deferred income taxes payable 297,000 627,000
Other current liabilities 463,730 419,566
----------- -----------
Total current liabilities 1,897,743 1,808,105
Shareholders' equity:
Common stock 173,942 173,942
Note receivable from shareholder (15,320) (15,320)
Retained earnings 1,418,893 1,202,844
----------- -----------
Total shareholders' equity 1,577,515 1,361,466
----------- -----------
Total liabilities and shareholders' equity $ 3,475,258 $ 3,169,571
=========== ===========
</TABLE>
<PAGE>
DOCTOR DESIGN INCORPORATED
UNAUDITED STATEMENTS OF INCOME
FOR THE THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 1995 AND 1994
1995 1994
----------- -----------
Revenues $ 2,410,828 $ 1,064,511
Costs and expenses:
Cost of revenues 1,518,329 704,767
Selling and marketing 113,494 66,060
General and administrative 470,605 190,015
----------- -----------
Total costs and expenses 2,101,428 960,842
Income from operations 309,400 103,669
Interest income (expense) and other, net 41,449 (6,985)
----------- -----------
Income before provision for income taxes 350,849 96,684
Provision for income taxes 134,800 41,000
----------- -----------
Net income $ 216,049 $ 55,684
=========== ===========
<PAGE>
<TABLE>
DOCTOR DESIGN INCORPORATED
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 1995 AND 1994
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 216,049 $ 55,684
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 65,007 37,044
Deferred income taxes (330,000) 41,000
Gain on early debt extinguishment (28,007)
Changes in operating accounts:
Accounts receivable 826,407 (110,167)
Costs and profits in excess of billings (255,546) (25,560)
Other current assets 28,545 (5,732)
Accounts payable 104,751 156,271
Billings in excess of costs and profits (15,667) (28,588)
Income taxes payable 384,800
Other current liabilities 44,165 (4,796)
----------- -----------
Net cash provided by operating activities 1,040,504 115,156
Cash flows used for investing activities:
Purchases of property and equipment (112,205) (10,866)
Increase in deposits and other assets (11,712)
----------- -----------
Net cash used for investing activities (123,917) (10,866)
Cash flows used for financing activities:
Payments on long-term debt (70,403) (43,856)
----------- -----------
Net cash used for financing activities (70,403) (43,856)
Net cash flow 846,184 60,434
Cash at begining of period 104,182 10,566
----------- -----------
Cash at end of period $ 950,366 $ 71,000
=========== ===========
</TABLE>
<PAGE>
ITEM 7 (B): PRO FORMA FINANCIAL INFORMATION.
Unaudited Pro Forma Combined Financial Statements
The following unaudited pro forma condensed data, including the notes
thereto, are qualified in their entirety by reference to, and should be read in
conjunction with, the historical financial statements of Doctor Design Inc.
included elsewhere in this Form 8-K and the consolidated financial statements of
Integrated Systems, Inc. The unaudited pro forma combined statements of
operations combine Doctor Design's results of operations and Integrated Systems'
results of operations for the nine months ended November 30, 1995 and 1994 and
the three years ended February 28, 1995, giving effect to the acquisition as if
it had occurred at March 1, 1992. The unaudited pro forma combined balance sheet
data combine Doctor Design's and Integrated System's balance sheets as of
November 30 1995, giving effect to the acquisition as if it had occurred on
November 30, 1995.
The Pro Forma Financial Information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred had the acquisition been consummated
at the beginning of the periods presented, nor is it necessarily indicative of
future operating results or financial position.
<PAGE>
<TABLE>
PRO FORMA STATEMENT
INTEGRATED SYSTEMS, INC. AND DOCTOR DESIGN, INC.
STATEMENT #1
PRO FORMA COMBINED BALANCE SHEET
AS OF NOVEMBER 30, 1995
Includes Doctor Design as of September 30, 1995 and
Integrated Systems, Inc. as of November 30, 1995
(in thousands)
<CAPTION>
Doctor Pro Forma Pro Forma
Design ISI Adjustments Combined
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 950 $ 10,162 $ 11,112
Marketable securities 16,192 16,192
Accounts receivable, net 1,836 17,100 18,936
Deferred income taxes 852 852
Other current assets 79 2,334 2,413
-------- -------- -------- --------
Total current assets 2,865 46,640 49,505
Marketable securities 19,590 19,590
Property and equipment 610 3,578 838 5,026
Other assets 790 790
Intangible assets 1,994 1,994
-------- -------- -------- --------
Total assets $ 3,475 $ 72,592 $ 838 $ 76,905
-------- -------- -------- --------
Current liabilities:
Accounts payable $ 645 $ 2,222 $ 2,867
Accrued payroll and related expenses 464 2,124 2,588
Deferred revenue 16 7,466 7,482
Notes payable 18 18
Income taxes payable 458 2,852 3,310
Deferred income taxes 297 297
Other current liabilities 3,491 500 3,991
-------- -------- -------- --------
Total current liabilities 1,898 18,155 500 20,553
-------- -------- -------- --------
Other liabilities 451 781 1,232
Common stock 174 37,780 37,954
Note receivable from shareholder (15) (15)
Unrealized holding gain 341 341
Retained earnings 1,418 15,865 (443) 16,840
-------- -------- -------- --------
Total shareholders' equity 1,577 53,986 (443) 55,120
-------- -------- -------- --------
Total liabilities and shareholders' equity $ 3,475 $ 72,592 $ 838 $ 76,905
======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
PRO FORMA STATEMENTS
INTEGRATED SYSTEMS, INC. AND DOCTOR DESIGN, INC.
STATEMENT #2
COMBINED STATEMENTS OF INCOME FOR THE NINE-MONTH PERIOD
ENDED NOVEMBER 30, 1995 AND 1994
Includes Doctor Design for the nine months ended September 30, 1995 and 1994 and Integrated Systems, Inc. for the nine months ended
November 30, 1995 and 1994
<CAPTION>
1995 1994
------------------------------------------- ------------------------------------------
(in thousands) Doctor Pro Forma Pro Forma Doctor Pro Forma Pro Forma
Design ISI Adjustments Combined Design ISI Adjustments Combined
-------- -------- -------- --------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 8,314 $ 50,648 $ 58,962 $ 2,930 $ 36,266 $ 39,196
Costs and expenses:
Cost of revenue 5,215 11,978 17,193 1,814 8,230 10,044
Selling and marketing 475 18,478 18,953 146 14,332 14,478
Research and development 8,229 8,229 30 5,874 5,904
General and administrative 1,422 4,178 (74) 5,526 570 2,678 (74) 3,174
Amortization 449 449 1,123 1,123
Merger related expenses 3,601 3,601
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses 7,112 46,913 (74) 53,951 2,560 32,237 (74) 34,723
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations 1,202 3,735 74 5,011 370 4,029 74 4,473
Interest and other income 52 1,727 (60) 1,719 (23) 1,302 (60) 1,219
-------- -------- -------- -------- -------- -------- -------- --------
Pretax income 1,254 5,462 14 6,730 347 5,331 14 5,692
Income taxes 512 1,748 2 2,262 141 1,706 2 1,849
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 742 $ 3,714 $ 12 $ 4,468 $ 206 $ 3,625 $ 12 $ 3,843
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share $ 1.50 $ 0.35 $ 0.41 $ 0.42 $ 0.38 $ 0.38
======== ======== ======== ======== ======== ========
Shares 496 10,494 10,990 496 9,492 9,988
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
PRO FORMA STATEMENTS
INTEGRATED SYSTEMS, INC. AND DOCTOR DESIGN, INC.
STATEMENT #3
COMBINED RESULTS FOR THE YEAR ENDED FEBRUARY 28, 1995
Includes Doctor Design for the year ended December 31, 1994 and
Integrated Systems, Inc. for the year ended February 28, 1995
<CAPTION>
(in thousands) Doctor Pro Forma Pro Forma
Design ISI Adjustments Combined
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 5,460 $ 51,979 $ 57,439
Costs and expenses:
Cost of revenue 3,158 11,754 14,912
Selling and marketing 233 20,269 20,502
Research and development 52 8,294 8,346
General and administrative 947 3,601 (98) 4,450
Amortization 1,311 1,311
-------- -------- -------- --------
Total costs and expenses 4,390 45,229 (98) 49,521
-------- -------- -------- --------
Income from operations 1,070 6,750 98 7,918
Interest and other income (expense) (24) 1,712 (80) 1,608
-------- -------- -------- --------
Pretax income 1,046 8,462 18 9,526
Income taxes 418 2,708 3 3,129
-------- -------- -------- --------
Net income $ 628 $ 5,754 $ 15 $ 6,397
======== ======== ======== ========
Earnings per share $ 1.27 $ 0.60 $ 0.63
======== ======== ========
Shares 496 9,583 10,079
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
PRO FORMA STATEMENTS
INTEGRATED SYSTEMS, INC. AND DOCTOR DESIGN, INC.
STATEMENT #4
COMBINED RESULTS FOR THE YEAR ENDED FEBRUARY 28, 1994
Includes Doctor Design for the year ended June 30, 1994 and
Integrated Systems, Inc. for the year ended February 28, 1994
<CAPTION>
(in thousands) Doctor Pro Forma Pro Forma
Design ISI Adjustments Combined
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 4,491 $ 41,701 $ 46,192
Costs and expenses:
Cost of revenue 2,808 10,409 13,217
Selling and marketing 230 16,225 16,455
Research and development 56 5,865 5,921
General and administrative 704 2,916 (98) 3,522
Amortization 1,764 1,764
-------- -------- -------- --------
Total costs and expenses 3,798 37,179 (98) 40,879
-------- -------- -------- --------
Income from operations 693 4,522 98 5,313
Interest and other income (expense) (40) 1,409 (80) 1,289
-------- -------- -------- --------
Pretax income 653 5,931 18 6,602
Income taxes 101 1,898 3 2,002
-------- -------- -------- --------
Net income $ 552 $ 4,033 $ 15 $ 4,600
======== ======== ======== ========
Earnings per share $ 1.11 $ 0.44 $ 0.47
======== ======== ========
Shares 496 9,228 9,724
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
PRO FORMA STATEMENTS
INTEGRATED SYSTEMS, INC. AND DOCTOR DESIGN, INC.
STATEMENT #5
COMBINED RESULTS FOR THE YEAR ENDED FEBRUARY 28, 1993
Includes Doctor Design for the year ended June 30, 1993 and
Integrated Systems, Inc. for the year ended February 28, 1993
<CAPTION>
(in thousands) Doctor Pro Forma Pro Forma
Design ISI Adjustments Combined
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 2,863 $ 32,388 $ 35,251
Costs and expenses:
Cost of revenue 2,162 7,391 9,553
Selling and marketing 334 11,564 11,898
Research and development 108 6,133 6,241
General and administrative 672 2,468 (98) 3,042
Amortization 1,199 1,199
-------- -------- -------- --------
Total costs and expenses 3,276 28,755 (98) 31,933
-------- -------- -------- --------
Income (loss) from operations (413) 3,633 98 3,318
Interest and other income 218 1,575 (83) 1,710
-------- -------- -------- --------
Pretax income (loss) (195) 5,208 15 5,028
Income taxes 1 1,771 1,772
-------- -------- -------- --------
Net income (loss) ($ 196) $ 3,437 $ 15 $ 3,256
======== ======== ======== ========
Earnings per share ($ 0.40) $ 0.37 $ 0.33
======== ======== ========
Shares 496 9,318 9,814
======== ======== ========
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Doctor Design, Inc. statements of operations for the years ended
June 30, 1993 and 1994 and December 31, 1994 and the Integrated Systems, Inc.
consolidated statements of income for the three years ended February 28, 1995
have been combined. The combined financial statements include pro forma
adjustments to include the effect of ownership of a building in which Doctor
Design is located. This building was owned by a majority shareholder of Doctor
Design during the periods reported. Additionally, the Doctor Design statements
of operations for the nine months ended September 30, 1995 and 1994 and the
Integrated Systems consolidated statements of income for the nine months ended
November 30, 1994 and 1995 have been combined. This method of combining the two
companies is for the presentation of unaudited pro forma condensed combined
financial statements only. The unaudited pro forma condensed combined financial
statements, including the notes thereto, should be read in conjunction with the
historical consolidated financial statements of Doctor Design included herein
and those of Integrated Systems.
No adjustments have been made to conform the accounting policies of the
combining companies. The nature and extent of such adjustments, if any, will be
based upon further study and analysis and are not expected to be significant.
2. UNAUDITED PRO FORMA COMBINED NET INCOME PER SHARE
The unaudited pro forma combined statements of operations for Doctor
Design and Integrated Systems have been prepared as if the acquisition were
completed at the beginning of the earliest periods presented. The unaudited pro
forma combined net income per share is based on the combined weighted average
number of common and common equivalent shares of Doctor Design common stock and
Integrated Systems common stock for each period, based upon the acquisition
exchange ratio.
3. PRO FORMA UNAUDITED COMBINED SHARES OUTSTANDING
These unaudited pro forma combined financial statements reflect the
issuance of approximately 372,000 shares of Integrated Systems common stock in
exchange for an aggregate of approximately 2,501,000 shares of Doctor Design
common stock in connection with the acquisition based on the acquisition
exchange ratio of 0.1486 shares of Integrated Systems common stock for every one
share of Doctor Design common stock.
<TABLE>
The following table details the pro forma share issuances in connection with the
acquisition:
<CAPTION>
Doctor Design Integrated Systems
Common Shares Exchange Common Shares
Outstanding Ratio Outstanding
---------------- ------------ -------------
<S> <C> <C> <C>
Doctor Design shares outstanding as of November 30, 1995 2,501,000 0.1486 372,000
Integrated Systems shares outstanding as of November 30 1995 10,190,000
----------
Total number of shares of Integrated Systems common stock
outstanding after completion of the acquisition 10,562,000
----------
</TABLE>
<PAGE>
In addition, Integrated Systems assumed all options to purchase Doctor
Design common stock outstanding immediately before the effective time of the
acquisition. Each Doctor Design option is exercisable for that number of
Integrated Systems' common stock equal to 0.1486 multiplied by the number of
shares of Doctor Design purchasable under the Doctor Design option. Pursuant to
this exchange ratio, Integrated Systems may issue up to approximately 132,000
shares of common stock upon exercise of the assumed options. Assuming exercise
of all assumed options, Integrated Systems may ultimately issue a total of up to
approximately 504,000 shares of Common Stock.
4. MERGER RELATED EXPENSES
Doctor Design and Integrated Systems estimate they will incur direct
transaction costs of approximately $500,000 associated with the acquisition
consisting of transaction fees for attorneys and accountants. These nonrecurring
transaction costs will be charged to operations primarily during the quarter
ended February 29, 1996.
The Unaudited Pro Forma Condensed Combined Balance Sheet gives effect
to estimated direct transaction costs as if such costs had been incurred as of
November 30, 1995. These costs are not reflected in the Unaudited Pro Forma
Condensed Combined Statements of Operations.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- -----------------------
2.01 Agreement and Plan of Reorganization dated as of December
14, 1995, as amended as of January 26, 1996, by and among
Registrant, ISI Purchasing Corporation and Dr. Design,
Inc. and related documents.
2.02 Agreement of Merger dated as of January 26, 1996 by and
between ISI Purchasing Corporation and Dr. Design, Inc.
23.01 Consent of McGladrey & Pullen, LLP
EXHIBIT 2.01
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered
into as of this 14th day of December, 1995, by and among Integrated Systems,
Inc., a California corporation ("ISI"), ISI Purchasing Corporation, a Delaware
corporation and a wholly owned subsidiary of ISI ("Newco") and Dr. Design, Inc.,
a California corporation ("DDI").
RECITALS
A. Newco will merge with and into DDI in a reverse triangular merger
(the "Merger"), with DDI to be the surviving corporation of the Merger, all
pursuant to the terms and conditions of this Agreement and an Agreement of
Merger substantially in the form of Exhibit A attached hereto (the "Agreement of
Merger") and the applicable provisions of the laws of the States of California
and Delaware. Upon the effectiveness of the Merger, all the outstanding Common
Stock of DDI ("DDI Common Stock") will be converted into Common Stock of ISI
("ISI Common Stock"), and ISI will assume all outstanding options to purchase
shares of the Common Stock of DDI (the "DDI Options"), as provided in this
Agreement and the Agreement of Merger.
B. The Merger is intended to be treated as a reorganization pursuant to
the provisions of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended (the "Code"), by virtue of the provisions of Section 368(a)(2)(E) of the
Code.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. PLAN OF REORGANIZATION
1.1 The Merger. On the Closing Date, Newco will be merged with and into
DDI pursuant to this Agreement and the Agreement of Merger and in accordance
with applicable provisions of the laws of the States of California and Delaware
as follows:
1.1.1 Conversion of Shares. Each share of DDI Common Stock
issued and outstanding immediately prior to the filing of the Agreement of
Merger with the Secretary of State of the State of California and the
Certificate of Merger with the Secretary of State of the State of Delaware (the
"Effective Time"), other than shares, if any, for which dissenters rights have
been or will be perfected in compliance with applicable law, will by virtue of
the Merger and at the Effective Time, and without further action on the part of
any holder thereof, be converted into the right to receive the "Applicable
Fraction" of a share of fully paid and nonassessable shares of ISI Common Stock.
The Applicable Fraction shall be determined by dividing the Total ISI Shares (as
defined below) by (a) the number of outstanding shares of DDI Common Stock
immediately prior to the Effective Time plus (b) the number of shares of Common
Stock of DDI purchasable upon exercise of all outstanding DDI Options (as
defined in Section 1.3). The "Total ISI Shares" shall be determined by dividing
Seventeen Million Five Hundred Thousand Dollars ($17,500,000.00) by the lower of
(a) the average of the closing prices of the ISI Common Stock on the Nasdaq
Stock Market on the ten (10) business days ending two (2) days prior to the
Closing Date, (b) the average of the closing prices of the ISI Common Stock on
the Nasdaq Stock Market on the sixty (60) business days ending two (2) days
prior to the Closing Date and (c) Thirty Seven Dollars and Thirty-Five Cents
($37.35); with such lower price being referred to herein as the "ISI Average
Price". In the event the price of ISI Common Stock, as determined under
subsection (a), (b) or (c) above, is less than twenty seven dollars and fifty
cents ($27.50), the price used to calculate the Total ISI Shares shall be
$27.50; provided, however, that in such case, DDI may, in its sole discretion
and without penalty of any kind whatsoever, elect to terminate this Agreement
and the DDI Ancillary Agreements (as defined in Section 2.2.1 hereof).
<PAGE>
1.1.2 Adjustments for Capital Changes. If prior to the Merger,
ISI or DDI recapitalizes through a split-up of its outstanding shares into a
greater number, or a combination of its outstanding shares into a lesser number,
reorganizes, reclassifies or otherwise changes its outstanding shares into the
same or a different number of shares of other classes (other than through a
split-up or combination of shares provided for in the previous clause), or
declares a dividend on its outstanding shares payable in shares or securities
convertible into shares, the number of shares of ISI Common Stock into which the
shares of DDI Common Stock are to be converted will be adjusted appropriately so
as to maintain the proportionate interests of the holders of the DDI Common
Stock and the holders of ISI shares.
1.1.3 Dissenting Shares. Holders of shares of DDI Common Stock
who have complied with all requirements for perfecting dissenter's rights, as
set forth in the General Corporation Law of the State of California ("California
Law"), shall be entitled to their rights under the California Law with respect
to such shares ("Dissenting Shares").
1.2 Fractional Shares. No fractional shares of ISI Common Stock will be
issued in connection with the Merger, but in lieu thereof each holder of DDI
Common Stock who would otherwise be entitled to receive a fraction of a share of
ISI Common Stock will receive from ISI, at the Effective Time, an amount of cash
equal to the ISI Average Price multiplied by the fraction of a share of ISI
Common Stock to which such holder would otherwise be entitled.
1.3 DDI Options. At the Effective Time, ISI will assume all DDI Options
and each holder of a DDI Option granted under DDI's 1991 Stock Option Plan, as
amended (the "DDI Plan"), shall be entitled, in accordance with the existing
terms of such DDI Option, to purchase after the Effective Time that number of
shares of ISI Common Stock, determined by multiplying the number of shares of
Common Stock of DDI subject to such DDI Option at the Effective Time by the
Applicable Fraction, and the exercise price per share for each such DDI Option
will equal the exercise price of the DDI Option immediately prior to the
Effective Time divided by the Applicable Fraction. If the foregoing calculation
results in an assumed option being exercisable for a fraction of a share, then
the number of shares of ISI Common Stock subject to such option will be rounded
down to the nearest whole number with no cash being payable for such fractional
share. The term, exercisability, vesting schedule, status as an "incentive stock
option" under Section 422A of the Code, if applicable, and all other terms of
the DDI Options will otherwise be unchanged. The continuous term of employment
with DDI will be credited to each holder of a DDI Option as if it were
employment with ISI for purposes of determining the vesting and the number of
shares subject to exercise after the Effective Time.
1.4 Escrow Agreement. At the closing of the Merger (the
"Closing"), ISI will withhold ten percent (10%) of the shares of ISI Common
Stock to be issued to the shareholders of DDI (the "DDI Shareholders") in
accordance with Section 1.1 (rounded down to the nearest whole number of shares
to be issued to each DDI Shareholder) and ten percent (10%) of the shares
issuable upon exercise of DDI Options assumed by ISI during the Escrow Period
(as such term is defined below) and deliver such shares (the "Escrow Shares") to
the Chemical Trust Company of California (the "Escrow Agent"), as escrow agent,
to be held by Escrow Agent as collateral for DDI's indemnification obligations
under Section 10.2 and pursuant to the provisions of an escrow agreement (the
"Escrow Agreement") in substantially the form of Exhibit 1.4. The Escrow Shares
will be represented by a certificate or certificates issued in the name of the
Escrow Agent and will be held by the Escrow Agent from the Closing until (a) the
date on which ISI has received audited financial statements together with a
report thereon from ISI's independent auditors covering the combined results of
ISI and DDI for the first fiscal year of ISI ending after the Closing Date, for
items expected to be encountered in the audit process (but such period to end no
later than one (1) year from the Closing Date), provided that ISI shall have a
reasonable period of time, not to exceed ninety (90) days, to review the audit
results to determine if any claim for Damages exists under Section 10.2 (as
defined in Section 10.2) and ISI shall provide notice of any claim for Damages
with the ninety (90) day period and (b) twelve (12) months after the Closing
Date for all other items (the "Escrow Period"). Provided however, in all cases
as to matters which an Indemnified Person has given written notice of a claim
for Damages (as defined in Section 10.2 below) during the applicable period set
forth in (a) or (b), the Escrow Period with respect thereto shall continue until
such claim for Damages is finally resolved and DDI's indemnification obligations
under Section 10.2 hereof with respect thereto are fully satisfied. In the event
that the Merger is approved by the DDI Shareholders, as provided herein, the DDI
Shareholders shall, without any further
-2-
<PAGE>
act of any DDI Shareholder, be deemed to have consented to and approved (i) the
use of the Escrow Shares as collateral for DDI's indemnification obligations
under Section 10.2 in the manner set forth in the Escrow Agreement, (ii) the
appointment of Marco J. Thompson as the representative of the DDI Shareholders
(the "Representative") under the Escrow Agreement and as the attorney-in-fact
and agent for and on behalf of each DDI Shareholder (other than holders of
Dissenting Shares), and the taking by the Representative of any and all actions
and the making of any decisions required or permitted to be taken by him under
the Escrow Agreement (including, without limitation, the exercise of the power
to: authorize delivery to ISI of Escrow Shares in satisfaction of claims by ISI;
agree to, negotiate, enter into settlements and compromises of and demand
arbitration and comply with orders of courts and awards of arbitrators with
respect to such claims; resolve any claim made pursuant to Section 10.2; and
take all actions necessary in the judgment of the Representative for the
accomplishment of the foregoing) and (iii) to all of the other terms, conditions
and limitations in the Escrow Agreement.
1.5 Effects of the Merger. At the Effective Time: (a) the separate
existence of Newco will cease and Newco will be merged with and into DDI, and
DDI will be the surviving corporation, pursuant to the terms of the Agreement of
Merger, (b) the Articles of Incorporation and Bylaws of DDI will continue
unchanged as the Articles of Incorporation and Bylaws of the surviving
corporation, (c) each share of Newco Common Stock outstanding immediately prior
to the Effective Time will continue to be an identical outstanding share of the
surviving corporation, (d) the Board of Directors and officers of ISI will
remain unchanged, all the directors of DDI immediately prior to the Effective
Time except for Marco Thompson will resign and ISI will appoint two (2) new
directors of the surviving corporation and the officers of DDI immediately prior
to the Effective Time will become the officers of the surviving corporation, (e)
each share of Common Stock of DDI outstanding immediately prior to the Effective
Time will be converted and each DDI Option outstanding immediately prior to the
Effective Time will be assumed by ISI as provided in Sections 1.1, 1.2 and 1.3;
and (f) the Merger will, from and after the Effective Time, have all of the
effects provided by applicable law.
1.6 Further Assurances. DDI agrees that if, at any time before or after
the Effective Time, ISI considers or is advised that any further deeds,
assignments or assurances are reasonably necessary or desirable to vest, perfect
or confirm in ISI title to any property or rights of DDI, ISI and its proper
officers and directors may execute and deliver all such proper deeds,
assignments and assurances and do all other things necessary or desirable to
vest, perfect or confirm title to such property or rights in ISI and otherwise
to carry out the purpose of this Agreement, in the name of DDI or otherwise.
1.7 Reorganization. The parties intend to adopt this Agreement as a
plan of reorganization and to consummate the Merger in accordance with the
provisions of Section 368(a)(1)(A) of the Code. The parties believe that the
total value of the ISI Common Stock to be received in the Merger by the
shareholders of DDI is equal, in each instance, to the total value of the DDI
Common Stock to be surrendered in exchange therefor. The ISI Stock, and options
to purchase ISI Stock, issued in the Merger will be issued solely in exchange
for DDI Common Stock and DDI Options, respectively, and no other transaction
other than the Merger represents, provides for or is intended to be an
adjustment to the consideration paid for the DDI Common Stock and DDI Options.
Except for cash paid in lieu of fractional shares or for Dissenting Shares, no
consideration that could constitute "other property" within the meaning of
Section 356 of the Code is being paid by ISI for the DDI Common Stock in the
Merger. The parties shall not take a position on any tax returns inconsistent
with this Section 1.7. In addition, ISI represents now, and as of the Closing
Date, that it presently intends to continue DDI's historic business or use a
significant portion of DDI's business assets in a business. At the Closing,
officers of each of ISI and DDI shall execute and deliver officers' certificates
in the forms of Exhibits 1.7A-B, together with an acknowledgment that such
certificates will be relied upon by counsel to DDI and counsel to ISI. The
provisions and representations contained or referred to in this Section 1.7
shall survive until the expiration of the applicable statute of limitations.
1.8 Pooling of Interests. The parties intend that the Merger be treated
as a "pooling of interests" for accounting purposes.
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1.9 Publication of Financials. ISI shall cause publication of the
combined results of DDI and ISI within thirty (30) days after ISI's fiscal year
end if the Closing occurs no later than January 26, 1996, otherwise ISI shall
cause publication of the combined results within fifteen (15) days after the
close of a period of at least thirty (30) days of combined operations of DDI and
ISI. For purposes of this Section 1.9, the term "publication" shall have the
meaning provided in SEC Accounting Series Release No. 135.
2. REPRESENTATIONS AND WARRANTIES OF DDI
DDI hereby represents and warrants as follows, that, except as set
forth on the DDI Schedule of Exceptions delivered to ISI herewith as Exhibit
2.0:
2.1 Organization and Good Standing. DDI is a corporation duly
organized, validly existing and in good standing under the laws of the state of
California, has the corporate power and authority to own, operate and lease its
properties and to carry on its business as now conducted and as proposed to be
conducted, and is qualified as a foreign corporation in each jurisdiction in
which a failure to be so qualified could reasonably be expected to have a
material adverse effect on its present operations or financial condition.
2.2 Power, Authorization and Validity.
2.2.1 DDI has the right, power, legal capacity and authority
to enter into and perform its obligations under this Agreement, and all
agreements to which DDI is or will be a party that are required to be executed
pursuant to this Agreement (the "DDI Ancillary Agreements"). The execution,
delivery and performance of this Agreement and the DDI Ancillary Agreements have
been duly and validly approved and authorized by DDI's Board of Directors.
2.2.2 No filing, authorization or approval, governmental or
otherwise, is necessary to enable DDI to enter into, and to perform its
obligations under, this Agreement and the DDI Ancillary Agreements, except for
(a) the filing of the Agreement of Merger with the California Secretary of
State, and the filing of appropriate documents with the relevant authorities of
other states in which DDI is qualified to do business, if any, (b) the filing of
the Certificate of Merger with the Delaware Secretary of State, (c) such filings
as may be required to comply with federal and state securities laws, and (d) the
approval of the DDI Shareholders of the transactions contemplated hereby.
2.2.3 This Agreement and the DDI Ancillary Agreements are, or
when executed by DDI will be, valid and binding obligations of DDI enforceable
in accordance with their respective terms, except as to the effect, if any, of
(a) applicable bankruptcy and other similar laws affecting the rights of
creditors generally, (b) rules of law governing specific performance, injunctive
relief and other equitable remedies and (c) the enforceability of provisions
requiring indemnification in connection with the offering, issuance or sale of
securities; provided, however, that the Agreement of Merger will not be
effective until filed with the California Secretary of State and the Certificate
of Merger will not be effective until filed with the Delaware Secretary of
State.
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2.3 Capitalization. The authorized capital stock of DDI consists of
5,000,000 shares of Class A Common Stock (no par value) and 1,000,000 shares of
Class B Common Stock (no par value), of which 2,555,720 shares of Class A Common
Stock and no shares of Class B Common Stock are issued and outstanding. An
aggregate of 1,500,000 shares of DDI Common Stock are reserved and authorized
for issuance pursuant to the DDI Plan, of which options to purchase a total of
887,443 shares of DDI Common Stock are outstanding. All issued and outstanding
shares of DDI Common Stock have been duly authorized and validly issued, are
fully paid and non assessable, are not subject to any right of rescission, and
have been offered, issued, sold and delivered by DDI in compliance with all
registration or qualification requirements (or applicable exemptions therefrom)
of applicable federal and state securities laws. A list of all holders of DDI
Common Stock and DDI Options, and the number of shares and options held by each
has been delivered by DDI to ISI herewith as Schedule 2.3. Except as set forth
in this Section and in Schedule 2.3, there are no options, warrants, calls,
commitments, conversion privileges or preemptive or other rights or agreements
outstanding to purchase any of DDI's authorized but unissued capital stock or
any securities convertible into or exchangeable for shares of DDI Common Stock
or obligating DDI to grant, extend, or enter into any such option, warrant,
call, right, commitment, conversion privilege or other right or agreement, and
there is no liability for dividends accrued but unpaid. There are no voting
agreements, rights of first refusal or other restrictions (other than normal
restrictions on transfer under applicable federal and state securities laws)
applicable to any of DDI's outstanding securities. DDI is not under any
obligation to register under the United States Securities Act of 1933, as
amended (the "Securities Act") any securities that may be subsequently issued.
2.4 Subsidiaries. DDI does not have any subsidiaries or any interest,
direct or indirect, in any corporation, partnership, joint venture or other
business entity.
2.5 No Violation of Existing Agreements. Neither the execution and
delivery of this Agreement nor any DDI Ancillary Agreement, nor the consummation
of the transactions contemplated hereby, will conflict with, or (with or without
notice or lapse of time, or both) result in a termination, breach, impairment or
violation of (a) any provision of the Certificate of Incorporation or Bylaws of
DDI or any Subsidiary, as currently in effect, (b) in any material respect, any
material instrument or contract to which DDI or any Subsidiary is a party or by
which DDI or any Subsidiary is bound, or (c) any federal, state, local or
foreign judgment, writ, decree, order, statute, rule or regulation applicable to
DDI or any Subsidiary or their respective assets or properties. The consummation
of the Merger and the transfer to ISI of all material rights, licenses,
franchises, leases and agreements of DDI and each Subsidiary will not require
the consent of any third party.
2.6 Litigation. There is no action, proceeding, claim or investigation
pending against DDI or any Subsidiary before any court or administrative agency
that if determined adversely to DDI or any Subsidiary may reasonably be expected
to have a material adverse effect on the present or future operations or
financial condition of DDI or any Subsidiary, nor, to the best of DDI's
knowledge, has any such action, proceeding, claim or investigation been
threatened. There is, to the best of DDI's knowledge, no reasonable basis for
any shareholder or former shareholder of DDI, or any other person, firm,
corporation, or entity, to assert a claim against DDI or ISI based upon: (a)
ownership or rights to ownership of any shares of DDI Common Stock (except for
dissenter's rights with respect to shares of ISI Common Stock issuable by virtue
of the Merger), (b) any rights as a DDI Shareholder, including any option or
preemptive rights or rights to notice or to vote, or (c) any rights under any
agreement among DDI and its Shareholders.
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2.7 Taxes. DDI and each of its Subsidiaries has filed all material
federal, state, local and foreign tax returns required to be filed, has paid all
taxes shown due on all returns which have been filed, has established an
adequate accrual or reserve for the payment of all taxes, due and payable,
including reasonable accruals for taxes, payable in respect of the periods
subsequent to the periods covered by the most recent applicable tax returns, has
made all necessary estimated tax payments, and has no material liability for
taxes in excess of the amount so paid or accruals or reserves so established. No
deficiencies for any tax have been threatened, claimed, proposed, or assessed by
any taxing authority. No tax return of DDI or any Subsidiary has ever been
audited by the Internal Revenue Service or any state taxing agency or authority.
For the purposes of this Agreement, the terms "tax" and "taxes" include all
federal, state, local and foreign income, gains, franchise, excise, property,
sales, use, employment, license, payroll, occupation, recording, value added or
transfer taxes, governmental charges, fees, levies or assessments (whether
payable directly or by withholding), and, with respect to such taxes, any
estimated tax, interest and penalties or additions to tax and interest on such
penalties and additions to tax.
2.8 DDI Financial Statements. DDI has delivered to ISI as Schedule 2.8
DDI's audited balance sheet as of June 30, 1995 (the "Balance Sheet") and income
statement and statement of cash flows for the year then ended (collectively, the
"Audited Financial Statements") and the unaudited balance sheet as of September
30, 1995 (the September Balance Sheet) and unaudited interim financial
statements for the period ended September 30, 1995 (collectively, the "Unaudited
Financial Statements")(The Audited Financial Statements and the Unaudited
Financial Statements are collectively referred to herein as the "Financial
Statements'"). The Financial Statements (a) are in accordance with the books and
records of DDI, (b) fairly present the financial condition of DDI at the date
therein indicated and the results of operations for the period therein
specified, (c) the Audited Financial Statements have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis, and
(d) the Unaudited Financial Statements will be subject to normal year-end audit
adjustments and will not contain footnotes. DDI has no material debt, liability
or obligation of any nature, whether accrued, absolute, contingent or otherwise,
and whether due or to become due, that is not reflected or reserved against in
the Financial Statements which would be required under generally accepted
accounting principles to be reflected or reserved, except for those that may
have been incurred after the date of the Financial Statements in the ordinary
course of its business, consistent with past practice and that are not material
in amount either individually or collectively.
2.9 Title to Properties. DDI has good and marketable title to all of
its assets as shown on the Balance Sheet, free and clear of all liens, charges,
restrictions or encumbrances (other than for taxes not yet due and payable). All
machinery and equipment included in such properties is in good condition and
repair, normal wear and tear excepted, and all leases of real or personal
property to which DDI or any Subsidiary is a party are fully effective and
afford DDI or the Subsidiary peaceful and undisturbed possession of the subject
matter of the lease. Neither DDI nor any Subsidiary is in violation of any
zoning, building, safety or environmental ordinance, regulation or requirement
or other law or regulation applicable to the operation of owned or leased
properties (the violation of which would have a material adverse effect on its
business), or has received any notice of violation with which it has not
complied.
2.10 Absence of Certain Changes. Since the date of the September
Balance Sheet, there has not been with respect to DDI or any Subsidiary:
(a) any change in the financial condition, properties, assets,
liabilities, business or operations thereof which change by itself or in
conjunction with all other such changes, whether or not arising in the ordinary
course of business, has had or will have a material adverse effect thereon;
(b) any material contingent liability incurred thereby as
guarantor or otherwise with respect to the obligations of others;
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(c) any material mortgage, encumbrance or lien placed on any
of the properties thereof;
(d) any material obligation or liability incurred thereby
other than obligations and liabilities incurred in the ordinary course of
business;
(e) any material purchase or sale or other disposition, or any
agreement or other arrangement for the purchase, sale or other disposition, of
any of the properties or assets thereof other than in the ordinary course of
business;
(f) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties, assets or business
thereof;
(g) any declaration, setting aside or payment of any dividend
on, or the making of any other distribution in respect of, the capital stock
thereof, any split, combination or recapitalization of the capital stock thereof
or any direct or indirect redemption, purchase or other acquisition of the
capital stock thereof;
(h) any labor dispute or claim of unfair labor practices, any
change in the compensation payable or to become payable to any of its officers,
employees or agents, or any bonus payment or arrangement made to or with any of
such officers, employees or agents;
(i) any change with respect to the management, supervisory or
other key personnel thereof;
(j) any payment or discharge of a material lien or liability
thereof which lien was not either shown on the September Balance Sheet or
incurred in the ordinary course of business thereafter; or
(k) any obligation or liability incurred thereby to any of its
officers, directors or shareholders or any loans or advances made thereby to any
of its officers, directors or shareholders except normal compensation and
expense allowances payable to officers.
2.11 Contracts and Commitments. Except as set forth on Schedule 2.11
delivered to ISI herewith, neither DDI nor any Subsidiary has any contract,
obligation or commitment which is material to the business of DDI or any
Subsidiary or which involves a potential commitment in excess of Seventy Five
Thousand Dollars ($75,000) or any stock redemption or purchase agreement,
financing agreement, license, lease or franchise. A copy of each agreement or
document listed on Schedule 2.11 has been delivered to ISI's counsel. Neither
DDI nor any Subsidiary is in default in any material respect under any contract,
obligation or commitment listed on Schedule 2.11 or that is otherwise material
to the business of DDI or a Subsidiary. Neither DDI nor any Subsidiary is a
party to any contract or arrangement which has had or could reasonably be
expected to have a material adverse effect on its business or prospects. Neither
DDI nor any Subsidiary has any material liability for renegotiation of
government contracts or subcontracts, if any.
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2.12 Intellectual Property. To the best of DDI's knowledge, DDI and the
DDI Subsidiaries own, or have the right to use, sell or license all material
Intellectual Property Rights (as defined below) necessary or required for the
conduct of their respective businesses as presently conducted (such Intellectual
Property Rights being hereinafter collectively referred to as the "DDI IP
Rights") and such rights to use, sell or license are reasonably sufficient for
such conduct of their respective businesses. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby will not constitute a material breach of any material
instrument or agreement governing any DDI IP Right (the "DDI IP Rights
Agreements"), will not cause the forfeiture or termination or give rise to a
right of forfeiture or termination of any DDI IP Right or materially impair the
right of DDI or any Subsidiaries to use, sell or license any DDI IP Right or
portion thereof (except where such breach, forfeiture or termination would not
have a material adverse effect on DDI and the DDI Subsidiaries, taken as a
whole). There are no royalties, honoraria, fees or other payments payable by DDI
to any person by reason of the ownership, use, license, sale or disposition of
the DDI IP Rights (other than as set forth in the DDI IP Rights Agreements
listed in Schedule 2.12). Neither the manufacture, marketing, license, sale or
intended use of any product currently licensed or sold by DDI or any of the DDI
Subsidiaries or currently under development by DDI or any of the DDI
Subsidiaries violates any license or agreement between DDI or any of the DDI
Subsidiaries and any third party or infringes any Intellectual Property Right of
any other party; and there is no pending or, to the best knowledge of DDI,
threatened claim or litigation contesting the validity, ownership or right to
use, sell, license or dispose of any DDI IP Right nor, to the best knowledge of
DDI without any independent investigation thereof, is there any basis for any
such claim, nor has DDI received any notice asserting that any DDI IP Right or
the proposed use, sale, license or disposition thereof conflicts or will
conflict with the rights of any other party, nor, to the best knowledge of DDI,
is there any basis for any such assertion. DDI has taken reasonable and
practicable steps designed to safeguard and maintain the secrecy and
confidentiality of, and its proprietary rights in, all material DDI IP Rights.
All officers, employees and consultants of DDI and each Subsidiary have executed
and delivered to DDI or the Subsidiary an agreement regarding the protection of
proprietary information and the assignment to DDI or the Subsidiary of all
Intellectual Property Rights arising from the services performed for DDI or the
Subsidiary by such persons. Schedule 2.12 contains a list of all applications,
registrations, filings and other formal actions made or taken pursuant to
federal, state and foreign laws by DDI to perfect or protect its interest in DDI
IP Rights, including, without limitation, all patents, patent applications,
trademarks, trademark applications and service marks. As used herein, the term
"INTELLECTUAL PROPERTY RIGHTS" shall mean all worldwide industrial and
intellectual property rights, including, without limitation, patents, patent
applications, patent rights, trademarks, trademark applications, trade names,
service marks, service mark applications, copyright, copyright applications,
franchises, licenses, inventories, know-how, trade secrets, customer lists,
proprietary processes and formulae, all source and object code, algorithms,
architecture, structure, display screens, layouts, inventions, development tools
and all documentation and media constituting, describing or relating to the
above, including, without limitation, manuals, memoranda and records.
2.13 Compliance with Laws. DDI and each of its Subsidiaries has
complied, or prior to the Closing Date will have complied, and is or will be at
the Closing Date in full compliance, in all material respects with all
applicable laws, ordinances, regulations, and rules, and all orders, writs,
injunctions, awards, judgments, and decrees applicable to it or to the assets,
properties, and business thereof (the violation of which would have a material
adverse effect upon its business), including, without limitation: (a) all
applicable federal and state securities laws and regulations, (b) all applicable
federal, state, and local laws, ordinances, regulations, and all orders, writs,
injunctions, awards, judgments, and decrees pertaining to (i) the sale,
licensing, leasing, ownership, or management of its owned, leased or licensed
real or personal property, products and technical data, (ii) employment and
employment practices, terms and conditions of employment, and wages and hours
and (iii) safety, health, fire prevention, environmental protection, toxic waste
disposal, building standards, zoning and other similar matters (c) the Export
Administration Act and regulations promulgated thereunder and all other laws,
regulations, rules, orders, writs, injunctions, judgments and decrees applicable
to the export or re-export of controlled commodities or technical data and (d)
the Immigration Reform and Control Act. Each of DDI and the Subsidiaries has
received all permits and approvals from, and has made all filings with, third
parties, including government agencies and authorities,
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that are necessary in connection with its present business. To the best of DDI's
knowledge, there are no legal or administrative proceedings or investigations
pending or threatened, that, if enacted or determined adversely to DDI or any
Subsidiary, would result in any material adverse change in the present or future
operations or financial condition thereof.
2.14 Certain Transactions and Agreements. Neither Marco Thompson nor
any member of his immediate family, has any direct or indirect ownership
interest in any firm or corporation that competes with DDI (except with respect
to any interest in less than one percent of the stock of any corporation whose
stock is publicly traded). Neither Marco Thompson nor any member of his
immediate family is directly or indirectly interested in any contract or
informal arrangement with DDI or any Subsidiary, except for normal compensation
for services as an officer, director or employee thereof. Neither Marco Thompson
nor any member of his immediate family has any interest in any property, real or
personal, tangible or intangible, including inventions, patents, copyrights,
trademarks or trade names or trade secrets, used in or pertaining to the
business of DDI or any Subsidiary, except for the normal rights of a
shareholder.
2.15. Employees, ERISA and Other Compliance.
2.15.1 Except as set forth in Schedule 2.15.1, neither DDI nor
any Subsidiary has any employment contracts or consulting agreements currently
in effect that are not terminable at will (other than agreements with the sole
purpose of providing for the confidentiality of proprietary information or
assignment of inventions). All officers, employees and consultants of DDI and
the Subsidiaries having access to proprietary information have executed and
delivered to DDI or the Subsidiary an agreement regarding the protection of such
proprietary information and the assignment of inventions to DDI or the
Subsidiary; copies of the form of all such agreements have been delivered to
ISI's counsel.
2.15.2 Neither DDI nor any Subsidiary (i) has ever been or is
now subject to a union organizing effort, (ii) is subject to any collective
bargaining agreement with respect to any of its employees, (iii) is subject to
any other contract, written or oral, with any trade or labor union, employees'
association or similar organization, or (iv) has any current labor disputes. DDI
and each of its Subsidiaries has good labor relations, and has no knowledge of
any facts indicating that the consummation of the transactions contemplated
hereby will have a material adverse effect on such labor relations, and has no
knowledge that any of its key employees intends to leave its employ.
2.15.3 Schedule 2.15.3 identifies each "employee benefit
plan," as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") but excluding workers' compensation, unemployment
compensation and other government-mandated programs) currently or previously
maintained, contributed to or entered into by DDI or any Subsidiary under which
DDI or any Subsidiary or any ERISA Affiliate (as defined below) thereof has any
present or future obligation or liability (collectively, the "DDI Employee
Plans"). For purposes of this Section 2.15.3, "ERISA Affiliate" shall mean any
entity which is a member of (A) a "controlled group of corporations," as defined
in Section 414(b) of the Code, (B) a group of entities under "common control,"
as defined in Section 414(c) of the Code, or (C) an "affiliated service group,"
as defined in Section 414(m) of the Code, or treasury regulations promulgated
under Section 414(o) of the Code, any of which includes DDI or any Subsidiary.
Copies of all DDI Employee Plans (and, if applicable, related trust agreements)
and all amendments thereto and summary plan descriptions thereof (including
summary plan descriptions) have been delivered to ISI or its counsel, together
with the three most recent annual reports (Form 5500, including, if applicable,
Schedule B thereto) prepared in connection with any such DDI Employee Plan. All
DDI Employee Plans which individually or collectively would constitute an
"employee pension benefit plan," as defined in Section 3(2) of ERISA
(collectively, the "DDI Pension Plans"), are identified as such in Schedule
2.15.3. As of June 30, 1995, all contributions due from DDI or any Subsidiary
with respect to any of the DDI Employee Plans have been made as required under
ERISA or have been accrued on DDI's or any such DDI Subsidiary's financial
statements. Each DDI Employee Plan has been maintained substantially in
compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including, without limitation, ERISA
and the Code, which are applicable to such DDI Employee Plans.
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2.15.4 No DDI Pension Plan constitutes, or has since the
enactment of ERISA constituted, a "multiemployer plan," as defined in Section
3(37) of ERISA. No DDI Pension Plans are subject to Title IV of ERISA. No
"prohibited transaction," as defined in Section 406 of ERISA or Section 4975 of
the Code, has occurred with respect to any DDI Employee Plan which is covered by
Title I of ERISA which would result in a material liability to DDI and its
Subsidiaries taken as a whole, excluding transactions effected pursuant to a
statutory or administrative exemption. Nothing done or omitted to be done and no
transaction or holding of any asset under or in connection with any DDI Employee
Plan has or will make DDI or any officer or director of DDI subject to any
material liability under Title I of ERISA or liable for any material tax (as
defined in Section 2.7) or penalty pursuant to Sections 4972, 4975, 4976 or 4979
of the Code or Section 502 of ERISA.
2.15.5 Any DDI Pension Plan which is intended to be qualified
under Section 401(a) of the Code (a "DDI 401(a) Plan") has received a favorable
determination from the Internal Revenue Service as to its qualifications, and
DDI is not aware of any reason why such determination may not be relied upon by
such plan.
2.15.6 Schedule 2.15.6 lists each employment, severance or
other similar contract, arrangement or policy and each plan or arrangement
(written or oral) providing for insurance coverage (including any self-insured
arrangements), workers' benefits, vacation benefits, severance benefits,
disability benefits, death benefits, hospitalization benefits, retirement
benefits, deferred compensation, profit-sharing, bonuses, stock options, stock
purchase, phantom stock, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or benefits for
employees, consultants or directors which (A) is not a DDI Employee Plan, (B) is
entered into, maintained or contributed to, as the case may be, by DDI or any
Subsidiary and (C) covers any employee or former employee of DDI or any
Subsidiary. Such contracts, plans and arrangements as are described in this
Section 2.15.6 are herein referred to collectively as the "DDI Benefit
Arrangements." Each DDI Benefit Arrangement has been maintained in substantial
compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations which are applicable to such DDI Benefit
Arrangement. DDI has delivered to ISI or its counsel a complete and correct copy
or description of each DDI Benefit Arrangement.
2.15.7 There has been no amendment to, written interpretation
or announcement (whether or not written) by DDI or any Subsidiary relating to,
or change in employee participation or coverage under, any DDI Employee Plan or
DDI Benefit Arrangement that would increase materially the expense of
maintaining such DDI Employee Plan or DDI Benefit Arrangement above the level of
the expense incurred in respect thereof for the fiscal year ended June 30, 1995.
2.15.8 DDI has provided to individuals entitled thereto all
required notices and coverage pursuant to Section 4980B of the Code and the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"),
with respect to any "qualifying event" (as defined in Section 4980B(f)(3) of the
Code) under any DDI Employee Plan occurring prior to and including the Closing
Date, and no material Tax payable on account of Section 4980B of the Code has
been incurred with respect to any current or former employees (or their
beneficiaries) of DDI or any Subsidiary.
2.15.9 No benefit payable or which may become payable by DDI
or any Subsidiary pursuant to any DDI Employee Plan or any DDI Benefit
Arrangement or as a result of or arising under this Agreement shall constitute
an "excess parachute payment" (as defined in Section 280G(b)(1) of the Code)
which is subject to the imposition of an excise Tax under Section 4999 of the
Code or which would not be deductible by reason of Section 280G of the Code.
2.15.10 DDI and each DDI Subsidiary is in compliance in all
material respects with all applicable laws, agreements and contracts relating to
employment, employment practices, wages, hours, and terms and conditions of
employment, including, but not limited to, employee compensation matters, but
not including ERISA.
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2.15.11 To DDI's knowledge, no employee of DDI or an
Subsidiary is in violation of any term of any employment contract, patent
disclosure agreement, noncompetition agreement, or any other contract or
agreement, or any restrictive covenant relating to the right of any such
employee to be employed thereby, or to use trade secrets or proprietary
information of others, and the employment of such employees does not subject DDI
or any Subsidiary to any liability.
2.15.12 A list of all employees, officers and consultants of
DDI and the Subsidiaries and their current compensation is set forth on Schedule
2.15.12, which has been delivered to ISI.
2.15.13 Neither DDI nor any Subsidiary is a party to any (a)
agreement with any executive officer or other key employee thereof (i) the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction involving DDI in the nature of any of the
transactions contemplated by this Agreement and the Agreement of Merger, (ii)
providing any term of employment or compensation guarantee, or (iii) providing
severance benefits or other benefits after the termination of employment of such
employee regardless of the reason for such termination of employment, or (b)
agreement or plan, including, without limitation, any stock option plan, stock
appreciation rights plan or stock purchase plan, any of the benefits of which
will be materially increased, or the vesting of benefits of which will be
materially accelerated, by the occurrence of any of the transactions
contemplated by this Agreement and the Agreement of Merger or the value of any
of the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement and the Agreement of Merger.
2.16 Corporate Documents. DDI has made available to ISI for examination
all documents and information listed in the DDI Schedule of Exceptions or other
Exhibits called for by this Agreement which has been requested by ISI's legal
counsel, including, without limitation, the following: (a) copies of DDI's
Certificate of Incorporation and Bylaws as currently in effect; (b) its Minute
Book containing all records of all proceedings, consents, actions, and meetings
of the shareholders, the board of directors and any committees thereof; (c) its
stock ledger and journal reflecting all stock issuances and transfers; and (d)
all permits, orders, and consents issued by any regulatory agency with respect
to DDI, or any securities of DDI, and all applications for such permits, orders,
and consents.
2.17 No Brokers. Neither DDI nor any of the DDI Shareholders are
obligated for the payment of fees or expenses of any investment banker, broker
or finder in connection with the origin, negotiation or execution of this
Agreement or the Agreement of Merger or in connection with any transaction
contemplated hereby or thereby.
2.18 Disclosure. Neither this Agreement, its exhibits and schedules,
nor any of the certificates or documents to be delivered by DDI to ISI under
this Agreement, taken together, contains any untrue statement of a material fact
or omits to state any material fact necessary in order to make the statements
contained herein and therein, in light of the circumstances under which such
statements were made, not materially misleading.
2.19 Information Supplied. None of the information supplied or to be
supplied by DDI to its shareholders in connection with any shareholder's meeting
(collectively, "Notice Materials"), at the date such information is supplied and
at the time of the meeting of the DDI Shareholders to be held to approve the
Merger, contains or will contain any untrue statement of a material fact or
omits or will omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not materially misleading.
2.20 Certain Material Agreements. Neither DDI nor any Subsidiary is a
party or subject to any oral or written material contracts not entered into in
the ordinary course of business, including, but not limited to any:
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(a) Contract providing for payments by or to DDI or any
Subsidiary in an aggregate amount of Seventy Five Thousand Dollars ($75,000) or
more;
(b) License agreement as licensor or licensee (except for
standard non-exclusive hardware and software licenses granted to end-user
customers in the ordinary course of business the form of which has been provided
to ISI's counsel);
(c) Material agreement for the lease of real or personal
property;
(d) Joint venture contract or arrangement or any other
agreement that involves a sharing of profits with other persons;
(e) Instrument evidencing or related in any way to
indebtedness for borrowed money by way of direct loan, sale of debt securities,
purchase money obligation, conditional sale, guarantee, or otherwise, except for
trade indebtedness incurred in the ordinary course of business, and except as
disclosed in the Financial Statements; or
(f) Contract containing covenants purporting to limit DDI's or
any Subsidiary's freedom to compete in any line of business in any geographic
area.
All agreements, contracts, plans, leases, instruments,
arrangements, licenses and commitments listed in the DDI Schedule of Exceptions
identified to this Section 2.20 are valid and in full force and effect. Neither
DDI nor any Subsidiary is, nor, to the knowledge of DDI, is any other party
thereto, in breach or default in any material respect under the terms of any
such agreement, contract, plan, lease, instrument, arrangement, license or
commitment, which breach or default may reasonably be expected to have a
material adverse effect on DDI or any Subsidiary.
2.21 Books and Records.
2.21.1 The books, records and accounts of DDI and its
Subsidiaries (a) are in all material respects true, complete and correct, (b)
have been maintained in accordance with good business practices on a basis
consistent with prior years, (c) are stated in reasonable detail and accurately
and fairly reflect the transactions and dispositions of the assets of DDI, and
(d) accurately and fairly reflect the basis for the Financial Statements.
2.21.2 DDI has devised and maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (a)
transactions are executed in accordance with management's general or specific
authorization; (b) transactions are recorded as necessary (i) to permit
preparation of financial statements in conformity with generally accepted
accounting principles or any other criteria applicable to such statements, and
(ii) to maintain accountability for assets, and (c) the amount recorded for
assets on the books and records of DDI is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
2.22 Insurance. DDI and its Subsidiaries maintain and at all times
during the prior three years have maintained fire and casualty, general
liability, business interruption, product liability, and sprinkler and water
damage insurance which it believes to be reasonably prudent for similarly sized
and similarly situated businesses.
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2.23 Environmental Matters.
2.23.1 During the period that DDI and Subsidiary have leased
or owned their respective properties or owned or operated any facilities, there
have been no disposals, releases or threatened releases of Hazardous Materials
(as defined below) on, from or under such properties or facilities. DDI has no
knowledge of any presence, disposals, releases or threatened releases of
Hazardous Materials on, from or under any of such properties or facilities,
which may have occurred prior to DDI or any Subsidiary having taken possession
of any of such properties or facilities. For the purposes of this Agreement, the
terms "disposal," "release," and "threatened release" shall have the definitions
assigned thereto by the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. ss. 9601 et seq., as amended ("CERCLA"). For
the purposes of this Agreement "Hazardous Materials" shall mean any hazardous or
toxic substance, material or waste which is or becomes prior to the Closing
regulated under, or defined as a "hazardous substance," "pollutant,"
"contaminant," "toxic chemical," "hazardous materials," "toxic substance" or
"hazardous chemical" under (1) CERCLA; (2) any similar federal, state or local
law; or (3) regulations promulgated under any of the above laws or statutes.
2.23.2 None of the properties or facilities of DDI or any
Subsidiary is in material violation of any federal, state or local law,
ordinance, regulation or order relating to industrial hygiene or to the
environmental conditions on, under or about such properties or facilities,
including, but not limited to, soil and ground water condition. During the time
that DDI or any Subsidiary have owned or leased their respective properties and
facilities, neither DDI nor any Subsidiary nor, to DDI's knowledge, any third
party, has used, generated, manufactured or stored on, under or about such
properties or facilities or transported to or from such properties or facilities
any Hazardous Materials except in accordance with applicable environmental laws.
2.23.3 During the time that DDI or any Subsidiary have owned
or leased their respective properties and facilities, there has been no
litigation brought or threatened against DDI or any Subsidiary by, or any
settlement reached by DDI or any Subsidiary with, any party or parties alleging
the presence, disposal, release or threatened release of any Hazardous Materials
on, from or under any of such properties or facilities.
2.24 Interested Party Transactions. No officer or director of DDI or
any "affiliate" or "associate" (as those terms are defined in Rule 405
promulgated under the Securities Act) of any such person has had, either
directly or indirectly, a material interest in: (i) any person or entity which
purchases from or sells, licenses or furnishes to DDI or any Subsidiary any
goods, property, technology or intellectual or other property rights or
services; or (ii) any contract or agreement to which DDI or any Subsidiary is a
party or by which it may be bound or affected.
3. REPRESENTATIONS AND WARRANTIES OF ISI AND NEWCO
ISI and Newco hereby jointly and severally represent and warrant as
follows, that, except as set forth on the ISI Schedule of Exceptions delivered
to DDI as Exhibit 3.0:
3.1 Organization and Good Standing.
ISI is a corporation duly organized, validly existing and in good
standing under the laws of the State of California, and has the corporate power
and authority to own, operate and lease its properties and to carry on its
business as now conducted and as proposed to be conducted, and is qualified as a
foreign corporation in each jurisdiction in which a failure to be so qualified
could reasonably be expected to have a material adverse effect on its present
operations or financial condition.
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Newco is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has the corporate power
and authority to own, operate and lease its properties and to carry on its
business as now conducted and as proposed to be conducted, and is qualified as a
foreign corporation in each jurisdiction in which a failure to be so qualified
could reasonably be expected to have a material adverse effect on its present
operations or financial condition.
3.2 Power, Authorization and Validity.
3.2.1 ISI and Newco have the right, power, legal capacity and
authority to enter into and perform their obligations under this Agreement, and
all agreements to which ISI and Newco are or will be a party that are required
to be executed pursuant to this Agreement (the "ISI Ancillary Agreements"). The
execution, delivery and performance of this Agreement and the ISI Ancillary
Agreements have been duly and validly approved and authorized by ISI's Board of
Directors and Newco's Board of Directors.
3.2.2 No filing, authorization or approval, governmental or
otherwise, is necessary to enable ISI or Newco to enter into, and to perform
their obligations under, this Agreement and the ISI Ancillary Agreements, except
for (a) the filing of the Agreement of Merger with the California Secretary of
State and Delaware Secretary of State, the filing of appropriate documents with
the relevant authorities of other states in which ISI and Newco are qualified to
do business, if any, and (b) such filings as may be required to comply with
federal and state securities laws.
3.2.3 This Agreement and the ISI Ancillary Agreements are, or
when executed by ISI and Newco will be, valid and binding obligations of ISI and
Newco enforceable in accordance with their respective terms, except as to the
effect, if any, of (a) applicable bankruptcy and other similar laws affecting
the rights of creditors generally, (b) rules of law governing specific
performance, injunctive relief and other equitable remedies and (c) the
enforceability of provisions requiring indemnification in connection with the
offering, issuance or sale of securities; provided, however, that the Agreement
of Merger will not be effective until filed with the California Secretary of
State and Delaware Secretary of State.
3.2.4 Due Authorization. The ISI Common Stock to be issued to
DDI Shareholders in the Merger, when issued by ISI pursuant to the terms of this
Agreement, will be duly authorized, validly issued, fully paid and
non-assessable, will be issued in compliance with applicable federal and state
securities laws and will be free and clear of all liens, encumbrances and
adverse claims and may be resold by DDI affiliates in accordance with Rule 145
of the Securities Act.
3.3 No Violation of Existing Agreements. Neither the execution and
delivery of this Agreement nor any ISI Ancillary Agreement, nor the consummation
of the transactions contemplated hereby, will conflict with, or (with or without
notice or lapse of time, or both) result in a termination, breach, impairment or
violation of (a) any provision of the Articles of Incorporation or Bylaws of ISI
and Newco, as currently in effect, (b) in any material respect, any material
instrument or contract to which ISI or Newco is a party or by which ISI or Newco
is bound, or (c) any federal, state, local or foreign judgment, writ, decree,
order, statute, rule or regulation applicable to ISI or Newco or their assets or
properties.
3.4 Disclosure. ISI has made available to DDI an investor disclosure
package consisting of ISI's annual report on Form 10-K for its fiscal year
ending February 28, 1995 (the "Fiscal Year End"), all Forms 10-Q and 8-K filed
by ISI with the SEC since the Fiscal Year End and up to the date of this
Agreement and all proxy materials distributed to ISI's shareholders since the
Fiscal Year End and up to the date of this Agreement (the "ISI Disclosure
Package"). The ISI Disclosure Package, this Agreement, the exhibits and
schedules hereto, and any certificates or documents to be delivered to DDI
pursuant to this Agreement, when taken together, do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements contained herein and therein, in light of the
circumstances under which such statements were made, not misleading.
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3.5 Absence of Certain Changes. Since the Fiscal Year End, there has
not been any change in the financial condition, properties, assets, liabilities,
business or operations of ISI which change by itself or in conjunction with all
other such changes, whether or not arising in the ordinary course of business,
has had or will have a material adverse effect thereon except as disclosed in
the ISI Disclosure Package.
3.6 Litigation. There is no action, proceeding, claim or investigation
pending against ISI before any court or administrative agency that if determined
adversely to ISI may reasonably be expected to have a material adverse effect on
the present or future operations or financial condition of ISI, nor, to the best
of ISI's knowledge, has any such action, proceeding, claim or investigation been
threatened. There is, to the best of ISI's knowledge, no reasonable basis for
any shareholder or former shareholder of ISI, or any other person, firm,
corporation, or entity, to assert a claim against ISI based upon: (a) ownership
or rights to ownership of any shares of ISI Stock (except for dissenter's rights
with respect to shares of ISI Common Stock issuable by virtue of the Merger),
(b) any rights as a ISI Shareholder, including any option or preemptive rights
or rights to notice or to vote, or (c) any rights under any agreement among ISI
and its shareholders.
3.7 Compliance with Laws. ISI and Newco have complied, or prior to the
Closing Date will have complied, and are or will be at the Closing Date in full
compliance, in all material respects with all applicable laws, ordinances,
regulations, and rules, and all orders, writs, injunctions, awards, judgments,
and decrees applicable to them, the violation of which would have a material
adverse effect upon their business. ISI and Newco have received all permits and
approvals from, and have made all filings with, third parties, including
government agencies and authorities, that are necessary in connection with their
present business. To the best of ISI's and Newco's knowledge, there are no legal
or administrative proceedings or investigations pending or threatened, that, if
enacted or determined adversely to them, would result in any material adverse
change in the present or future operations or financial condition thereof.
3.8 No Brokers. ISI and Newco are not obligated for the payment of fees
or expenses of any investment banker, broker or finder in connection with the
origin, negotiation or execution of this Agreement or the Agreement of Merger or
in connection with any transaction contemplated hereby or thereby.
4. DDI PRECLOSING COVENANTS
During the period from the date of this Agreement until the Effective
Time, DDI covenants and agrees as follows:
4.1 Advice of Changes. DDI will promptly advise ISI in writing (a) of
any event occurring subsequent to the date of this Agreement that would render
any representation or warranty of DDI contained in this Agreement, if made on or
as of the date of such event or the Closing Date, untrue or inaccurate in any
material respect and (b) of any material adverse change in DDI's business,
results of operations or financial condition. To ensure compliance with this
Section 4.1, DDI shall deliver to ISI within twenty (20) days after the end of
each monthly accounting period ending after the date of this Agreement and
before the Closing Date, an unaudited balance sheet and statement of operations,
which financial statements shall be prepared in the ordinary course of business,
in accordance with DDI's books and records and generally accepted accounting
principles and shall fairly present the financial position of DDI as of their
respective dates and the results of DDI's operations for the periods then ended
except that the Unaudited Financial Statements will be subject to normal
year-end audit adjustments and will not contain footnotes.
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4.2 Maintenance of Business. DDI will use its best efforts to carry on
and preserve its business and its relationships with customers, suppliers,
employees and others in substantially the same manner as it has prior to the
date hereof. If DDI becomes aware of a material deterioration in the
relationship with any material customer, supplier or key employee, it will
promptly bring such information to the attention of ISI in writing and, if
requested by ISI, will exert its best efforts to restore the relationship.
4.3 Conduct of Business. DDI will continue to conduct its business and
maintain its business relationships in the ordinary and usual course and will
not, without the prior written consent of ISI:
(a) borrow any money;
(b) enter into any transaction not in the ordinary course of
business;
(c) encumber or permit to be encumbered any of its assets
except in the ordinary course of its business consistent with past practice and
to an extent which is not material;
(d) dispose of any material portion of its assets except in
the ordinary course of business consistent with past practice;
(e) enter into any material lease or contract for the purchase
or sale of any property, real or personal, except in the ordinary course of
business consistent with past practice;
(f) fail to maintain its equipment and other assets in good
working condition and repair according to the standards it has maintained to the
date of this Agreement, subject only to ordinary wear and tear;
(g) pay any bonus, increased salary or special remuneration to
any officer, employee or consultant (except in case of employees or consultants
for normal salary increases consistent with past practices not to exceed Twenty
Thousand Dollars ($20,000) for any single employee and except pursuant to
existing arrangements previously disclosed to and approved in writing by ISI) or
enter into any new employment or consulting agreement with any such person;
(h) change accounting methods;
(i) declare, set aside or pay any cash or stock dividend or
other distribution in respect of capital stock, or redeem or otherwise acquire
any of its capital stock;
(j) amend or terminate any contract, agreement or license to
which it is a party except those amended or terminated in the ordinary course of
business, consistent with past practice, and which are not material in amount or
effect;
(k) lend any amount to any person or entity, other than (i)
advances for travel and expenses which are incurred in the ordinary course of
business consistent with past practice, not material in amount and documented by
receipts for the claimed amounts; (ii) any loans pursuant to the DDI 401(k)
Plan; or (iii) amounts advanced to DDI employees through the DDI employee
computer loan program.
(l) guarantee or act as a surety for any obligation except for
the endorsement of checks and other negotiable instruments in the ordinary
course of business, consistent with past practice, which are not material in
amount;
(m) waive or release any material right or claim except in the
ordinary course of business, consistent with past practice;
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(n) issue or sell any shares of its capital stock of any class
(except upon the exercise of an option or warrant currently outstanding), or any
other of its securities, or issue or create any warrants, obligations,
subscriptions, options, convertible securities, or other commitments to issue
shares of capital stock, or accelerate the vesting of any outstanding option or
other security;
(o) split or combine the outstanding shares of its capital
stock of any class or enter into any recapitalization affecting the number of
outstanding shares of its capital stock of any class or affecting any other of
its securities;
(p) merge, consolidate or reorganize with, or acquire any
entity;
(q) amend its Articles of Incorporation or Bylaws;
(r) license any of its technology or intellectual property
except in the ordinary course of business consistent with past practice;
(s) agree to any audit assessment by any tax authority or file
any federal or state income or franchise tax return unless copies of such
returns have been delivered to ISI for its review prior to filing;
(t) change any insurance coverage or issue any certificates of
insurance except as is routinely done in the ordinary course of DDI's business;
or
(u) agree to do, or permit any Subsidiary to do or agree to
do, any of the things described in the preceding clauses 4.3(a) through 4.3(t).
4.4 Shareholders Approval. DDI will hold a special meeting of its
shareholders (the "Shareholders Meeting") at the earliest practicable date to
submit this Agreement, the Merger and related matters for the consideration and
approval of the DDI Shareholders, which approval will be recommended by DDI's
Board of Directors and management. Such meeting will be called, held and
conducted, and any proxies will be solicited, in compliance with applicable law.
4.5 Proxy Statement. DDI will send to its shareholders in a timely
manner, for the purpose of considering and voting upon the Merger at the
Shareholders Meeting, the Notice Materials. DDI will promptly provide all
information relating to its business or operations necessary for inclusion in
the Notice Materials to satisfy all requirements of applicable state and federal
securities laws. DDI shall be solely responsible for any statement, information
or omission in the Notice Materials relating to it or its affiliates based upon
written information furnished by it. DDI will not provide or publish to its
shareholders any material concerning it or its affiliates that violates the
Securities Act or the United States Securities Exchange Act of 1934, as amended,
(the "Exchange Act") with respect to the transactions contemplated hereby.
4.6 Preparation of Permit Application, Hearing Request and Hearing
Notice. As promptly as practicable after the date hereof, ISI and DDI shall
prepare and file with the Commissioner the Permit Application, Hearing Request
and Hearing Notice and any other documents required by the California Corporate
Securities Law of 1968, as amended in connection with the Merger. Each of ISI
and DDI shall use its best efforts to have the Permit Application, Hearing
Request and Hearing Notice declared effective under the California Corporate
Securities Law of 1968, as amended as promptly as practicable after such filing.
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4.7 Regulatory Approvals. DDI will execute and file, or join in the
execution and filing, of any application or other document that may be necessary
in order to obtain the authorization, approval or consent of any governmental
body, federal, state, local or foreign which may be reasonably required, or
which ISI may reasonably request, in connection with the consummation of the
transactions contemplated by this Agreement. DDI will use its best efforts to
obtain all such authorizations, approvals and consents.
4.8 Necessary Consents. DDI will use its best efforts to obtain such
written consents and take such other actions as may be necessary or appropriate
in addition to those set forth in Section 4.6 to allow the consummation of the
transactions contemplated hereby and to allow ISI to carry on DDI's business
after the Closing.
4.9 Litigation. DDI will notify ISI in writing promptly after learning
of any material actions, suits, proceedings or investigations by or before any
court, board or governmental agency, initiated by or against it or any
Subsidiary, or known by it to be threatened against it or any Subsidiary.
4.10 No Other Negotiations. From the date hereof until the earlier of
termination of this Agreement or consummation of the Merger, DDI will not, and
will not authorize or permit any officer, director, employee or affiliate of
DDI, or any other person, on its behalf to, directly or indirectly, solicit or
encourage any offer from any party or consider any inquiries or proposals
received from any other party, participate in any negotiations regarding, or
furnish to any person any information with respect to, or otherwise cooperate
with, facilitate or encourage any effort or attempt by any person (other than
ISI), concerning the possible disposition of all or any substantial portion of
DDI's business, assets or capital stock by merger, sale or any other means. DDI
will promptly notify ISI orally and in writing of any such inquiries or
proposals. If DDI merges with, or DDI or its assets are acquired by, a company
other than ISI or a wholly-owned subsidiary of ISI during a period of one year
after the date hereof based on any discussions during said period, DDI (or the
acquiring company) will pay ISI the sum of One Million Five Hundred Thousand
Dollars ($1,500,000); provided, however, DDI shall not be required to pay any
sums hereunder in the event DDI terminates this Agreement pursuant to Section
1.1.1. Notwithstanding the foregoing, ISI shall not be entitled to any sums
hereunder in the event ISI unilaterally causes the Merger not to occur for any
reason, including, without limitation, the failure of ISI to satisfy any ISI
condition to Closing or in the event the Merger does not occur because a
condition of Closing is not satisfied due to no fault of DDI.
4.11 Access to Information. Until the Closing, DDI and ISI will allow
the other party and its agents reasonable access the files, books, records and
offices of the other party's and each Subsidiary, including, without limitation,
any and all information relating to the other party's taxes, commitments,
contracts, leases, licenses, and real, personal and intangible property and
financial condition to the same extent that the other party did during the due
diligence period. DDI will cause its accountants to cooperate with ISI and its
agents in making available all financial information reasonably requested,
including without limitation the right to examine all working papers pertaining
to all financial statements prepared or audited by such accountants.
4.12 Satisfaction of Conditions Precedent. DDI will use its best
efforts to satisfy or cause to be satisfied all the conditions precedent which
are set forth in Section 8, and DDI will use its best efforts to cause the
transactions contemplated by this Agreement to be consummated, and, without
limiting the generality of the foregoing, to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties that may be necessary or reasonably required on its
part in order to effect the transactions contemplated hereby.
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4.13 DDI Affiliates Agreements. To ensure that the issuance of ISI
Common Stock in the Merger complies with the Securities Act and that the Merger
will be accounted for as a "pooling of interests," concurrently with the
execution of this Agreement DDI will deliver to ISI a letter identifying all
persons who are, in DDI's reasonable judgment, "affiliates" of DDI at the time
this Agreement is executed, including, all persons or entities who own ten
percent (10%) or greater of DDI Common Stock, assuming in that calculation all
DDI Options have been exercised (the "Principal Shareholders"). DDI will provide
ISI with all information and documents needed to evaluate this list for
compliance with securities laws. DDI will cause each of its affiliates to
deliver to ISI, on or prior to the mailing of the Notice Materials, a written
agreement (the "DDI Affiliates Agreement"), in the form of Exhibit 4.13,
providing that such person (i) has not made and will not make any disposition of
DDI Common Stock in the 30 day period prior to the Effective Time, (ii) will not
offer to sell, sell or otherwise dispose of any of the ISI Common Stock issued
to such person in the Merger in violation of the Securities Act and Rule 145
promulgated thereunder, as they may be amended from time to time, and (iii) will
make no disposition of ISI Stock after the Effective Time until ISI shall have
publicly released a report including the combined financial results of ISI and
DDI for a period of at least 30 days of combined operations of ISI and DDI; and
(b) such other representations as may be reasonably requested by ISI, its
accountants or its attorneys for the purpose of ensuring "pooling of interests"
accounting.
4.14 Principal Shareholder Representations. To ensure that the Merger
will qualify as a reorganization for federal income tax purposes, DDI will cause
each of the Principal Shareholders to execute, at or before the Closing, the DDI
Affiliates Agreement which contains a representation that such shareholder has
no present plan or intention to sell or otherwise dispose of more than fifty
percent (50%) of the shares of ISI Common Stock which the shareholders receives
in the Merger and making such other representations as may be reasonably
requested by ISI, its accountants or its attorneys for the purpose of ensuring
such tax treatment.
4.15 DDI Dissenting Shares. As promptly as practicable after the date
of the DDI Shareholders' Meeting and prior to the Closing Date, DDI shall
furnish ISI with the name and address of each DDI Dissenting Shareholder and the
number of DDI Dissenting Shares owned by such DDI Dissenting Shareholder.
4.16 Non-Competition Agreements. DDI shall assist ISI in obtaining from
Marco Thompson an agreement, in form and substance attached hereto as Exhibit
8.14, not to compete with the business of DDI and ISI (or any successor
corporations) for a period of three (3) years after the Effective Time of the
Merger.
4.17 Pooling Accounting. DDI shall use its best efforts to cause the
business combination to be effected by the Merger to be accounted for as a
pooling of interests. DDI shall use its best efforts to cause its Affiliates not
to take any action that would adversely affect the ability of ISI to account for
the business combination to be effected by the Merger as a pooling of interests.
4.18 Blue Sky Laws. DDI shall use its best efforts to assist ISI to the
extent necessary to comply with the securities and Blue Sky laws of all
jurisdictions which are applicable in connection with the Merger.
4.19 Assumption of Loan for Office Building. DDI shall assume the loan
obligations of Marco and Laura Thompson under a Small Business Administration
Loan dated April 10, 1989 (the "Loan") in conjunction with the assignment of
ownership of the Office Building E, located at 5415 Oberlin Drive, San Diego,
California (the "Office Building") by Marco and Laura Thompson to DDI pursuant
to the Office Building Purchase Agreement by and between DDI and Marco and Laura
Thompson, attached hereto as Exhibit 4.19A (the "Office Building Purchase
Agreement"). The Lease dated January 1, 1989 between DDI and Marco and Laura
Thompson (the "Lease") shall be terminated simultaneously with the execution of
the Office Building Purchase Agreement. Marco and Laura Thompson agree to
relinquish their rights to such number of shares of ISI Common Stock issued to
them pursuant to Section 1.1.1 hereof equal in value, as determined in
accordance with Section 1.1.1 hereof, to the amount by which the outstanding
balance of the
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Loan exceeds the fair market value of the Office Building, which fair market
value is determined pursuant to the appraisal provided by an "MIA" certified
appraiser, which is attached hereto as Exhibit 4.19B.
4.20 Life Insurance. The named beneficiary on those life insurance
policies covering Marco Thompson and Laura Thompson, for which the premiums are
currently being paid by DDI, shall remain as is, with the cash surrender value
of the policies remaining as an asset of DDI and Marco and Laura Thompson shall
assume all obligations for payment of the premiums, effective as of Closing. DDI
will not surrender the cash value without the prior written consent of Marco and
Laura Thompson.
4.21 Waivers from Security Holders. DDI shall obtain fully executed
security holder consent and waiver of rights forms from each current security
holder of shares or options of DDI, with an exception for up to a total of five
percent (5%) of all outstanding shares and options, in the form attached hereto
as Exhibit 4.21 (the "Security Holder Consent and Waiver of Rights").
4.22 Waivers Related to Employment Matters and Intellectual Property
Matters. Until and including on December 24, 1995, DDI shall take whatever
reasonable actions are deemed necessary by ISI, including, but not limited to,
obtaining fully executed waivers in a form satisfactory to ISI from such persons
by whom a claim would have a material adverse effect on the business of DDI, as
reasonably deemed necessary by ISI, concerning any employment related matters or
intellectual property related matters, as requested by ISI.
5. ISI PRECLOSING COVENANTS
During the period from the date of this Agreement until the Effective
Time, ISI covenants and agrees as follows:
5.1 Advice of Changes. ISI will promptly advise DDI in writing (a) of
any event occurring subsequent to the date of this Agreement that would render
any representation or warranty of ISI contained in this Agreement, if made on or
as of the date of such event or the Closing Date, untrue or inaccurate in any
material respect and (b) of any material adverse change in ISI's business,
results of operations or financial condition.
5.2 Regulatory Approvals. ISI will execute and file, or join in the
execution and filing, of any application or other document that may be necessary
in order to obtain the authorization, approval or consent of any governmental
body, federal, state, local or foreign, which may be reasonably required, or
which DDI may reasonably request, in connection with the consummation of the
transactions contemplated by this Agreement. ISI will use its best efforts to
obtain all such authorizations, approvals and consents.
5.3 Satisfaction of Conditions Precedent. ISI will use its best efforts
to satisfy or cause to be satisfied all the conditions precedent which are set
forth in Section 7, and ISI will use its best efforts to cause the transactions
contemplated by this Agreement to be consummated and, without limiting the
generality of the foregoing, to obtain all consents and authorizations of third
parties and to make all filings with, and give all notices to, third parties
that may be necessary or reasonably required on its part in order to effect the
transactions contemplated hereby.
5.4 ISI Affiliates Agreements. To ensure that the Merger will be
accounted for as a "pooling of interests," ISI will cause each of its affiliates
to sign and deliver to ISI, on or prior to the mailing of the Notice Materials,
a written agreement (the "ISI Affiliates Agreement"), in the form of Exhibit
5.4, providing that such person will make no disposition of ISI Common Stock (a)
in the 30 day period prior to the Effective Time or (b) after the Effective Time
until ISI shall have publicly released a report including the combined financial
results of ISI and DDI for a period of at least 30 days of combined operations
of ISI and DDI.
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5.5 Preparation of Permit Application, Hearing Request and Hearing
Notice. As promptly as practicable after the date hereof, ISI, with DDI's
assistance, shall prepare and file with the Commissioner the Permit Application,
Hearing Request and Hearing Notice and any other documents required by the
California Corporate Securities Law of 1968, as amended in connection with the
Merger. ISI, with DDI's assistance, shall use its best efforts to have the
Permit Application, Hearing Request and Hearing Notice declared effective under
the California Corporate Securities Law of 1968, as amended as promptly as
practicable after such filing.
5.6 Blue Sky Laws. ISI shall take such steps as may be necessary to
comply with the securities and Blue Sky laws of all jurisdictions which are
applicable in connection with the Merger.
5.7 Pooling Accounting. ISI shall use its best efforts to cause the
business combination to be effected by the Merger to be accounted for as a
pooling of interests. ISI shall use its best efforts to cause its Affiliates not
to take any action that would adversely affect the ability of ISI to account for
the business combination to be effected by the Merger as a pooling of interests.
6. CLOSING MATTERS
6.1 The Closing. Subject to termination of this Agreement as provided
in Section 9 below, the Closing will take place at the offices of Fenwick &
West, Two Palo Alto Square, Palo Alto, California 94306 at 1:30 p.m., Pacific
Standard Time on or before January 26, 1996, or, if all conditions to closing
have not been satisfied or waived by such date, such other place, time and date
as DDI and ISI may mutually select (the "Closing Date"). Concurrently with the
Closing, the Agreement of Merger will be filed in the office of the California
Secretary of State and the Certificate of Merger will be filed with the office
of the Delaware Secretary of State. The Agreement of Merger provides that the
Merger shall become effective upon filing.
6.2 Exchange of Certificates.
6.2.1 As of the Effective Time, all shares of DDI Common Stock
that are outstanding immediately prior thereto will, by virtue of the Merger and
without further action, cease to exist and will be converted into the right to
receive from ISI the number of shares of ISI Common Stock determined as set
forth in Section 1.1.1, subject to Sections 1.1.3 and 1.2.
6.2.2 As soon as practicable after the Effective Time, each
holder of shares of DDI Common Stock that are not Dissenting Shares will
surrender the certificate(s) for such shares (the "DDI Certificates"), duly
endorsed as requested by ISI, to ISI for cancellation. Promptly after the
Effective Time and receipt of such DDI Certificates, ISI will issue to each
tendering holder a certificate for the number of shares of ISI Common Stock to
which such holder is entitled pursuant to Section 1.1.1 hereof, less the shares
of ISI Common Stock deposited into escrow pursuant to Section 1.4 hereof, and
distribute any cash payable under Section 1.2.
6.2.3 No dividends or distributions payable to holders of
record of ISI Common Stock after the Effective Time, or cash payable in lieu of
fractional shares, will be paid to the holder of any unsurrendered DDI
Certificate(s) until the holder of the DDI Certificate(s) surrenders such DDI
Certificate(s). Subject to the effect, if any, of applicable escheat and other
laws, following surrender of any DDI Certificate, there will be delivered to the
person entitled thereto, without interest, the amount of any dividends and
distributions therefor paid with respect to ISI Common Stock so withheld as of
any date subsequent to the Effective Time and prior to such date of delivery.
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6.2.4 All ISI Common Stock delivered upon the surrender of DDI
Common Stock in accordance with the terms hereof will be deemed to have been
delivered in full satisfaction of all rights pertaining to such DDI Common
Stock. There will be no further registration of transfers on the stock transfer
books of DDI or its transfer agent of the DDI Common Stock. If, after the
Effective Time, DDI Certificates are presented for any reason, they will be
canceled and exchanged as provided in this Section 6.2.
6.2.5 Until certificates representing DDI Common Stock
outstanding prior to the Merger are surrendered pursuant to Section 6.2.2 above,
such certificates will be deemed, for all purposes, to evidence ownership of the
number of shares of ISI Stock into which the DDI Common Stock will have been
converted, reduced by the number of shares withheld as Escrow Shares.
6.3 Assumption of Options. Promptly after the Effective Time, ISI will
notify in writing each holder of a DDI Option of the assumption of such DDI
Option by ISI, and the number of shares of ISI Common Stock that are then
subject to such option and the exercise price of such option, as determined
pursuant to Sections 1.1 and 1.3 hereof.
7. CONDITIONS TO OBLIGATIONS OF DDI
DDI's obligations hereunder are subject to the fulfillment or
satisfaction, on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by DDI, but only in a writing signed by DDI):
7.1 Accuracy of Representations and Warranties. The representations and
warranties of ISI set forth in Section 3 shall be true and accurate in every
material respect on and as of the Closing with the same force and effect as if
they had been made at the Closing, and DDI shall receive a certificate to such
effect executed by ISI's President and Chief Financial Officer.
7.2 Covenants. ISI shall have performed and complied in all material
respects with all of its covenants contained in Section 5 on or before the
Closing, and DDI shall receive a certificate to such effect signed by ISI's
President and Chief Financial Officer.
7.3 Absence of Material Adverse Change. There shall not have been, in
the reason- able judgment of the Board of Directors of DDI, any material adverse
change in the business or financial condition of ISI.
7.4 Compliance with Law. There shall be no order, decree, or ruling by
any court or governmental agency or threat thereof, or any other fact or
circumstance, which would prohibit or render illegal the transactions
contemplated by this Agreement.
7.5 Government Consents. There shall have been obtained at or prior to
the Closing Date such permits or authorizations, and there shall have been taken
such other action, as may be required to consummate the Merger by any regulatory
authority having jurisdiction over the parties and the actions herein proposed
to be taken, including but not limited to requirements under applicable federal
and state securities laws.
7.6 Opinion of ISI's Counsel. DDI shall have received from counsel to
ISI, an opinion substantially in the form of Exhibit 7.6.
7.7 Shareholder Approval. The principal terms of this Agreement and the
Agreement of Merger shall have been approved and adopted by DDI Shareholders, as
required by applicable law and DDI's Articles of Incorporation and Bylaws.
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7.8 Tax Opinion. DDI shall have received a tax opinion from counsel to
DDI that the Merger constitutes a "reorganization" within the meaning of Section
368 of the Internal Revenue Code.
7.9 No Litigation. No litigation or proceeding shall be threatened or
pending for the purpose or with the probable effect of enjoining or preventing
the consummation of any of the transactions contemplated by this Agreement.
7.10 Employment Agreements. DDI shall have received executed copies of
Employment Agreements executed by ISI, DDI and Marco Thompson in substantially
the form of Exhibit 8.15.
7.11 Satisfactory Form of Legal and Accounting Matters. The form, scope
and substance of all legal and accounting matters contemplated hereby and all
closing documents and other papers delivered hereunder shall be reasonably
acceptable to DDI's counsel.
7.12 Consents. DDI shall have received duly executed copies of all
material third-party consents and approvals contemplated by this Agreement in
form and substance reasonably satisfactory to DDI, except for such consents and
approvals as ISI and DDI shall have agreed shall not be obtained.
7.13 Fairness Hearing. ISI shall have received the issuance of the
Permit by the California Department of Corporations following a Fairness Hearing
for this Merger and the issuance of the ISI Common Stock shall be an exempt
transaction under Section 3(a)(10) of the Securities Act.
8. CONDITIONS TO OBLIGATIONS OF ISI
The obligations of ISI hereunder are subject to the fulfillment or
satisfaction on, and as of the Closing, of each of the following conditions (any
one or more of which may be waived by ISI, but only in a writing signed by ISI):
8.1 Accuracy of Representations and Warranties. The representations and
warranties of DDI set forth in Section 2 shall be true and accurate in every
material respect on and as of the Closing with the same force and effect as if
they had been made at the Closing, and ISI shall receive a certificate to such
effect executed by DDI's President and Chief Financial Officer.
8.2 Covenants. DDI shall have performed and complied in all material
respects with all of its covenants contained in Section 4 on or before the
Closing, and ISI shall receive a certificate to such effect signed by DDI's
President and Chief Financial officer.
8.3 Absence of Material Adverse Change. There shall not have been, in
the reason- able judgment of the Board of Directors of ISI, any material adverse
change in the business or financial condition of DDI.
8.4 Compliance with Law. There shall be no order, decree, or ruling by
any court or governmental agency or threat thereof, or any other fact or
circumstance, which would prohibit or render illegal the transactions
contemplated by this Agreement.
8.5 Government Consents. There shall have been obtained at or prior to
the Closing Date such permits or authorizations, and there shall have been taken
such other action, as may be required to consummate the Merger by any regulatory
authority having jurisdiction over the parties and the actions herein proposed
to be taken, including but not limited to requirements under applicable federal
and state securities laws.
8.6 Opinion of DDI's Counsel. ISI shall have received from counsel to
DDI, an opinion substantially in the form of Exhibit 8.6.
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8.7 Consents. ISI shall have received duly executed copies of all
material third-party consents, approvals, assignments, waivers, authorizations
or other certificates contemplated by this Agreement or the ISI Schedule of
Exceptions or reasonably deemed necessary by ISI's legal counsel to provide for
the continuation in full force and effect of any and all material contracts and
leases of DDI and for ISI to consummate the transactions contemplated hereby in
form and substance reasonably satisfactory to ISI, except for such thereof as
ISI and DDI shall have agreed shall not be obtained, as contemplated by the ISI
Schedule of Exceptions.
8.8 No Litigation. No litigation or proceeding shall be threatened or
pending for the purpose or with the probable effect of enjoining or preventing
the consummation of any of the transactions contemplated by this Agreement, or
which could be reasonably expected to have a material adverse effect on the
present or future operations or financial condition of DDI.
8.9 Requisite Approvals. The principal terms of this Agreement and the
Agreement of Merger shall have been approved and adopted by DDI Shareholders, as
required by applicable law and DDI's Certificate of Incorporation and Bylaws,
and by DDI's Board of Directors.
8.10 Dissenting Shares. The Dissenting Shares shall not constitute more
than two percent (2%) of the total number of shares of DDI Common Stock
outstanding immediately prior to the Effective Time.
8.11 Escrow. ISI shall have received an Escrow Agreement executed by
DDI and Marco J. Thompson, as the Representative for all DDI Shareholders,
providing for the escrow of the Escrow Shares on the terms and conditions of the
Escrow Agreement.
8.12 Affiliates Agreements and Principal Shareholder Representatives.
DDI shall have delivered to ISI the letter required by Section 4.13 naming all
persons who are Principal Shareholders for purposes of Section 4.14 and all
persons who are "affiliates" of DDI for purposes of Rule 145 under the
Securities Act, and each such person shall have executed and delivered a DDI
Affiliates Agreement to ISI in accordance with Sections 4.13 and 4.14.
8.13 Pooling Opinion. ISI's accounting firm, Coopers and Lybrand
("ISI's Auditors"), shall have received from DDI's accounting firm, McGladrey &
Pullen, LLP ("DDI's Auditors"), an opinion, in form and substance satisfactory
to ISI's Auditors, to the effect that DDI's Auditors are not aware of any fact
concerning DDI that would preclude ISI from accounting for the Merger as a
pooling of interests, and ISI shall have received from ISI's Auditors an
opinion, in form and substance satisfactory to ISI, that the Merger will be
treated as a "pooling of interests" for accounting purposes.
8.14 Non-Competition Agreements. ISI shall have received executed
copies of Non-Competition Agreements executed by ISI, DDI and Marco Thompson, in
substantially the form of Exhibit 8.14.
8.15 Employment Agreements. ISI shall have received executed copies of
Employ-ment Agreements executed by ISI, DDI and Marco Thompson in substantially
the form of Exhibit 8.15.
8.16 Resignation of Directors. The directors of DDI in office
immediately prior to the Effective Time of the Merger (other than Marco
Thompson) shall have resigned as directors of the Surviving Corporation
effective as of the Effective Time of the Merger.
8.17 Satisfactory Form of Legal and Accounting Matters. The form, scope
and substance of all legal and accounting matters contemplated hereby and all
closing documents and other papers delivered hereunder shall be reasonably
acceptable to ISI's counsel.
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8.18 Consents. ISI shall have received duly executed copies of all
material third-party consents and approvals contemplated by this Agreement in
form and substance reasonably satisfactory to ISI, except for such consents and
approvals as ISI and DDI shall have agreed shall not be obtained.
8.19 Tax Opinion. ISI shall have received a tax opinion from counsel to
ISI that the Merger constitutes a "reorganization" within the meaning of Section
368 of the Internal Revenue Code.
8.20 Fairness Hearing. ISI shall have received the issuance the Permit
by the California Department of Corporations following a Fairness Hearing for
this Merger and the issuance of the ISI Common Stock shall be an exempt
transaction under Section 3(a)(10) of the Securities Act.
8.21 Price. The price of ISI Common Stock used in calculating the Total
ISI Shares pursuant to Section 1.1.1 will be at least $27.50.
8.22 Office Building. Marco and Laura Thompson shall have transferred
physical possession and valid title in the Office Building to DDI pursuant to
the terms of the Office Building Purchase Agreement. The Lease shall have been
terminated.
8.23 Life Insurance Policies. Marco and Laura Thompson shall have
assumed the obligation for payment of the premiums of the policies.
8.24 Waivers from Security Holders. DDI shall have obtained fully
executed Security Holder Consent and Waiver of Rights from such current security
holders of DDI, as specified in Section 4.21 hereof.
8.25 Waivers Related to Employment Matters and Intellectual Property
Matters. DDI shall have taken whatever reasonable actions deemed necessary by
ISI, including, but not limited to, obtaining fully executed waivers in a form
satisfactory to ISI from such persons by whom a claim would have a material
adverse effect on the business of DDI, as deemed reasonably necessary by ISI,
concerning any employment related matters or intellectual property related
matters, as requested by ISI pursuant to Section 4.22 hereof.
9. TERMINATION OF AGREEMENT
9.1 Prior to Closing.
9.1.1 This Agreement may be terminated at any time prior to
the Closing by the mutual written consent of each of the parties hereto.
9.1.2 Unless otherwise agreed by the parties hereto, this
Agreement will be terminated if the Closing shall not have occurred on or before
January 26, 1996.
9.2 At the Closing. At the Closing, this Agreement may be terminated
and abandoned:
9.2.1 By ISI if any of the conditions precedent to ISI's
obligations set forth in Section 8 above have not been fulfilled or waived at
and as of the Closing; or
9.2.2 By DDI if any of the conditions precedent to DDI's
obligations set forth in Section 7 above have not been fulfilled or waived at
and as of the Closing.
Any termination of this Agreement under this Section 9.2 will
be effective by the delivery of notice of the terminating party to the other
party hereto.
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9.3 No Liability. Any termination of this Agreement pursuant to this
Section 9 will be without further obligation or liability upon any party in
favor of the other party hereto other than the obligations provided in Sections
10.2 and 11.16 and in the Nondisclosure Agreement between DDI and ISI dated
November 27, 1995, which will survive termination of this Agreement; provided,
however, that nothing herein will limit the obligation of DDI and ISI to use
their best efforts to cause the Merger to be consummated, as set forth in
Sections 4.11 and 5.3 hereof, respectively.
10. SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION AND REMEDIES, CONTINUING
COVENANTS
10.1 Survival of Representations. All representations, warranties and
covenants of ISI contained in this Agreement will remain operative and in full
force and effect, regardless of any investigation made by or on behalf of the
parties to this Agreement, until the earlier of the termination of this
Agreement or one year after the Closing Date, whereupon such representations,
warranties and covenants will expire (except for covenants that by their terms
survive for a longer period). Unless otherwise specified herein, all
representations, warranties and covenants of DDI will survive the Effective Time
and will continue until the expiration of the one year period set forth above
and covenants that by their terms survive thereafter will continue to survive in
accordance with their terms.
10.2 Agreement to Indemnify. Subject to the limitations set forth in
this Section 10, DDI will indemnify and hold harmless ISI and its officers,
directors, agents and employees, and each person, if any, who controls or may
control ISI within the meaning of the Securities Act (hereinafter referred to
individually as an "Indemnified Person" and collectively as "Indemnified
Persons") from and against any and all claims, demands, actions, causes of
actions, losses, costs, damages, liabilities and expenses including, without
limitation, reasonable legal fees (hereinafter referred to as "Damages"):
(a) Arising out of any misrepresentation or breach of or
default in connection with any of the representations, warranties and covenants
given or made by DDI in this Agreement or any certificate, document or
instrument delivered by or on behalf of DDI pursuant hereto (other than with
respect to changes in the truth or accuracy of the representations and
warranties of DDI under this Agreement after the date hereof if DDI has advised
ISI of such changes in an update to Exhibit 2.0 delivered prior to the Closing
and ISI has nonetheless proceeded with the Closing); or
(b) Resulting from any failure of any DDI Shareholders to have
good, valid and marketable title to the issued and outstanding DDI Common Stock
held by such shareholders, free and clear of all liens, claims, pledges,
options, adverse claims, assessments or charges of any nature whatsoever, or to
have full right, capacity and authority to vote such DDI Common Stock in favor
of the Merger and the other transactions contemplated by the Agreement of
Merger.
In seeking indemnification for Damages under this Section, the
Indemnified Persons shall exercise their remedies with respect to the Escrow
Shares and any other assets deposited in escrow pursuant to the Escrow
Agreement; provided, however, that no such claim for Damages will be asserted
after the expiration of the Escrow Period. Except for intentional fraud or
willful misconduct or breach of any of the provisions of the Affiliates
Agreement: (i) no DDI Shareholder shall have any liability to an Indemnified
Person under this Agreement except to the extent of such DDI Shareholder's
Escrow Shares and any other assets deposited under the Escrow Agreement and (ii)
the remedies set forth in this Section 10.2 shall be the exclusive remedies of
ISI and the other Indemnified Persons hereunder against any DDI Shareholder.
11. MISCELLANEOUS
11.1 Governing Law. The internal laws of the State of California
(irrespective of its conflict of law principles) will govern the validity of
this Agreement, the construction of its terms, and the interpretation and
enforcement of the rights and duties of the parties hereto.
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11.2 Assignment; Binding Upon Successors and Assigns. Neither party
hereto may assign any of its rights or obligations hereunder without the prior
written consent of the other party hereto. This Agreement will be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
11.3 Severability. If any provision of this Agreement, or the
application thereof, will for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances will be interpreted so as reasonably to effect
the intent of the parties hereto. The parties further agree to replace such void
or unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the extent possible, the economic, business and
other purposes of the void or unenforceable provision.
11.4 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and the
same instrument. This Agreement will become binding when one or more
counterparts hereof, individually or taken together, will bear the signatures of
both parties reflected hereon as signatories.
11.5 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby or by law on such party,
and the exercise of any one remedy will not preclude the exercise of any other.
11.6 Amendment and Waivers. Any term or provision of this Agreement may
be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof or default in the performance hereof will
not be deemed to constitute a waiver of any other default or any succeeding
breach or default. The Agreement may be amended by the parties hereto at any
time before or after approval of the DDI Shareholders, but, after such approval,
no amendment will be made which by applicable law requires the further approval
of the DDI Shareholders without obtaining such further approval.
11.7 No Waiver. The failure of any party to enforce any of the
provisions hereof will not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
11.8 Expenses. Whether or not the transaction contemplated by this
Agreement is consummated, ISI will pay the reasonable fees (not to exceed an
aggregate of $125,000) of DDI's accountants, attorneys, and other professionals
related to the transaction contemplated hereby.
11.9 Attorneys' Fees. Should suit be brought to enforce or interpret
any part of this Agreement, the prevailing party will be entitled to recover, as
an element of the costs of suit and not as damages, reasonable attorneys' fees
to be fixed by the court (including without limitation, costs, expenses and fees
on any appeal). The prevailing party will be entitled to recover its costs of
suit, regardless of whether such suit proceeds to final judgment.
11.10 Notices. Any notice or other communication required or permitted
to be given under this Agreement will be in writing, will be delivered
personally or by registered or certified mail, postage prepaid and will be
deemed given upon delivery, if delivered personally, or three days after deposit
in the mails, if mailed, to the following addresses:
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(i) If to ISI:
Integrated Systems, Inc.
3260 Jay Street
Santa Clara, CA 95054
Attention: President
(ii) If to DDI:
5415 Oberlin Drive
San Diego, CA 92121
Attention: President
or to such other address as a party may have furnished to the other parties in
writing pursuant to this Section 11.10.
11.11 Construction of Agreement. This Agreement has been negotiated by
the respective parties hereto and their attorneys and the language hereof will
not be construed for or against either party. A reference to a Section or an
exhibit will mean a Section in, or exhibit to, this Agreement unless otherwise
explicitly set forth. The titles and headings herein are for reference purposes
only and will not in any manner limit the construction of this Agreement which
will be considered as a whole.
11.12 No Joint Venture. Nothing contained in this Agreement will be
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party will have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party will have any power or authority to bind or
commit any other. No party will hold itself out as having any authority or
relationship in contravention of this Section.
11.13 Further Assurances. Each party agrees to cooperate fully with the
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other party to evidence and reflect the transactions described herein and
contemplated hereby and to carry into effect the intents and purposes of this
Agreement.
11.14 Absence of Third Party Beneficiary Rights. No provisions of this
Agreement are intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, partner or any party hereto or any other
person or entity unless specifically provided otherwise herein, and, except as
so provided, all provisions hereof will be personal solely between the parties
to this Agreement.
11.15 Public Announcement. Upon execution of the Agreement by both
parties, and until the consummation of the Merger, all press releases and other
public and private communications shall be made by the parties only with the
mutual written consent of DDI and ISI.
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11.16 Confidentiality. DDI and ISI each recognize that they have
received and will receive confidential information concerning the other during
the course of the Merger negotiations and preparations. Accordingly, ISI and DDI
each agrees (a) to use its respective best efforts to prevent the unauthorized
disclosure of any confidential information concerning the other that was or is
disclosed during the course of such negotiations and preparations, and is
clearly designated in writing as confidential at the time of disclosure, and (b)
to not make use of or permit to be used any such confidential information other
than for the purpose of effectuating the Merger and related transactions. The
obligations of this section will not apply to information that (i) is or becomes
part of the public domain, (ii) is disclosed by the disclosing party to third
parties without restrictions on disclosure, (iii) is received by the receiving
party from a third party without breach of a nondisclosure obligation to the
other party or (iv) is required to be disclosed by law. If this Agreement is
terminated, all copies of documents containing confidential information shall be
returned by the receiving party to the disclosing party.
11.17 Entire Agreement. This Agreement and the exhibits hereto
constitute the entire understanding and agreement of the parties hereto with
respect to the subject matter hereof and supersede all prior and contemporaneous
agreements or understandings, inducements or conditions, express or implied,
written or oral, between the parties with respect hereto other than the
Nondisclosure Agreement between DDI and ISI dated November 27, 1995. The express
terms hereof control and supersede any course of performance or usage of the
trade inconsistent with any of the terms hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
"ISI" "DDI"
Integrated Systems, Inc. Dr. Design, Inc.
By: /s/ Naren K. Gupta By: /s/ Marco Thompson
---------------------------- --------------------------
Its: Chairman of the Board Its: Chief Executive Officer
--------------------------- --------------------------
"NEWCO"
ISI Purchasing Corporation
By: /s/ David P. St. Charles
------------------------------------------
Its: President and Chief Executive Officer
-----------------------------------------
[SIGNATURE PAGE FOR AGREEMENT AND PLAN OF REORGANIZATION]
<PAGE>
LIST OF EXHIBITS
Exhibit A Agreement of Merger
Exhibit 1.4 Escrow Agreement
Exhibit 1.7A* ISI Officers Tax Certificate
Exhibit 1.7B* DDI Officers Tax Certificate
Exhibit 2.0* DDI Schedule of Exceptions
Schedule 2.3* List of all holders and numbers held of DDI Common Stock
and DDI options.
Schedule 2.8* DDI's Audited Financial Statements and
Unaudited Financial Statements.
Schedule 2.11* Material Contracts, Obligations or Commitments in
excess of $75,000.
Schedule 2.12* DDI IP Rights Agreements
Schedule 2.15.1* DDI Employee Plans.
Schedule 2.15.6* DDI Benefit Arrangements.
Schedule 2.15.12* List of all Employees, Officers and Consultants of DDI.
Exhibit 3.0* ISI Schedule of Exceptions
Exhibit 4.13* DDI Affiliates Agreement
Exhibit 4.19A Office Building Purchase Agreement between DDI and
Marco and Laura Thompson
Exhibit 4.19B* Appraisal of Office Building
Exhibit 4.21* Security Holder Consent and Waiver of Rights
form
Exhibit 5.4* ISI Affiliates Agreement
Exhibit 7.6* Opinion of ISI's Counsel
Exhibit 8.6* Opinion of DDI's Counsel
Exhibit 8.14 NonCompetition Agreement with ISI, DDI and
Marco Thompson
Exhibit 8.15 Employment Agreement with ISI, DDI, and Marco
Thompson
- ---------------------
*Omitted schedules. The Company agrees to furnish supplementally a copy of any
omitted schedule to the Commission upon request.
<PAGE>
OFFICER'S CERTIFICATE
Sharon Pinto hereby certifies that:
1. She is a Vice President of DR. DESIGN, INC., a California
corporation (the "Company").
2. The Agreement of Merger to which this certificate is
attached, after having been first duly approved by the Board of Directors and
shareholders of the Company, was duly signed on behalf of the Company by the
undersigned and Laura Thompson, Vice President and Secretary, respectively, of
the Company.
3. The Company has three (3) authorized classes of shares,
designated as Class A Common Stock, Class B Common Stock and Preferred Stock.
There are no issued and outstanding shares of Class B Common Stock or Preferred
Stock of the Company entitled to vote on the Agreement of Merger. The total
number of issued and outstanding shares of the Class A Common Stock of the
Corporation entitled to vote on the Agreement of Merger was 2,555,720.
4. The percentage vote required for Common Stock was more than
50% of the outstanding shares of the Common Stock.
5. The Agreement of Merger was approved by the vote of a
number of shares of Common Stock of the Company which equaled or exceeded the
vote required.
The undersigned declares under penalty of perjury under the
laws of the State of Delaware that the matters set forth in this Certificate are
true and correct of her own knowledge.
Executed at San Diego, California, this ___ day of January,
1996.
- --------------------------------
Sharon Pinto, Vice President
<PAGE>
OFFICER'S CERTIFICATE
David St. Charles hereby certifies that:
1. He is the President of ISI Purchasing Corporation, a
Delaware corporation ("Newco").
2. The Agreement of Merger to which this certificate is
attached, after having been first duly approved by the Board of Directors and
the sole shareholder of the Company, was duly signed on behalf of the Company by
the undersigned and by Narendra Gupta, Secretary of the Company.
3. Newco has one class of shares authorized, designated as
Common Stock. The total number of issued and outstanding shares of the Common
Stock of the Corporation entitled to vote on the Agreement of Merger was 1,000.
4. The percentage vote required for Common Stock was more than
50% of the outstanding shares of the Common Stock.
5. The Agreement of Merger was approved by the vote of a
number of shares of Common Stock of Newco which equaled or exceeded the vote
required.
The undersigned declares under penalty of perjury under the
laws of the State of Delaware that the matters set forth in this Certificate are
true and correct of his own knowledge.
Executed at Santa Clara, California, this ___ day of January,
1996.
- ------------------------------------
David St. Charles, President
<PAGE>
AGREEMENT OF MERGER OF
ISI PURCHASING CORPORATION,
A DELAWARE CORPORATION,
WITH AND INTO
DR. DESIGN, INC.,
A CALIFORNIA CORPORATION
This Agreement of Merger (this "Agreement") is entered into as of
January 26, 1996 by and between ISI Purchasing Corporation, a Delaware
corporation ("Newco") and a wholly-owned subsidiary of Integrated Systems, Inc.,
a California corporation ("Buyer"), and Dr. Design, Inc., a California
corporation (the "Company").
RECITALS
A. Buyer, Newco and Company have entered into an Agreement and Plan of
Reorganization, dated as of December 14, 1995 (the "Plan"), providing for
certain representations, warranties and agreements in connection with the
transactions contemplated hereby, in accordance with the General Corporation Law
of California (the "California Law"). All capitalized terms not herein defined
shall have the meaning ascribed to them in the Plan.
B. The Boards of Directors of Buyer, Newco and Company have determined
it to be advisable and in the respective best interests of Buyer, Newco and
Company and their respective shareholders that Newco be merged with and into
Company (the "Merger") so that Company will be the surviving corporation of the
Merger.
NOW, THEREFORE, Newco and Company hereby agree as follows:
1. THE MERGER
At the time of the filing of this Agreement (together with the
Officers' Certificates attached hereto) with the Secretary of State of the
States of California and Delaware (the "Effective Time"), Newco will be merged
with and into Company, and Company shall continue as the surviving corporation
(following the Merger, the Company is hereinafter sometimes referred to as the
"Surviving Corporation"), pursuant to the terms and conditions of this Agreement
and in accordance with applicable provisions of the laws of the States of
Delaware and California as follows:
1.1 ARTICLES OF INCORPORATION. The Articles of Incorporation of Company
immediately prior to the Effective Time, without amendment thereto, shall be the
Articles of Incorporation of the Surviving Corporation.
1.2 BYLAWS. The Bylaws of Company immediately prior to the Effective
Time, without amendment thereto, shall be the Bylaws of the Surviving
Corporation. The Bylaws of the Surviving Corporation thereafter may be amended
in accordance with their terms, the Articles of Incorporation of the Surviving
Corporation and as provided by the California Law.
1.3 CONVERSION OF SHARES. As of the Effective Time, by virtue of the
Merger and without any action on the part of any shareholder of Company, each of
the issued and outstanding shares of Company's Common Stock (the "Company
Shares") (other than any shares held by persons exercising dissenters' rights in
accordance with Chapter 13 of the California Law ("Dissenting Shares")) shall be
converted into the right to receive, subject to the provisions of Section 1.1.1
of the Plan, 0.148612 (the "Applicable Fraction") shares of fully paid and
nonassessable Buyer's Common Stock (the "Conversion Shares").
1.4 ASSUMPTION OF OPTIONS. At the Effective Time, each option to
purchase shares of Company Common Stock (the "Company Options") that is
outstanding immediately prior to the Effective Time will, by virtue of the
Merger and without further action on the part of any holder thereof, be assumed
by Buyer and become exercisable for the number of shares of Buyer's Common Stock
that equals the number of shares of Company Common Stock subject to such Company
Option multiplied by the Applicable Fraction. The exercise price per share of
Buyer Common Stock purchasable under each such option will be equal to the
exercise price of the Company Option divided by the Applicable Fraction. All
other terms of the Company Option will remain unchanged.
<PAGE>
1.5 FRACTIONAL SHARES. No fraction of a Conversion Share will be issued
by virtue of the Merger, but in lieu thereof each holder of Company Shares who
would otherwise be entitled to a fraction of a Conversion Share (after
aggregating all fractional Conversion Shares to be received by such holder)
shall receive from Buyer an amount of cash (rounded to the nearest whole cent)
equal to the product of (i) the price of a share of Buyer's Common Stock
determined pursuant to Section 1.1.1 of the Plan, multiplied by (ii) the
fraction of a Conversion Share to which each such holder would otherwise be
entitled.
1.6 NO FURTHER TRANSFER. At the Effective Time, the stock transfer
books of the Company shall be closed and no transfer of Company Shares shall
thereafter be made.
1.7 ESCROW. Of the aggregate number of Conversion Shares issuable by
virtue of the Merger to a shareholder, Buyer shall deposit in escrow a number of
Conversion Shares equal to ten percent (10%) of the total number of Conversion
Shares issuable by virtue of the Merger to such shareholder (the "Escrowed
Shares"), pursuant to the terms of a separate Escrow Agreement. In addition, ten
percent (10%) of the shares of Buyer's Common Stock issued upon exercise of
assumed Company Options will be deposited into escrow.
1.8 DISSENTERS' RIGHTS. Holders of Dissenting Shares who have complied
with all requirements for perfecting the rights of dissenting shareholders as
set forth in Section 1300 et. seq. of the California Law shall be entitled to
their rights under the California Law.
1.9 SURVIVING CORPORATION. Dr. Design, Inc., a California corporation,
will be the surviving corporation of the Merger.
2. SURRENDER OF CERTIFICATES
2.1 SURRENDER AND EXCHANGE OF OUTSTANDING CERTIFICATES. As soon as
practicable after the Effective Time, each holder of a certificate or
certificates representing Company Shares issued and outstanding immediately
prior to the Effective Time (other than Dissenting Shares) shall surrender such
certificate(s) to Buyer's transfer agent. Thereupon, each such holder shall be
entitled to receive in exchange therefor the number of shares of Buyer's Common
Stock represented by such certificate(s), less the Escrowed Shares. Buyer's
transfer agent shall issue to the Company's shareholders certificates for the
shares of Buyer's Common Stock issuable to the Company's shareholders in the
Merger as soon as practicable following such surrender. Each certificate which
immediately before the Effective Time evidenced Company Shares shall, from and
after the Effective Time until such certificate is surrendered to Buyer, or its
transfer agent, be deemed, for all corporate purposes, to evidence the right to
receive the consideration described above; provided, however, that until such
certificate is so surrendered by the holder thereof, no dividend or other
distribution payable to such holder after the Effective Time shall be paid in
respect of such certificates.
3. TERMINATION AND AMENDMENT
3.1 TERMINATION. Notwithstanding the approval of this Agreement by the
shareholders of Newco and Company, this Agreement may be terminated at any time
prior to the Effective Time by the mutual written agreement of Newco and
Company, and will terminate in the event the Plan is terminated in accordance
with its terms. In the event of the termination of this Agreement as provided
above, this Agreement will forthwith become void and there will be no liability
on the part of either Buyer, Newco and Company or their respective officers and
directors, except as otherwise provided in the Plan.
3.2 AMENDMENT. This Agreement may be amended by the parties hereto at
any time by execution of an instrument in writing signed on behalf of each of
the parties hereto.
4. MISCELLANEOUS
4.1 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.
4.2 PLAN. The Plan and this Agreement are intended to be construed
together in order to effectuate their purposes.
-2-
<PAGE>
4.3 ASSIGNMENT; BINDING UPON SUCCESSORS AND ASSIGNS. Neither party
hereto may assign any of its rights or obligations under this Agreement without
the prior written consent of the other party hereto. This Agreement will be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
4.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of California (irrespective of
its choice of law principles).
4.5 FURTHER ASSIGNMENTS. After the Effective Time, Company and its
officers and directors may execute and deliver such deeds, assignments and
assurances and do all other things necessary or desirable to vest, perfect or
confirm title to Newco's property or rights in Company and otherwise to carry
out the purposes of the Plan, in the name of Newco or otherwise.
5. SERVICE OF PROCESS
After the Effective Time, the Company agrees that it may be served with
process in the State of Delaware in any proceeding for enforcement of any
obligation of Newco, as well as for enforcement of any obligation of Company
arising from the Merger, including any suit or other proceeding to enforce the
right of any stockholders as determined in appraisal proceedings pursuant to the
provisions of ss. 262 of the Delaware General Corporation Law, and shall
irrevocably appoint the Secretary of State of the State of Delaware as its agent
to accept service of process in any such suit or other proceedings. The address
to which copies of any such service of process upon the Secretary of State shall
be mailed to is:
Dr. Design, Inc.
5415 Oberlin Drive
San Diego, CA 92121
Attn: President
[THE REST OF THIS PAGE HAS INTENTIONALLY
BEEN LEFT BLANK]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
DR. DESIGN, INC.
By: By:
------------------------------------- ------------------------------
Sharon Pinto, Vice President Laura Thompson, Secretary
ISI PURCHASING CORPORATION
By: By:
------------------------------------- ------------------------------
David St. Charles, President Narendra Gupta, Secretary
SIGNATURE PAGE TO AGREEMENT OF MERGER
-4-
<PAGE>
EXHIBIT 1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF DR. DESIGN, INC.
-5-
<PAGE>
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
Marco Thompson and Laura Thompson certify that:
1. They are the President and Secretary, respectively, of DR.
DESIGN, INC., a California corporation (the "Company").
2. The Agreement of Merger in the form attached was duly
approved by the Board of Directors of the Company.
3. The Company has three (3) authorized classes of shares,
designated as Class A Common Stock, Class B Common Stock and Preferred Stock.
There are no issued and outstanding shares of Class B Common Stock or Preferred
Stock of the Company entitled to vote on the Agreement of Merger. The total
number of issued and outstanding shares of the Class A Common Stock of the
Corporation entitled to vote on the Agreement of Merger was 2,555,720.
4. The percentage vote required for Common Stock was more than
50% of the outstanding shares of the Common Stock.
5. The Agreement of Merger was approved by the vote of a
number of shares of Common Stock of the Company which equaled or exceeded the
vote required.
We further declare under penalty of perjury under the laws of
the State of California that the matters set forth in this Certificate are true
and correct of our own knowledge.
Executed at San Diego, California, this __ day of January,
1996.
- --------------------------- -----------------------------
Marco Thompson, President Laura Thompson, Secretary
<PAGE>
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
David St. Charles and Narendra Gupta certify that:
1. They are the President and Secretary, respectively, of ISI
Purchasing Corporation, a Delaware corporation ("Newco").
2. The Agreement of Merger in the form attached was duly
approved by the Board of Directors of Newco.
3. Newco has one class of shares authorized, designated as
Common Stock. The total number of issued and outstanding shares of the Common
Stock of the Corporation entitled to vote on the Agreement of Merger was 1,000.
4. The percentage vote required for Common Stock was more than
50% of the outstanding shares of the Common Stock.
5. The Agreement of Merger was approved by the vote of a
number of shares of Common Stock of Newco which equaled or exceeded the vote
required.
6. No vote of the shareholders of Integrated Systems, Inc.,
the parent corporation of Newco and the corporation whose equity securities are
being issued in the merger, is required.
We further declare under penalty of perjury under the laws of
the State of California that the matters set forth in this Certificate are true
and correct of our own knowledge.
Executed at Santa Clara, California, this __ day of January,
1996.
- ------------------------------- ------------------------------
David St. Charles, President Narendra Gupta, Secretary
<PAGE>
AGREEMENT OF MERGER
OF
ISI PURCHASING CORPORATION
AND
DR. DESIGN, INC.
This Agreement of Merger (this "Agreement") is entered into as of
January 26, 1996 by and between ISI Purchasing Corporation, a Delaware
corporation ("Newco") and a wholly-owned subsidiary of Integrated Systems, Inc.,
a California corporation ("Buyer"), and Dr. Design, Inc., a California
corporation (the "Company").
RECITALS
A. Buyer, Newco and Company have entered into an Agreement and Plan of
Reorganization, dated as of December 14, 1995 (the "Plan"), providing for
certain representations, warranties and agreements in connection with the
transactions contemplated hereby, in accordance with the General Corporation Law
of California (the "California Law"). All capitalized terms not herein defined
shall have the meaning ascribed to them in the Plan.
B. The Boards of Directors of Buyer, Newco and Company have determined
it to be advisable and in the respective best interests of Buyer, Newco and
Company and their respective shareholders that Newco be merged with and into
Company (the "Merger") so that Company will be the surviving corporation of the
Merger.
NOW, THEREFORE, Newco and Company hereby agree as follows:
1. THE MERGER
At the time of the filing of this Agreement (together with the
Officers' Certificates attached hereto) with the Secretary of State of the
States of California and Delaware (the "Effective Time"), Newco will be merged
with and into Company, and Company shall continue as the surviving corporation
(following the Merger, the Company is hereinafter sometimes referred to as the
"Surviving Corporation"), pursuant to the terms and conditions of this Agreement
and in accordance with applicable provisions of the laws of the States of
Delaware and California as follows:
1.1 ARTICLES OF INCORPORATION. The Articles of Incorporation of Company
immediately prior to the Effective Time, without amendment thereto, shall be the
Articles of Incorporation of the Surviving Corporation.
1.2 BYLAWS. The Bylaws of Company immediately prior to the Effective
Time, without amendment thereto, shall be the Bylaws of the Surviving
Corporation. The Bylaws of the Surviving Corporation thereafter may be amended
in accordance with their terms, the Articles of Incorporation of the Surviving
Corporation and as provided by the California Law.
1.3 CONVERSION OF SHARES. As of the Effective Time, by virtue of the
Merger and without any action on the part of any shareholder of Company, each of
the issued and outstanding shares of Company's Common Stock (the "Company
Shares") (other than any shares held by persons exercising dissenters' rights in
accordance with Chapter 13 of the California Law ("Dissenting Shares")) shall be
converted into the right to receive, subject to the provisions of Section 1.1.1
of the Plan, 0.148612 (the "Applicable Fraction") shares of fully paid and
nonassessable Buyer's Common Stock (the "Conversion Shares").
1.4 ASSUMPTION OF OPTIONS. At the Effective Time, each option to
purchase shares of Company Common Stock (the "Company Options") that is
outstanding immediately prior to the Effective Time will, by virtue of the
Merger and without further action on the part of any holder thereof, be assumed
by Buyer and become exercisable for the number of shares of Buyer's Common Stock
that equals the number of shares of Company Common Stock subject to such Company
Option multiplied by the Applicable Fraction. The exercise price per share of
Buyer Common Stock purchasable under each such option will be equal to the
exercise price of the Company Option divided by the Applicable Fraction. All
other terms of the Company Option will remain unchanged.
<PAGE>
1.5 FRACTIONAL SHARES. No fraction of a Conversion Share will be issued
by virtue of the Merger, but in lieu thereof each holder of Company Shares who
would otherwise be entitled to a fraction of a Conversion Share (after
aggregating all fractional Conversion Shares to be received by such holder)
shall receive from Buyer an amount of cash (rounded to the nearest whole cent)
equal to the product of (i) the price of a share of Buyer's Common Stock
determined pursuant to Section 1.1.1 of the Plan, multiplied by (ii) the
fraction of a Conversion Share to which each such holder would otherwise be
entitled.
1.6 NO FURTHER TRANSFER. At the Effective Time, the stock transfer
books of the Company shall be closed and no transfer of Company Shares shall
thereafter be made.
1.7 ESCROW. Of the aggregate number of Conversion Shares issuable by
virtue of the Merger to a shareholder, Buyer shall deposit in escrow a number of
Conversion Shares equal to ten percent (10%) of the total number of Conversion
Shares issuable by virtue of the Merger to such shareholder (the "Escrowed
Shares"), pursuant to the terms of a separate Escrow Agreement. In addition, ten
percent (10%) of the shares of Buyer's Common Stock issued upon exercise of
assumed Company Options will be deposited into escrow.
1.8 DISSENTERS' RIGHTS. Holders of Dissenting Shares who have complied
with all requirements for perfecting the rights of dissenting shareholders as
set forth in Section 1300 et. seq. of the California Law shall be entitled to
their rights under the California Law.
2. SURRENDER OF CERTIFICATES
2.1 SURRENDER AND EXCHANGE OF OUTSTANDING CERTIFICATES. As soon as
practicable after the Effective Time, each holder of a certificate or
certificates representing Company Shares issued and outstanding immediately
prior to the Effective Time (other than Dissenting Shares) shall surrender such
certificate(s) to Buyer's transfer agent. Thereupon, each such holder shall be
entitled to receive in exchange therefor the number of shares of Buyer's Common
Stock represented by such certificate(s), less the Escrowed Shares. Buyer's
transfer agent shall issue to the Company's shareholders certificates for the
shares of Buyer's Common Stock issuable to the Company's shareholders in the
Merger as soon as practicable following such surrender. Each certificate which
immediately before the Effective Time evidenced Company Shares shall, from and
after the Effective Time until such certificate is surrendered to Buyer, or its
transfer agent, be deemed, for all corporate purposes, to evidence the right to
receive the consideration described above; provided, however, that until such
certificate is so surrendered by the holder thereof, no dividend or other
distribution payable to such holder after the Effective Time shall be paid in
respect of such certificates.
3. TERMINATION AND AMENDMENT
3.1 TERMINATION. Notwithstanding the approval of this Agreement by the
shareholders of Newco and Company, this Agreement may be terminated at any time
prior to the Effective Time by the mutual written agreement of Newco and
Company, and will terminate in the event the Plan is terminated in accordance
with its terms. In the event of the termination of this Agreement as provided
above, this Agreement will forthwith become void and there will be no liability
on the part of either Buyer, Newco and Company or their respective officers and
directors, except as otherwise provided in the Plan.
3.2 AMENDMENT. This Agreement may be amended by the parties hereto at
any time by execution of an instrument in writing signed on behalf of each of
the parties hereto.
4. MISCELLANEOUS
4.1 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.
4.2 PLAN. The Plan and this Agreement are intended to be construed
together in order to effectuate their purposes.
4.3 ASSIGNMENT; BINDING UPON SUCCESSORS AND ASSIGNS. Neither party
hereto may assign any of its rights or obligations under this Agreement without
the prior written consent of the other party hereto. This Agreement will be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
-2-
<PAGE>
4.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of California (irrespective of
its choice of law principles).
4.5 FURTHER ASSIGNMENTS. After the Effective Time, Company and its
officers and directors may execute and deliver such deeds, assignments and
assurances and do all other things necessary or desirable to vest, perfect or
confirm title to Newco's property or rights in Company and otherwise to carry
out the purposes of the Plan, in the name of Newco or otherwise.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
DR. DESIGN, INC.
___________________________ By: _____________________________
Laura Thompson, Secretary Marco Thompson, President
NEWCO
___________________________ By: _____________________________
Narendra Gupta, Secretary David St. Charles, President
SIGNATURE PAGE TO AGREEMENT OF MERGER
-3-
<PAGE>
EXHIBIT 1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF DR. DESIGN, INC.
-4-
<PAGE>
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
Sharon Pinto and Laura Thompson certify that:
1. They are the Vice President and Secretary, respectively, of
DR. DESIGN, INC., a California corporation (the "Company").
2. The Agreement of Merger in the form attached was duly
approved by the Board of Directors of the Company.
3. The Company has three (3) authorized classes of shares,
designated as Class A Common Stock, Class B Common Stock and Preferred Stock.
There are no issued and outstanding shares of Class B Common Stock or Preferred
Stock of the Company entitled to vote on the Agreement of Merger. The total
number of issued and outstanding shares of the Class A Common Stock of the
Corporation entitled to vote on the Agreement of Merger was 2,555,720.
4. The percentage vote required for Common Stock was more than
50% of the outstanding shares of the Common Stock.
5. The Agreement of Merger was approved by the vote of a
number of shares of Common Stock of the Company which equaled or exceeded the
vote required.
We further declare under penalty of perjury under the laws of
the State of California that the matters set forth in this Certificate are true
and correct of our own knowledge.
Executed at San Diego, California, this __ day of January,
1996.
- --------------------------------- -----------------------------
Sharon Pinto, Vice President Laura Thompson, Secretary
<PAGE>
EXHIBIT 1.4
ESCROW AGREEMENT
This Escrow Agreement (this "Agreement") is entered into as of
December 14, 1995, by and among Integrated Systems, Inc., a California
corporation ("ISI"), those individuals listed on Exhibit A, attached hereto, who
are the principal shareholders (the "Holders") of Dr. Design, Inc., a California
corporation ("DDI"), Marco J. Thompson as Representative of the Holders
("Representative") and Chemical Trust Company of California, a California
corporation, as "Escrow Agent".
A. DDI and ISI have entered into an Agreement and Plan of
Reorganization dated as of December 14, 1995 (the "Plan") pursuant to which ISI
Purchasing Corporation, a wholly owned subsidiary of ISI ("Newco") will merge
with and into DDI, with DDI surviving the merger as a wholly owned subsidiary of
ISI. The capitalized terms used in this Agreement and not otherwise defined
herein will have the meanings given them in the Plan. A copy of the Plan is
simultaneously being delivered to the Escrow Agent.
B. Pursuant to the Plan, an aggregate of 371,607 shares of ISI
Common Stock are to be issued in the Merger to the Holders.
C. The Plan provides for shares equaling ten percent (10%) of
the shares of ISI Common Stock that are issued in the Merger to the Holders and
ten percent (10%) of the shares issuable upon exercise of the DDI Options
assumed by ISI (the "Escrow Shares") to be deducted from the shares of ISI
Common Stock issued to the Holders and placed in an escrow account (the "Escrow
Account") to secure certain indemnification obligations of DDI to ISI and other
Indemnified Persons (as defined in Section 10.2 of the Plan) under the Plan on
the terms and conditions set forth herein. The Escrow Shares required to be
deposited in the Escrow Account pursuant to this Agreement are shown on Exhibit
A attached hereto.
D. The parties hereto desire to establish the terms and
conditions pursuant to which the Escrow Shares will be deposited, held in, and
disbursed from the Escrow Account.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. ESCROW AND INDEMNIFICATION
(a) Escrow of Shares. Promptly after the Effective Time
of the Merger, ISI or its transfer agent will deposit the Escrow Shares with the
Escrow Agent, who will hold them in escrow as collateral for the indemnification
obligations of the Holders under Section 10.2 of the Plan until the Escrow Agent
is required to release such Escrow Shares pursuant to the terms of this
Agreement. The Escrow Shares will include "Additional Escrow Shares" as that
term is defined in Section 2(b) of this Agreement. The Escrow Shares shall at
all times be free from and not be subject to any lien, attachment, trustee
process or any other judicial process of any creditor of any party hereto. The
Escrow Agent agrees to accept delivery of the Escrow Shares and to hold such
Escrow Shares in escrow subject to the terms and conditions of this Agreement.
<PAGE>
(b) Indemnification. ISI and the other Indemnified
Persons are indemnified pursuant to the terms of Section 10.2 of the Plan (which
terms are incorporated herein by reference) from and against any Damages, as
defined in the Plan, subject to the limitations set forth in Section 10.2 of the
Plan and herein. (For purposes of this Agreement, references to ISI will include
all other Indemnified Persons, as applicable.) The Escrow Shares will be
security for this indemnity obligation, subject to the limitations, and in the
manner provided, in Sections 1.4 and 10.2 of the Plan and this Agreement.
Promptly after the receipt by ISI of notice or discovery of any claim, damage or
legal action or proceeding giving rise to indemnification rights under the Plan,
ISI will give the Representative and the Escrow Agent written notice of such
claim, damage, legal action or proceeding (a "Claim") in accordance with Section
3 hereof. Notwithstanding the foregoing, ISI may not make any Claim for Damages
under Section 10.2 of the Plan after the Final Release Date, as defined in
Section 2(c) hereof. Within five (5) days of delivery of such written notice,
the Representative may, with ISI's written consent, which shall not be
unreasonably withheld, at the expense of the Holders, elect to take all
necessary steps properly to contest any Claim involving third parties or to
prosecute such Claim to conclusion or settlement. If the Representative makes
the foregoing election, ISI will have the right to participate at its own
expense in all proceedings. If the Representative does not make such election,
ISI shall be free to handle the prosecution or defense of any such Claim and
will notify the Representative of the progress of any such Claim, will permit
the Representative, at the sole cost of the Representative, to participate in
such prosecution or defense and will provide the Representative with reasonable
access to all relevant information and documentation relating to the Claim and
ISI's prosecution or defense thereof. In any case, the party not in control of
the Claim will cooperate with the other party in the conduct of the prosecution
or defense of such Claim. Neither party will compromise or settle any such Claim
without the written consent of either ISI (if the Representative defends the
Claim) or the Representative (if ISI defends the Claim), such consent not to be
unreasonably withheld.
(c) Limitation on Liability. The maximum liability of a
Holder under Section 10.2 of the Plan and under this Agreement (other than for
intentional fraud or willful misconduct), and ISI's sole and exclusive remedy
under Section 10.2 of the Plan and under this Agreement will be the number of
Escrow Shares set forth next to each such Holder's name on Exhibit A.
2. DEPOSIT OF ESCROW SHARES; RELEASE FROM ESCROW.
(a) Delivery of Escrow Shares. On the Closing Date, the
Escrow Shares allocable to a Holder (the "Initial Escrow Shares") will be
delivered by ISI's transfer agent to the Escrow Agent in the form of duly
authorized stock certificates issued in the respective names of the Holder
thereof together with endorsed stock powers. On the Closing Date, each of the
Holders will deliver to ISI's transfer agent a duly endorsed stock power bearing
a medallion stamp guarantee in the form of Exhibit B attached hereto. In
addition, upon exercise by a Holder after the Closing Date and prior to the
Final Release Date of any DDI stock options assumed by ISI pursuant to the Plan,
ISI will deliver to the Escrow Agent the Escrow Shares attributable to such
option exercise. In the event ISI issues any Additional Escrow Shares (as
defined below), such shares will be issued and delivered to the Escrow Agent in
the same manner as the Escrow Shares delivered on the Closing Date.
(b) Dividends, Voting and Rights of Ownership. Except
for tax-free dividends paid in stock declared with respect to the Escrow Shares
pursuant to Section 305(a) of the Code ("Additional Escrow Shares"), any cash
dividends, dividends payable in securities or other distributions of any kind
made in respect of the Escrow Shares will be distributed currently by ISI to
each Holder. The Holder will have the right to vote the Escrow Shares deposited
in the Escrow Account for the account of such Holder so long as such Escrow
Shares are held in escrow, and ISI will take all reasonable steps necessary to
allow the exercise of such rights. While the Escrow Shares remain in the Escrow
Agent's possession pursuant to this Agreement, the Holder will retain and will
be able to exercise all other incidents of ownership of said Escrow Shares that
are not inconsistent with the terms and conditions hereof.
-2-
<PAGE>
(c) Distribution to Holder. Within five (5) business
days after (a) public release of ISI's audited financial results together with a
report thereon from ISI's independent auditors covering the combined results of
ISI and DDI for the first fiscal year of ISI ending after the Closing Date, for
items expected to be encountered in the audit process (but such period to end no
later than one (1) year from the Closing Date), provided that ISI shall have a
reasonable period of time, not to exceed ninety (90) days, to review the audit
results to determine if any claim for Damages exists under Section 10.2 of the
Plan and ISI shall provide notice of any Claim hereof within the ninety (90) day
period, a copy of which press release shall be immediately provided to the
Escrow Agent by ISI, and (b) twelve (12) months after the Closing Date for all
other items (the "Final Release Date"), the Escrow Agent will release from
escrow to each Holder his Escrow Shares, plus all Additional Escrow Shares, less
(A) any Escrow Shares delivered to ISI in accordance with Section 4 hereof in
satisfaction of Claims by ISI and (B) any Escrow Shares subject to delivery to
ISI in accordance with Section 4 hereof with respect to any then pending but
unresolved Claims of ISI. Any Escrow Shares held as a result of clause (B) will
be released to the Holder or released to ISI for cancellation (as appropriate)
promptly upon resolution of each specific Claim involved.
(d) Release of Shares. The Escrow Shares will be held
by the Escrow Agent until required to be released pursuant to Section 2(c)
above. Within five (5) business days after the release condition is met, Escrow
Agent will deliver to the Holders the requisite number of Escrow Shares to be
released on such date as identified by ISI and the Representative to the Escrow
Agent in writing. Such delivery will be in the form of stock certificate(s)
issued in the name of such Holders. ISI and the Representative undertake to
deliver a timely notice to the Escrow Agent identifying the number of Escrow
Shares to be released within such five (5) day period. ISI will take such action
as may be necessary to cause stock certificates to be issued in the name of the
Holders. In the event any Escrow Shares are subject to Rule 145 resale
restrictions, certificates representing Escrow Shares held for the account of
the Holders who were affiliates of DDI on the date of the Plan or thereafter
will bear a legend indicating such resale restrictions. Cash will be paid in
lieu of fractions of Escrow Shares in an amount equal to the product determined
by multiplying such fraction by the price determined pursuant to Section 1.1.1
of the Plan (such price being hereafter referred to as the "Closing Price").
Within five (5) business days after written request from the Representative, ISI
will submit a certified schedule of the cash amounts payable for fractional
shares and will deposit with the Escrow Agent sufficient funds to pay such cash
amounts for fractional shares.
(e) No Encumbrance. No Escrow Shares or any beneficial
interest therein may be pledged, sold, assigned or transferred, including by
operation of law, by a Holder or be taken or reached by any legal or equitable
process in satisfaction of any debt or other liability of the Holder (other than
such Holder's obligations under Section 10.2 of the Plan), prior to the delivery
to such Holder of the Escrow Shares by the Escrow Agent.
(f) Power to Transfer Escrow Shares. The Escrow Agent
is hereby granted the power to effect any transfer of Escrow Shares contemplated
by this Agreement. ISI will cooperate with the Escrow Agent in promptly issuing
stock certificates to effect such transfers.
3. NOTICE OF CLAIM.
(a) Each notice of a Claim by ISI (the "Notice of
Claim") will be in writing and will contain the following information to the
extent it is reasonably available to ISI:
(i) ISI's good faith estimate of the
reasonably foreseeable maximum amount of the alleged Damages (which amount may
be the amount of damages claimed by a third party plaintiff in an action brought
against ISI or DDI based on alleged facts, which if true, would constitute a
breach of DDI's representations and warranties); and
-3-
<PAGE>
(ii) A brief description in reasonable detail
of the facts, circumstances or events giving rise to the alleged Damages based
on ISI's good faith belief thereof, including, without limitation, the identity
and address of any third-party claimant (to the extent reasonably available to
ISI) and copies of any formal demand or complaint.
(b) The Escrow Agent will not transfer any of the
Escrow Shares held in the Escrow Account to ISI pursuant to a Notice of Claim
until such Notice of Claim has been resolved in accordance with Section 4 below.
4. RESOLUTION OF NOTICE OF CLAIM AND TRANSFER OF ESCROW SHARES.
Any Notice of Claim received by the Representative and the Escrow Agent pursuant
to Section 3 above will be resolved as follows:
(a) Uncontested Claims. In the event that the
Representative does not contest a Notice of Claim in writing to the Escrow Agent
and ISI and does not pay the amount demanded within thirty (30) calendar days
after a Notice of Claim containing a statement of the claimed Damages is
delivered pursuant to Section 4(b) below, the Escrow Agent will immediately
transfer to ISI for cancellation that number of Escrow Shares having a value
(determined pursuant to Section 4(c) hereof) equal to the amount of Damages
specified in the Notice of Claim which will be allocated among the Holders in
proportion to their percentage interests in the Escrow Shares set forth on
Exhibit A, and will notify the Representative of such transfer.
(b) Contested Claims. In the event that the
Representative gives written notice contesting all, or a portion of, a Notice of
Claim to ISI and the Escrow Agent (a "Contested Claim") within the 30-day period
provided above, matters that are subject to third party claims brought against
ISI or DDI in a litigation or arbitration will await the final decision, award
or settlement of such litigation or arbitration. Any portion of the Notice of
Claim that is not contested will be resolved as set forth above in Section 4(a).
The final decision of the arbitrator or judge will be furnished to the Escrow
Agent, the Representative and ISI in writing and will constitute a conclusive
determination of the issue in question, binding upon the Holders and ISI. After
notice that the Notice of Claim is contested by the Representative, the Escrow
Agent will continue to hold in the Escrow Account Escrow Shares having a value
(determined pursuant to Section 4(c) hereof) sufficient to cover such Claim
(notwithstanding the expiration of the Final Release Date) until (i) execution
of a settlement agreement by ISI and the Representative setting forth a
resolution of the Notice of Claim, or (ii) receipt of a copy of the final award
of the arbitrator or judge.
(i) Arbitration. Any Contested Claim shall be
settled by arbitration in Santa Clara County, California, and, except as herein
specifically stated, in accordance with the commercial arbitration rules of the
American Arbitration Association ("AAA Rules") then in effect. However, in all
events, these arbitration provisions shall govern over any conflicting rules
which may now or hereafter be contained in the AAA Rules. Any judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
over the subject matter thereof. The arbitrator shall have the authority to
grant any equitable and legal remedies that would be available in any judicial
proceeding instituted to resolve a Contested Claim.
(ii) Compensation of Arbitrator. Any such
arbitration will be conducted before a single arbitrator who will be compensated
for his or her services at a rate to be determined by the parties or by the
American Arbitration Association, but based upon reasonable hourly or daily
consulting rates for the arbitrator in the event the parties are not able to
agree upon his or her rate of compensation.
(iii) Selection of Arbitrator. The American
Arbitration Association will have the authority to select an arbitrator from a
list of arbitrators who are qualified to handle any Claim made hereunder.
-4-
<PAGE>
(iv) Payment of Costs. ISI and the Holders
will each pay fifty percent (50%) of the initial compensation to be paid to the
arbitrator in any such arbitration and fifty percent (50%) of the costs of
transcripts and other normal and regular expenses of the arbitration
proceedings; provided, however, that the prevailing party in any arbitration
will be entitled to an award of attorneys' fees and costs, and all costs of
arbitration, including those provided for above, will be paid by the losing
party, and the arbitrator will be authorized to make such determinations. DDI's
liability for such fees and expenses of arbitration will be paid by ISI and will
be recovered as a Claim hereunder out of the Escrow Shares.
(v) Burden of Proof. For any Arbitrable Claim
submitted to arbitration, the burden of proof will be as it would be if the
claim were litigated in a judicial proceeding.
(vi) Award. Upon the conclusion of any
arbitration proceedings hereunder, the arbitrator will render findings of fact
and conclusions of law and a written opinion setting forth the basis and reasons
for any decision reached and will deliver such documents to each party to this
Agreement along with a signed copy of the award.
(vii) Terms of Arbitration. The arbitrator
chosen in accordance with these provisions will not have the power to alter,
amend or otherwise affect the terms of these arbitration provisions or the
provisions of this Agreement or the Plan.
(viii) Exclusive Remedy. Except as
specifically otherwise provided in this Agreement or the Plan, arbitration will
be the sole and exclusive remedy of the parties for any Arbitrable Claim arising
out of this Agreement.
(c) Determination of Amount of Claims. Any amount owed
to ISI hereunder, determined pursuant to Section 4(a) or (b) above, will be
immediately payable to ISI out of the Escrow Shares then held by the Escrow
Agent on a pro rata basis between the Holders at a per share value for all
Escrow Shares equal to the Closing Price of ISI Common Stock ($34.20).
(d) No Exhaustion of Remedies. ISI need not exhaust any
other remedies that may be available to it but shall proceed directly in
accordance with the provisions of this Agreement. ISI may institute Claims
against the Escrow Shares and in satisfaction thereof may recover Escrow Shares,
in accordance with the terms of this Agreement, without making any other Claims
directly against the Holders and without rescinding or attempting to rescind the
transactions consummated pursuant to the Plan. The assertion of any single Claim
for indemnification hereunder will not bar ISI from asserting other Claims
hereunder.
5. LIMITATION OF ESCROW AGENT'S LIABILITY.
(a) The Escrow Agent will incur no liability with
respect to any action taken or suffered by it in reliance upon any notice,
direction, instruction, consent, statement or other document believed by it to
be genuine and duly authorized, nor for any other action or inaction, except its
own willful misconduct or gross negligence. The Escrow Agent shall have no duty
to inquire into or investigate the validity, accuracy or content of any document
delivered to it. The Escrow Agent will not be responsible for the validity or
sufficiency of this Agreement. In all questions arising under this Agreement,
the Escrow Agent may rely on the advice or opinion of counsel, and for anything
done, omitted or suffered in good faith by the Escrow Agent based on such
advice, the Escrow Agent will not be liable to anyone. The Escrow Agent will not
be required to take any action hereunder involving any expense unless the
payment of such expense is made or provided for in a manner reasonably
satisfactory to it.
-5-
<PAGE>
(b) In the event conflicting demands are made or
conflicting notices are served upon the Escrow Agent with respect to the Escrow
Account, the Escrow Agent will have the absolute right, at the Escrow Agent's
election, to do either or both of the following: (i) resign so a successor can
be appointed pursuant to Section 9 hereof or (ii) file a suit in interpleader
and obtain an order from a court of competent jurisdiction requiring the parties
to interplead and litigate in such court their several claims and rights among
themselves. In the event such interpleader suit is brought, the Escrow Agent
will thereby be fully released and discharged from all further obligations
imposed upon it under this Agreement, and ISI will pay the Escrow Agent all
costs, expenses and reasonable attorney's fees expended or incurred by the
Escrow Agent pursuant to the exercise of Escrow Agent's rights under this
Section 5 (such costs, fees and expenses will be treated as extraordinary fees
and expenses for the purposes of Section 8 hereof). ISI shall be entitled to
reimbursement from the Holders of any extraordinary fees and expenses of Escrow
Agent in the event ISI prevails in such dispute pursuant to Section 8 hereof.
(c) Each other party hereto, jointly and severally
(each an "Indemnifying Party" and together the "Indemnifying Parties"), hereby
covenants and agrees to reimburse, indemnify and hold harmless Escrow Agent,
Escrow Agent's officers, directors, employees, counsel and agents (severally and
collectively, "Escrow Agent"), from and against any loss, damage, liability or
loss suffered, incurred by, or asserted against Escrow Agent (including amounts
paid in settlement of any action, suit, proceeding, or claim brought or
threatened to be brought and including reasonable expenses of legal counsel)
arising out of, in connection with or based upon any act or omission by Escrow
Agent (and/or any of its officers, directors, employees, counsel or agents)
relating in any way to this Agreement or Escrow Agent's services hereunder. This
indemnity shall exclude gross negligence and willful misconduct on Escrow
Agent's part. Anything in this Agreement to the contrary notwithstanding, in no
event shall the Escrow Agent be liable for special, indirect or consequential
loss or damage of any kind whatsoever (including but not limited to lost
profits), even if the Escrow Agent has been advised of the likelihood of such
loss or damage and regardless of the form of action.
(d) Each Indemnifying Party may participate at its own
expense in the defense of any claim or action that may be asserted against
Escrow Agent, and if the Indemnifying Parties so elect, the Indemnifying Parties
may assume the defense of such claim or action; provided, however, that if there
exists a conflict of interest that would make it inappropriate, in the sole
discretion of the Escrow Agent, for the same counsel to represent both Escrow
Agent and the Indemnifying Parties, Escrow Agent's retention of separate counsel
shall be reimbursable as herein above provided. Escrow Agent's right to
indemnification hereunder shall survive Escrow Agent's resignation or removal as
Escrow Agent and shall survive the termination of this Agreement by lapse of
time or otherwise.
(e) Escrow Agent hereby warrants that Escrow Agent will
notify each Indemnifying Party by letter, or by telephone or telecopy confirmed
by letter, of any receipt by Escrow Agent of a written assertion of a claim
against Escrow Agent, or any action commenced against Escrow Agent, within ten
(10) business days after Escrow Agent's receipt of written notice of such claim.
However, Escrow Agent's failure to so notify each Indemnifying Party shall not
operate in any manner whatsoever to relieve an Indemnifying Party from any
liability that it may have otherwise than on account of this Section 5.
(f) Escrow Agent may execute any of its powers or
responsibilities hereunder and exercise any rights hereunder either directly or
by or through its agents or attorneys. The Escrow Agent shall have no liability
for the conduct of any outside attorneys, accountants or other similar
professionals it retains. Nothing in this Agreement shall be deemed to impose
upon Escrow Agent any duty to qualify to do business or to act as a fiduciary or
otherwise in any jurisdiction other than the State of California.
-6-
<PAGE>
6. NOTICES. All notices, instructions and other communications
required or permitted to be given hereunder or necessary or convenient in
connection herewith must be in writing and will be deemed delivered (i) when
personally served or when delivered by telex or facsimile (to the telex or
facsimile number of the person to whom the notice is given), (ii) the first
business day following the date of deposit with an overnight courier service or
(iii) on the earlier of actual receipt or the third business day following the
date on which the notice is deposited in the United States mail, first class
certified, postage prepaid, addressed as follows:
If to the Escrow Agent: Chemical Trust Company of California
50 California Street, 10th Floor
San Francisco, CA 94111
Attn: Corporate Trust Department
If to ISI: Integrated Systems, Inc.
3260 Jay Street
Santa Clara, California 95054
Attn: Chief Financial Officer
With a copy to: Fred M. Greguras, Esq.
Fenwick & West
Two Palo Alto Square, Suite 800
Palo Alto, California 94306
If to the Representative: Marco J. Thompson
5415 Oberlin Drive
San Diego, CA 92121
With a copy to: Frederick T. Muto
Cooley, Godward, Castro, Huddleson & Tatum
4365 Executive Drive, Suite 1200
San Diego, CA 92121-2128
Phone: (619) 550-6000
Fax: 619-453-3555
or to such other address as ISI, the Representative or the Escrow Agent, as the
case may be, designates in a writing delivered to each of the other parties
hereto.
7. GENERAL.
(a) Governing Law, Assigns. This Agreement will be
governed by and construed in accordance with the internal laws of the State of
California without regard to conflict-of-law principles and will be binding
upon, and inure to the benefit of, the parties hereto and their respective
successors and permitted assigns.
(b) Counterparts. This Agreement may be executed in two
or more counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
(c) Entire Agreement. Except as otherwise set forth in
the Plan and the Agreement of Merger, this Agreement constitutes the entire
understanding and agreement of the parties with respect to the subject matter of
this Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
-7-
<PAGE>
(d) Waivers. No waiver by any party hereto of any
condition or of any breach of any provision of this Agreement will be effective
unless in writing. No waiver by any party of any such condition or breach, in
any one instance, will be deemed to be a further or continuing waiver of any
such condition or breach or a waiver of any other condition or breach of any
other provision contained herein.
(e) Tax Identification Numbers. Each party hereto,
other than the Escrow Agent, shall provide the Escrow Agent with their Tax
Identification Number (TIN) as assigned by the Internal Revenue Service prior to
the execution of this Agreement.
8. EXPENSES OF ESCROW AGENT. All fees and expenses of the Escrow
Agent incurred in the ordinary course of performing its responsibilities
hereunder will be paid by ISI upon receipt of a written invoice by Escrow Agent.
Any extraordinary fees and expenses, including without limitation any fees or
expenses (including the fees or expenses of counsel to the Escrow Agent)
incurred by the Escrow Agent in connection with a dispute over the distribution
of Escrow Shares or the validity of a Notice of Claim, will be paid by ISI upon
receipt of a written invoice by Escrow Agent. The Holders will be liable for any
extraordinary fees and expenses of the Escrow Agent arising in connection with a
dispute hereunder, in the event ISI prevails in such dispute. Such extraordinary
fees and expenses will be paid by ISI and recovered as a Claim hereunder out of
the Escrow Shares. The Escrow Agent shall have no duty to solicit any payments
which may be due it hereunder.
9. SUCCESSOR ESCROW AGENT. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by giving
notice of its resignation to the parties to this Agreement, specifying a date
not less than ten (10) days following such notice date of when such resignation
will take effect. ISI will designate a successor Escrow Agent prior to the
expiration of such ten-day period by giving written notice to the Escrow Agent
and the Representative. ISI may appoint a successor Escrow Agent without the
consent of the Representative so long as such successor is a bank with assets of
at least Fifty (50) Million Dollars, and may appoint any other successor Escrow
Agent with the consent of the Representative, which will not be unreasonably
withheld. The Escrow Agent will promptly transfer the Escrow Shares to such
designated successor.
10. LIMITATION OF RESPONSIBILITY. The Escrow Agent's duties are
limited to those set forth in this Agreement, and Escrow Agent, acting as such
under this Agreement, is not charged with knowledge of or any duties or
responsibilities under any other document or agreement, including without
limitation the Plan. Escrow Agent may execute any of its powers or
responsibilities hereunder and exercise any rights hereunder either directly or
by or through its agents or attorneys. Nothing in this Escrow Agreement shall be
deemed to impose upon the Escrow Agent any duty to qualify to do business or to
act as a fiduciary or otherwise in any jurisdiction other than California.
Escrow Agent shall not be responsible for and shall not be under a duty to
examine into or pass upon the validity, binding effect, execution or sufficiency
of this Escrow Agreement or of any agreement amendatory or supplemental hereto.
11. AMENDMENT. This Agreement may be amended by the written
agreement of ISI, the Escrow Agent and the Representative, provided that, if the
Escrow Agent does not agree to an amendment agreed upon by ISI and the
Representative, the Escrow Agent will resign and ISI will appoint a successor
Escrow Agent in accordance with Section 9 above. No amendment of the Plan shall
increase Escrow Agent's responsibilities or liability hereunder without Escrow
Agent's written agreement.
-8-
<PAGE>
12. HOLDERS' REPRESENTATIVE. For purposes of this Agreement, the
Holders hereby consent to the appointment of the Representative, as
representative of the Holders, and as the attorney-in-fact for and on behalf of
each Holder, and, subject to the express limitations set forth below, the taking
by the Representative of any and all actions and the making of any decisions
required or permitted to be taken by him under this Agreement, including,
without limitation, the exercise of the power to (i) authorize delivery to ISI
of the Escrow Shares, or any portion thereof, in satisfaction of Claims, (ii)
agree to, negotiate, enter into settlements and compromises of, and demand
arbitration and comply with orders of courts and awards of arbitrators with
respect to such Claims, (iii) resolve any Claims and (iv) take all actions
necessary in the judgment of the Representative for the accomplishment of the
foregoing and all of the other terms, conditions and limitations of this
Agreement. The Representative will have unlimited authority and power to act on
behalf of each Holder with respect to this Agreement and the disposition,
settlement or other handling of all Claims, rights or obligations arising under
this Agreement so long as all Holders are treated in the same manner. The
Holders will be bound by all actions taken by the Representative in connection
with this Agreement, and ISI will be entitled to rely on any action or decision
of the Representative. In performing his functions hereunder, the Representative
will not be liable to the Holders in the absence of gross negligence or willful
misconduct. The Representative may resign from such position, effective upon a
new representative being appointed in writing by Holders who beneficially own a
majority of the Escrow Shares. The Representative will not be entitled to
receive any compensation from ISI or the Holders in connection with this
Agreement. Any out-of-pocket costs and expenses reasonably incurred by the
Representative, including reasonable expenses of counsel and other experts
employed on behalf of the Holders in connection with any actions taken pursuant
to the terms of this Agreement or to enforce the rights of the Holders under
this Agreement will be paid by the Holders to the Representative in proportion
to their percentage interests in the Escrow Shares set forth on Exhibit A
through the release to the Representative of Escrow Shares equal in value to the
amount of such costs and expenses incurred.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the day and year first above written.
INTEGRATED SYSTEMS, INC. REPRESENTATIVE
By: By:
--------------------------------- --------------------------------
Marco J. Thompson
Its:
--------------------------------- --------------------------------
ESCROW AGENT HOLDERS
- -------------------------------------- --------------------------------
--------------------------------
By:
--------------------------------- --------------------------------
Authorized Signatory
SIGNATURE PAGE TO ESCROW AGREEMENT
-9-
<PAGE>
HOLDERS
- --------------------------------- ---------------------------------
Signature Signature
- --------------------------------- ---------------------------------
Printed Name Printed Name
- --------------------------------- ---------------------------------
Signature Signature
- --------------------------------- ---------------------------------
Printed Name Printed Name
- --------------------------------- ---------------------------------
Signature Signature
- --------------------------------- ---------------------------------
Printed Name Printed Name
- --------------------------------- ---------------------------------
Signature Signature
- --------------------------------- ---------------------------------
Printed Name Printed Name
- --------------------------------- ---------------------------------
Signature Signature
- --------------------------------- ---------------------------------
Printed Name Printed Name
- --------------------------------- ---------------------------------
Signature Signature
- --------------------------------- ---------------------------------
Printed Name Printed Name
SIGNATURE PAGE TO ESCROW AGREEMENT
-10-
<PAGE>
<TABLE>
EXHIBIT A
<CAPTION>
Holder DDI Shares Total ISI Shares* Escrow Shares
------ ---------- ----------------- --------------
<S> <C> <C> <C>
Thompson, Marco 2,018,368 291,754 29,175
Preuss, Peter 137,500 20,434 2,043
Hannan, Cecil and Molly 137,500 20,434 2,043
Kriss, Richard 125,000 18,576 1,857
Gauthier, Catherin 76,602 11,383 1,138
Bradbury, Colin 30,000 4,458 445
Johnson, Steve 15,000 2,229 222
Teplitsky, Simon 5,500 817 81
Lowell, Robert 5,000 743 74
Yarnall, Ronald 2,500 371 37
(Ramsey), Lisa-Miller Klizner 2,500 371 37
Allen, Sara 250 37 3
========== ================ ==============
2,555,720 371,607 37,155
<FN>
* The share numbers in this column are net of fractional shares for which cash
is being paid.
</FN>
</TABLE>
<PAGE>
STOCK POWER AND ASSIGNMENT
SEPARATE FROM CERTIFICATE
In connection with the merger of Dr. Design, Inc. ("DDI") with a wholly
owned subsidiary ("Sub") of Integrated Systems, Inc. ("ISI"), the undersigned is
receiving shares of ISI Common Stock in respect of the shares of DDI Common
Stock held by the undersigned prior to the merger.
FOR VALUE RECEIVED, and pursuant to that certain Agreement and Plan of
Reorganization dated as of December 14, 1995 between DDI, Sub and ISI (the
"Plan") and that certain Escrow Agreement dated as of December 14, 1995 executed
in connection therewith (the "Agreement"), the undersigned hereby assigns and
transfers unto Chemical Trust Company of California, as Escrow Agent (the
"Agent") pursuant to the Plan and the Agreement, ________ shares (the "Shares")
of the Common Stock of ISI.
The undersigned does hereby irrevocably constitute the Agent, as
attorney-in-fact, with full power of substitution and re-substitution, to hold
such Shares in escrow and to transfer such shares on the books of ISI in the
event that all or a portion of the Shares are retained by ISI in accordance with
the Agreement in satisfaction of the undersigned's indemnification obligations
under the Plan. The undersigned hereby acknowledges that the Shares will be held
in escrow until required to be released pursuant to the Agreement and that the
number of Shares released from escrow will be equal to the number of Shares
listed above less any amount retained in satisfaction of Claims as set forth in
the Agreement.
Dated: January __, 1996
HOLDER
- ---------------------------------
Signature
- ---------------------------------
Printed Name
[Medallion stamp bank guarantee of signature]
-12-
<PAGE>
EXHIBIT 4.19A
OFFICE BUILDING PURCHASE AGREEMENT
0. Introduction and Definitions. Marco and Laura Thompson (collectively
"SELLER") own the real property described in ATTACHMENT A and all improvements,
fixtures, window coverings, and all related rights (collectively the "PROPERTY")
and by this Agreement commit to sell the Property to Integrated Systems, Inc., a
California corporation ("BUYER"), which by this Agreement commits to purchase
the Property, all on the terms and conditions set forth below. The Property is
encumbered by a deed of trust in favor of the Small Business Administration
securing the repayment by Seller of approximately four hundred thousand dollars
as well as by a deed of trust in favor of the Bank of America in the approximate
amount of four hundred thousand dollars, all pursuant to the documentation set
forth in ATTACHMENT B (the "SBA ENCUMBRANCE" and "B OF A ENCUMBRANCE",
respectively, and collectively the "LOAN ENCUMBRANCES"). Seller presently leases
the Property to Dr. Design, Inc., a California corporation (the "TENANT"),
pursuant to a lease dated January 1, 1989 (the "LEASE"). Upon the closing of
this transaction, Buyer will acquire the Property; Buyer will pay off the Loan
Encumbrances; and the Lease will be terminated. This Agreement is entered into
as of January 15, 1996, which is referred to as the (effective) date of this
Agreement below.
1. Transfer. On the closing, Seller will convey to Buyer all of
Seller's right, title and interest in the Property by grant deed in form
acceptable to Buyer.
2. Price. In consideration of the transfer of the Property by Seller
upon closing, Buyer will pay off the outstanding indebtedness secured by the
Loan Encumbrances. The estimated pay off amount for the B of A Encumbrance is
approximately $371,000; the estimated pay off for the SBA Encumbrance is
$424,406.87. No other form of payment will be due to Seller from Buyer or Tenant
in connection with the transfer. Moreover, Seller will relinquish its rights to
such number of shares of stock in Buyer as set forth in Section 4.19 of the
Agreement and Plan of Reorganization dated December 14, 1995 (the "PLAN") in the
amount by which the total sums paid by Buyer to the lenders in order to pay off
the Loan Encumbrances exceed the recently appraised value of $515,000 (the
"PRICE"). (The MAI appraisal is Exhibit 4.19B to the Plan.) In consideration of
Seller's acceptance of the Price at the lower end of range of appraised values
(the higher end being $540,000), Buyer will accept the Property with the
physical deficiencies noted in Buyer's inspection report and listed in
ATTACHMENT C, and Seller will have no obligation to correct such deficiencies or
pay any sum or to reduce the Price on account of such deficiencies.
3. Closing. The parties have established an escrow for the closing.
Subject to the provisions of Paragraph 10 below, the closing will take place on
January 26, 1996, at the offices of the escrow holder; provided that the date,
time and/or place of the closing may be changed by mutual agreement of Buyer and
Seller; and provided further that if any of the conditions to the closing set
forth in Paragraph 6 below are not satisfied or waived by such time, the party
to be benefited by such unsatisfied conditions shall have the right and option,
but not the obligation, to extend the date of the Closing until a weekday
selected by such party that is no more than five days following the subsequent
satisfaction or waiver of such condition so long as the closing of the merger
pursuant to the Plan is correspondingly delayed (the "DEADLINE").
At the closing the following will occur:
a. Buyer will pay off the B of A Encumbrance and deposit the
estimated pay off amount of the SBA Encumbrance into escrow (or simply take
title subject to the SBA Encumbrance) pending receipt of the actual SBA pay off
demand, and the lenders will reconvey their respective interests in the Property
upon pay off.
b. Seller will convey marketable title to the Property subject
only to the "PERMITTED Exceptions" as defined in Section 6(c)(4) below by
executing and delivering the grant deed in form acceptable to Buyer and Seller.
c. Seller and Tenant will execute and deliver a Lease
termination in form acceptable to Buyer and Seller.
<PAGE>
d. Seller will commit to deliver all of the books and records
related to the Property and its management to Buyer not previously delivered
pursuant to Section 6(c)(6) below within ten days after the closing; provided
that for a period of at least three years following the closing, Buyer will
retain the originals of, and provide Seller reasonable access to, all books and
records so received.
e. Seller will refund to Tenant its security deposit in the
amount of $12,000 and a prorated amount of any rent and similar charges, which
have been paid in advance.
The following costs associated with the closing will be borne by
Seller: title insurance, recording fees, similar charges of the escrow holder or
recorder's office and any transfer taxes. Buyer and Seller will equally share
the cost of escrow settlement and title charges. Other costs of the transaction
will be borne by the respective party incurring the charge, such as attorneys'
or experts' fees. All interest on funds in escrow will accrue to the benefit of
Buyer.
4. Due Diligence. Prior to closing, Buyer will have the right to
conduct any investigation of the Property and related information it considers
reasonable and may authorize third parties to assist in this process. Seller
will arrange access to the Property and information as applicable on reasonable
notice. Buyer will restore the Property to its original condition within a
reasonable amount of time in the event that this purchase transaction does not
close. Buyer will indemnify, defend and hold Seller harmless from any claims,
loss, expense, or liability, including reasonable attorneys' fees, caused by
Buyer's or such third parties' investigative activities at the Property.
5. Representations and Warranties. Each of the parties makes the
representations and warranties set forth for it below, hereby certifying that
such representations and warranties are true and complete as of the date of this
Agreement and will be true and complete as of the closing, and acknowledges that
the other party will rely upon such representations and warranties in entering
into and undertaking the respective obligations of this Agreement. Such
representations and warranties will be true as of the closing and any claim for
breach of any representation or warranty must be brought upon the earlier of two
years after Buyer sells the Property or four years after the closing.
a. Seller. Seller represents and warrants that:
(1) Seller owns the Property free and clear of all
forms of claims, encroachments and liens of third parties, including
governmental agencies, except the Permitted Exceptions, and Seller and Tenant
have exclusive possessory rights to the Property prior to the Lease termination.
To Seller's knowledge, there have been no improvements to the Property performed
by third parties for which lien rights still exist.
(2) Seller has the requisite authority and has
obtained the consent of any third parties whose consent is required to convey
title to the Property to Buyer under the terms of this Agreement and to enter
into this Agreement, specifically excepting the SBA. Seller is not a "foreign
person" within the meaning of 42 USC Section 1445(f)(3).
(3) Except for the Permitted Exceptions, Seller is
a not a party to or otherwise bound by any agreements or litigation imposing a
material obligation on or otherwise affecting the Property, and the Property is
not subject to any pending claims or governmental actions, nor to Seller's
knowledge subject to any other material liabilities, other than the Permitted
Exceptions and as disclosed in Attachment C. Seller is not in default of any of
the contracts or agreements referred to above, including the SBA Encumbrance.
Seller has entered into no brokerage commitments with third parties concerning
the Property.
-2-
<PAGE>
(4) To Seller's knowledge and except as set forth
in Attachment C, the Property is in compliance with all applicable laws with
respect to its operation, use, occupancy and environmental conditions, other
than laws with respect to handicap access, about which Seller has no knowledge.
Environmental conditions include without limitation the presence of any material
considered "hazardous" such as asbestos, PCB's and petroleum products at or
around the Property. There are no hazardous materials at or around the Property,
except for normal quantities of materials customarily used in offices. To
Seller's knowledge, the building on the Property was constructed in accordance
with the final plans and specifications which complied with then applicable law.
(5) There exist no conditions on the Property
which could result in the early termination of casualty and liability insurance
coverage on the Property, and Seller has received no notice from any insurer
threatening early termination for any reason.
(6) (i) To Seller's knowledge, the improvements on
the Property are in good condition and its systems are in good working order,
except as set forth in Attachment C; (ii) there are not presently pending any
special assessment or condemnation proceedings or street alteration plans
affecting the Property; (iii) adequate utility facilities and services are
lawfully in place for the operation of the Property in its current uses; (iv)
the Property is not within a coastal zone under the California Coastal Act or a
special studies zone under the Alquist-Priolo Geologic Hazard Act; and (v) to
Seller's knowledge, Seller has disclosed all material information concerning the
Property to Buyer in a reasonably complete manner pursuant to this Agreement.
Except for the express representations and warranties set forth in this Section
5(a), Seller is selling the Property "as is" and in its current state of repair.
(7) The Agreement and all documents executed by
Seller which will be delivered to Buyer at the closing are, or at closing will
be, legal, valid and binding obligations of Seller and do not, or will not at
closing, violate any provisions of any agreement or judicial order to which
Seller is a party or to which Seller is subject.
b. Buyer. Buyer represents and warrants that:
(1) It is duly organized and in goodstanding under
the laws of the state of California and has the requisite authority, and the
consent of any third parties whose consent is required, to enter into this
Agreement and to acquire the Property under the terms of this Agreement,
specifically excluding the Small Business Administration and the Bank of
America.
(2) All requisite action of Buyer's Board of
Directors necessary to authorize and implement this transaction has been duly
taken.
(3) Buyer has not entered into any brokerage
commitments with third parties concerning the Property.
(4) The Agreement and all documents executed by
Buyer which will be delivered to Seller at the closing are, or at closing will
be, legal, valid and binding obligations of Buyer and do not, or will not at
closing, violate any provisions of any agreement or judicial order to which
Buyer is a party or to which Buyer is subject.
c. Indemnification. Each party will indemnify, defend and
hold the other party (including such party's officers, directors, agents,
employees attorneys and successors) harmless from all liability, loss or claim,
including attorneys' and experts' fees and the diminution in value of the
Property, arising from a misrepresentation or breach of warranty set forth
above. In the event Buyer seeks a recovery from Seller pursuant to this
paragraph, Buyer can elect to treat the claim as an additional claim of Buyer
which can be adjusted under the holdback provisions of the Plan, in which case
the number of shares due Seller would be correspondingly reduced. In the event
title insurance covers a claim, then Buyer will first look to the title insurer
for recovery. A party must give notice to the other of any claim for which
indemnification is expected pursuant to this paragraph prior to the expiration
of the "Escrow Period", as such term is defined in Section 1.4 of the Plan.
-3-
<PAGE>
6. Conditions.
a. Mutual. The respective obligations of the parties hereto are
mutually conditioned on the occurrence (or each party's waiver of the
occurrence) of simultaneous delivery of all items to be delivered at the
closing pursuant to Paragraph 3 above. Moreover, the merger of Buyer's
subsidiary and Tenant must be consummated (subject only to non discretionary,
ministerial acts of third parties) pursuant to the Plan.
b. Seller. Seller's obligations under this Agreement are further
conditioned on the satisfaction of each of the following:
(1) All representations and warranties of Buyer under this
Agreement are true and complete.
(2) All covenants of Buyer to be performed prior to the
closing have been performed.
c. Buyer. Buyer's obligations under this Agreement are further
conditioned on the satisfaction of each of the following:
(1) All representations and warranties of Seller under this
Agreement are true and complete.
(2) All covenants of Seller to be performed prior to the
closing have been performed.
(3) The Property is in substantially the same condition,
normal wear and tear excepted, as when Buyer approved its condition as set
forth in Section 6(c)(6) below; however, in the event of physical damage to the
Property for which there is adequate insurance proceeds, Seller will assign the
proceeds to Buyer, which will waive the related condition.
(4) Buyer is satisfied with the condition of title to the
Property. Seller has provided Buyer with a copy of a preliminary title report
dated January 10, 1996 issued by Southland Title Company together with copies of
all documents supporting any exceptions to title (the "REPORT"). By January 24,
1996, Buyer will review and approve or disapprove the Report and notify Seller
of any objections to the condition of title. Seller will correct the condition
of title to the satisfaction of Buyer prior to closing. Exceptions 1 through 6
of Exhibit B to the Report are "PERMITTED EXCEPTIONS" to the condition of title
as well as any other conditions approved by Buyer in writing and set forth in
Attachment C. Exceptions 7,8, and 9 of Exhibit B to the Report will be removed
on or before closing. Buyer's failure to timely notify Seller of any other
objections to the condition of title will be deemed an acceptance of such
condition of title.
(5) On or before the closing, Buyer will have received
evidence that the Title Company is prepared to issue a California Land Title
Association owner's policy of title insurance in the amount of the Price showing
title properly vested in Buyer subject only to the Permitted Exceptions.
(6) Buyer is satisfied with the status of the Property after
completion of its due diligence review, including the physical condition of the
Property. Within five days after the date of this Agreement, Seller will provide
to Buyer copies of all written materials in Seller's possession or control which
address the construction, condition or use of the Property, including without
limitation, occupancy certificates, permits, soil and engineering reports,
licenses, maintenance contracts, plans, specifications, leases, correspondence,
governmental notices and brokerage commitments. Moreover, if Seller knows of the
existence of any written material not in its possession or control, Seller will
notify Buyer of such instances. After receipt of all the material, Buyer will
promptly review such material, physically inspect the Property and approve or
disapprove of the status of the Property. Buyer will approve or disapprove of
the status of the Property by January 24, 1996.
-4-
<PAGE>
d. Failure of Condition. In the event of a failure of a condition,
the aggrieved party can elect to extend additional time for the other party to
cure the failure (thereby extending the Deadline) pursuant to Section 3 above,
and thereafter, if the condition remains unsatisfied, can elect either
terminate its obligations as set forth in Section 10 below or waive the
failure. The waiver of a condition by one party will not release the other
party from any other obligation of this Agreement, including those set forth in
Section 5. In the event the lender under the SBA Encumbrance does not timely
place a pay off demand into escrow in time to close prior to the Deadline,
Buyer will acquire the Property subject to such remaining debt (meaning that
Exception 8 of Exhibit B of the Report will become a Permitted Exception until
pay off), in which case the parties will continue to use good faith efforts to
secure such pay off demand after the closing and Buyer will pay off the SBA
Encumbrance when such necessary documents are in order.
e. Closing. Upon Buyer's acceptance of Seller's grant deed and the
other deliveries and the tender by Seller of all payments required pursuant to
Section 3, Seller will be deemed to have performed all of Seller's obligations
under this Agreement, except those continuing obligations related to: (i) the
representations and warranties and related indemnification undertakings set
forth in Section 5; (ii) the cooperation obligations as set forth in Section
6(d); (iii) the confidentiality and consultation obligations as set forth in
Sections 8 and 9; (iv) the miscellaneous obligations of Section 11; (v) the
additional undertakings provided for in the Plan and the Price offset
provisions of Section 2; and (vi) any supplemental undertakings made in writing
in connection with the closing of this transaction. Upon Buyer's tender of the
pay off amounts for the Loan Encumbrances and acceptance of Seller's grant deed
and the other deliveries pursuant to Section 3, Buyer will be deemed to have
performed all of its obligations under this Agreement, except those continuing
obligations of Buyer corresponding to those of Seller in items (i) through (vi)
above.
7.Operations Through Closing. Seller represents that Seller has managed
the Property in the ordinary course since December 14, 1995 and agrees through
closing to continue to manage the Property in the ordinary course.
8.Confidentiality. The parties, unless under compulsory process or
obligation to disclose in connection the provisions of the Securities and
Exchange Act of 1934, will maintain the confidentiality of the provisions of
this agreement and all information exchanged pursuant to it, and no party will
issue a press release in connection with this proposed transaction without the
prior consent of all other parties. This covenant will not limit a party's
ability to share relevant information with professional advisors, such as
attorneys and accountants, and with any lender on the Property, however.
Moreover, and notwithstanding any contrary provision of this Agreement, this
covenant will survive any termination of this Agreement. Each party will
promptly return all material provided by the other party pursuant to this
Agreement, in the event that this Agreement does not close. Neither party will
record this Agreement.
9. Consultation. After the closing, Seller will provide, at no charge, up
to five days of consultation with Buyer's facilities manager to assist an
orderly transition of the management of the Property.
10. Termination. This Agreement may be terminated (i) by the mutual
agreement of all parties or (ii) if any of the conditions to the closing set
forth in Paragraph 6 above are not satisfied and not waived in accordance
herewith, by any party to be benefited by such unsatisfied and unwaived
condition, in which case the termination shall occur upon notice by such party
to all other parties or (iii) as otherwise provided in the Plan. Upon
termination of this Agreement, all parties will be relieved of all further
obligations hereunder; provided that any party whose breach of this Agreement
resulted in such termination shall not be relieved of any liability resulting
therefrom. Sections 11, 10, 8 and 4 will survive the termination of this
Agreement.
-5-
<PAGE>
11. Miscellaneous. This Agreement (and the Plan) constitutes the entire
agreement between the parties on the subject matter of this Agreement and may
be amended only by a written amendment signed by all parties. All references to
the Agreement will include the provisions of the attachments to this Agreement.
This Agreement will be governed by California law as applied to contracts
entered into between residents of California. The parties acknowledge that
specific performance is an appropriate remedy for any breach of this Agreement.
All parties will bear their own legal expenses in connection with the
preparation of this Agreement and any modifications to it and the effectuation
of the transactions contemplated, except as set forth in Section 3. This
Agreement may be signed in counterparts, all of which together shall constitute
a single agreement. The invalidity of any portion of this Agreement will not
invalidate any other portion. No waivers permitted by this Agreement shall be
implied by conduct, and a waiver of one condition or breach will not be deemed
to be a waiver of a subsequent condition or breach. Time is of the essence in
this Agreement. In the event of any inconsistency between the provisions of
this Agreement and the provisions of the Plan then the provisions of the Plan
will supersede such provisions of this Agreement. Neither party can assign its
rights under this Agreement without the consent of the other party. All notices
must be in writing and delivered to Buyer as set forth in the Plan and
delivered to Seller in care of Tenant as set forth in the Plan. In the event
either party must seek legal recourse to enforce or interpret this Agreement,
then the prevailing party will be entitled to recover attorneys' and experts'
fees in addition to such other relief as the court may award. Finally, the
parties agree to execute such other documents as may be necessary in the future
in order to implement without additional risk or expense the provisions of this
Agreement.
12. Signatures.
Seller Buyer
- ----------------------------- ----------------------------------
Marco Thompson Integrated Systems, Inc.
By:
- ----------------------------- ------------------------------
Laura Thompson President
-6-
<PAGE>
ATTACHMENT A
See the attached legal description from page 3 of the Report.
------------------------------
ATTACHMENT B
See the attached Loan Encumbrances documentation.
-----------------------------
ATTACHMENT C
1. Conditions to Seller's representations and warranties set forth in Section
5a(3): none.
2. Conditions to Seller's representations and warranties set forth in Section
5a(6): see the attached pages from Buyer's physical inspection report.
3. Other Permitted Exceptions pursuant to Section 6b(4): none.
-7-
<PAGE>
LEASE TERMINATION
The undersigned parties, Marco and Laura Thompson (collectively "Landlord") and
Doctor Design, Inc. (a California corporation, "Tenant"), entered into a lease
dated January 1, 1989 for the improved real property located at 5415 Oberlin
Drive, San Diego, California (the "Lease").
By this agreement and effective only upon the closing of the Agreement for the
sale of the real property by Landlord to Integrated Systems, Inc. (California),
Landlord and Tenant terminate the Lease and release each other and the parties'
respective officers, directors, employees, agents, shareholders, successors and
assigns from liability under the Lease.
In the event the Agreement for sale of the real property does not close, then
this agreement is null and void.
Landlord Tenant
- ------------------------------- ---------------------------------
Marco Thompson Doctor Design, Inc.
- ------------------------------- ---------------------------------
Laura Thompson By: President
-8-
<PAGE>
EXHIBIT 8.14
NON-COMPETITION AND NON-SOLICITATION AGREEMENT
THIS NON-COMPETITION AND NON-SOLICITATION AGREEMENT, dated as of
December 14, 1995, (the "Non-Compete Agreement") is entered into by and among
Dr. Design, Inc., a California corporation ("DDI"), Integrated Systems, Inc., a
California corporation ("ISI") and Marco J. Thompson, a majority shareholder of
DDI ("Thompson").
W I T N E S S E T H:
WHEREAS, DDI has its principal place of business in San Diego,
California and does business throughout the United States and internationally;
and
WHEREAS, ISI engages in the business of consulting, research and
development of software products; and
WHEREAS, DDI and ISI have entered into an Agreement and Plan of
Reorganization dated as of December 14, 1995 (the "Merger Agreement"), whereby
NewCo, a wholly owned subsidiary of ISI ("NewCo") will merge with and into DDI
and, pursuant to the Merger Agreement, the outstanding shares of Common Stock of
DDI will be converted into ISI Common Stock and ISI will assume the outstanding
options to purchase shares of DDI Common Stock (the "DDI Options") in accordance
with the terms and conditions of the DDI Options, such that the DDI Options will
be exercisable for shares of ISI Common Stock (the "Merger"); and
WHEREAS, execution and delivery of this Non-Compete Agreement is a
condition to consummating the transactions contemplated by the Merger Agreement
and the parties hereto recognize and acknowledge the interest of DDI and ISI in
protecting the business and goodwill associated with DDI following the Merger.
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Capitalized terms not otherwise defined herein shall have the same
meaning as in the Merger Agreement as it may be amended and restated from time
to time.
2. As of the Closing, Thompson agrees that, without the prior written
consent of ISI and DDI, Thompson will not at any time within the three (3) year
period immediately following the Closing of the Merger (the "Restricted
Period"), directly or indirectly, within the State of California, elsewhere in
the United States or anywhere else in the world (collectively the "Territory")
whether or not for compensation, engage in or provide services to any business
that is competitive with or detrimental to any present or contemplated business
of DDI and its subsidiaries in any geographic area where DDI and its
subsidiaries engage in their business or maintain sales or service
representatives or employees. Thompson also agrees that, during the Restricted
Period, he shall not in any manner attempt to induce or assist others to attempt
to induce any customer or client of DDI and its subsidiaries to terminate his,
her or its association with DDI and its subsidiaries, nor do anything directly
or indirectly to interfere with the relationship between DDI and its
subsidiaries and any such persons or concerns. Each of the following activities
shall, without limitation, be deemed to constitute engaging in business within
the meaning of this Section 2: to engage in, work with, have an interest or
concern in, advise, lend money to, guarantee the debts or obligations of, or
permit one's name or any party thereof to be used in connection with, an
enterprise or endeavor, either individually, in partnership, or in conjunction
with any person or persons, firms, associations, companies, or corporations,
whether as a principal, agent, shareholder, employee, officer, director,
partner, consultant or in any other manner whatsoever; provided, however, that
Thompson shall retain the right to invest in or have an interest in entities
traded on any public market or offered by any national brokerage house, provided
that said interest does not exceed one percent (1%) of the voting control of
said entity. In addition, Thompson may make passive investments in privately
held entities that are determined by the Board of Directors of DDI not to be
competitors of DDI or its subsidiaries.
<PAGE>
3. Notwithstanding any other provision hereof, DDI, ISI and Thompson
agree that for a period of three (3) years immediately following consummation of
the Merger he will treat as confidential and not use for his own benefit or the
benefit of any third party all non-public information concerning ISI's or DDI's
records, assets, books, contracts, customer and supplier lists, commitments and
affairs including, but not limited to, information regarding accounts, finances,
strategies, marketing, customers and potential customers (their identities,
preferences, likes and dislikes), drawings, plans, reports, data, notes and
related information pertaining to or used in the manufacture, production or
marketing of the products and other information of a similar nature not
available to the public. If this Agreement is terminated, Thompson shall return
such documents and any electronic storage media containing such information as
shall reasonably be requested by DDI or ISI.
4. Thompson shall not, during the term of this Non-Compete Agreement,
solicit, directly or indirectly, any employee or customer of DDI and its
subsidiaries to leave the employ of DDI or its subsidiaries or any affiliate
thereof.
5. No rights under this Non-Compete Agreement shall be assignable nor
duties delegable by any party, except that ISI and DDI may assign any of their
rights hereunder to a purchaser of all or substantially all of its assets or a
majority of the outstanding securities ("Transferees"). Nothing contained in
this Agreement is intended to confer upon any person or entity, other than the
parties hereto, their successors in interest and permitted Transferees, any
rights or remedies under or by reason of this Agreement unless expressly so
stated to the contrary.
6. This Agreement shall be construed and enforced in accordance with
the laws of the State of California excluding that body of law known as
conflicts of law.
7. It is the intention of the parties hereto that the provisions of
this Non-Compete Agreement shall be enforced to the fullest extent permissible
under all applicable laws and public policies, but that the unenforceability or
the modification to conform with such laws or public policies of any provision
hereof shall not render unenforceable or impair the remainder of this
Non-Compete Agreement. The covenants in Section 2 herein with respect to the
Territory shall be deemed to be separate covenants with respect to each of the
states in the United States and countries in the Territory and should any court
of competent jurisdiction conclude or find that this Non-Compete Agreement or
any portion thereof is not enforceable with respect to any one or more of the
states or countries, respectively, such conclusion or finding shall in no way
render invalid or unenforceable the covenants herein with respect to the other
portions of the Territory. Accordingly, if any provision shall be determined to
be invalid or unenforceable either in whole or in part, this Non-Compete
Agreement shall be deemed amended to delete, or modify as necessary, the invalid
or unenforceable provisions to alter the balance of this Non-Compete Agreement
in order to render the same valid and enforceable.
8. Thompson acknowledges that ISI would not have entered into or
consummated the Merger pursuant to the Merger Agreement unless DDI and Thompson
had, among other things, entered into this Non-Compete Agreement. Any breach of
this Non-Compete Agreement will result in irreparable damage to ISI for which
ISI will not have an adequate remedy at law. Thompson and DDI further
acknowledge that ISI shall be entitled to injunctive relief hereunder and the
parties hereby consent to an injunction in favor of ISI without bond, enjoining
any breach of any of the foregoing by any court of competent jurisdiction,
without prejudice to any other right or remedy to which ISI may be entitled.
9. If an action is instituted to enforce any of the provisions of this
Non-Compete Agreement, the prevailing party in such action shall be entitled to
recover from the other party its or his reasonable attorneys' fees and costs.
10. This Non-Compete Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
-2-
<PAGE>
11. Thompson, DDI and ISI shall submit to mandatory binding arbitration
in any controversy or claim arising out of, or relating to, this Agreement or
any breach hereof in Santa Clara County, California, in accordance with the
commercial arbitration rules of the American Arbitration Association then in
effect, provided, however, that ISI retains its rights to, and shall not be
prohibited, limited or in any other way restricted from, seeking or obtaining
equitable relief from a court having jurisdiction over the parties.
12. This Non-Compete Agreement, together with the Merger Agreement and
the Nondisclosure Agreement that are a part thereof, constitutes the entire and
only agreement between the parties concerning the noncompetition and
nonsolicitation obligations of DDI and Thompson, and supersedes and cancels any
and all previous contracts, arrangements and understandings with respect
thereto.
IN WITNESS WHEREOF, the parties hereto have caused this Non-Compete
Agreement to be executed as of the date first above written.
Marco J. Thompson
- --------------------------------------
Dr. Design, Inc.
By:
----------------------------------
Its:
----------------------------------
Integrated Systems, Inc.
By:
----------------------------------
Its:
----------------------------------
[SIGNATURE PAGE TO NON-COMPETITION AND NON-SOLICITATION AGREEMENT]
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<PAGE>
EXHIBIT 8.15
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as
of January 26, 1996 (the "Effective Date") by and among Dr. Design, Inc., a
California corporation, with its principal offices located at 5415 Oberlin
Drive, San Diego, California 92121 ("DDI"), Integrated Systems, Inc., a
California corporation, with its principal offices located at 3260 Jay Street,
Santa Clara, California 95054 ("ISI"), and Marco J. Thompson, a resident of San
Diego, California ("Thompson").
In consideration of the promises and the terms and conditions
set forth in this Agreement, the parties agree as follows:
1. POSITION. During the term of this Agreement, ISI or DDI
will employ Thompson, and Thompson will serve ISI or DDI and will have such
responsibilities and authority as may from time to time be assigned to Thompson
by the Board of Directors of ISI or DDI.
2. DUTIES. Thompson will serve DDI in such capacities and with
such duties and responsibilities as the Board of Directors of DDI may from time
to time determine. Thompson will comply with and be bound by DDI's operating
policies, procedures, and practices from time to time in effect during
Thompson's employment. Thompson will perform his duties under this Agreement at
the offices of DDI. Thompson hereby represents and warrants that he is free to
enter into and fully perform this Agreement and the agreements referred to
herein without breach of any agreement or contract to which he is a party or by
which he is bound.
3. EXCLUSIVE SERVICE. Thompson will devote his full time and
efforts exclusively to this employment and apply all his skill and experience to
the performance of his duties and advancing DDI's interests in accordance with
Thompson's experience and skills. In addition, Thompson will not engage in any
outside consulting activity except with the prior written approval of DDI, or at
the direction of DDI, and Thompson will otherwise do nothing inconsistent with
the performance of his duties hereunder. Notwithstanding the forgoing, Thompson
shall be permitted to serve as a member of the Board of Directors of public and
private companies, subject to the prior written approval of the DDI Board of
Directors, not to be unreasonably withheld.
4. TERM OF AGREEMENT. This Agreement will commence on the
Effective Date, and will continue until the earlier of (i) three (3) years after
the Effective Date or (ii) when terminated pursuant to Section 7 hereof.
5. COMPENSATION AND BENEFITS.
5.1 BASE SALARY AND BONUS. ISI or DDI agrees to pay
Thompson a base salary that is commensurate with a position of this nature. The
initial base salary shall be One Hundred Fifty Thousand Dollars ($150,000) on an
annualized basis earned in accordance with DDI's customary payroll practice. In
addition, the target bonus shall be One Hundred Twenty-five Thousand Dollars
($125,000) (the "Target Bonus Amount") payable upon achievement of certain
agreed upon goals.
5.2 ADDITIONAL BENEFITS. Thompson will be eligible to
participate in DDI's employee benefit plans of general application, including
without limitation those plans covering pension and profit sharing, executive
bonuses, stock purchases, stock options, and those plans covering life, health,
and dental insurance in accordance with the rules established for individual
participation in any such plan and applicable law. Thompson will receive such
other benefits, including vacation, holidays and sick leave, as DDI generally
provides to its employees.
<PAGE>
5.3 EXPENSES. DDI will reimburse Thompson for all
reasonable and necessary expenses incurred by Thompson in connection with DDI's
business, are in accordance with the DDI's applicable policy and are properly
documented and accounted for in accordance with the requirements of the Internal
Revenue Service.
6. PROPRIETARY RIGHTS AND CONFIDENTIALITY. Thompson hereby
agrees to execute an Employee Invention Assignment and Confidentiality Agreement
with DDI in substantially the form attached hereto as Exhibit A.
7. TERMINATION.
7.1 EVENTS OF TERMINATION. Thompson's employment with
DDI shall terminate upon DDI's determination made in good faith that it is
terminating Thompson for "cause" as defined under Section 7.2 below
("Termination for Cause").
7.2 "CAUSE" DEFINED. For purposes of this Agreement,
"cause" for Thompson's termination will exist at any time after the happening of
one or more of the following events:
(a) Thompson's performance does not
reasonably satisfy performance goals that are mutually agreed upon by Thompson
and DDI, provided such nonsatisfaction is due to factors within Thompson's
control;
(b) unprofessional, unethical, fraudulent or
unlawful conduct or conduct that materially discredits DDI or is materially
detrimental to the reputation, character or standing of DDI;
(c) Thompson's material breach of a term of
this Agreement or the Employee Invention Assignment and Confidentiality
Agreement; or
(d) Thompson's death.
8. EFFECT OF TERMINATION, TERMINATION FOR CAUSE. In the event
of any termination of this Agreement pursuant to Section 7.1, DDI shall pay
Thompson the compensation and benefits otherwise payable to Thompson under
Section 5, through the date of termination set forth in the notice. Thompson's
rights under DDI's benefit plans of general application shall be determined
under the provisions of those plans.
9. EMPLOYEE SOLICITATION. For three (3) years from the date
hereof, Thompson shall not, directly or indirectly, either for himself or for
any other person or entity, directly or indirectly, solicit, induce or attempt
to induce any employee of ISI and its subsidiaries or DDI to terminate his or
her employment with ISI and its subsidiaries or DDI, respectively.
10. MISCELLANEOUS.
10.1 DISPUTE RESOLUTION. All disputes arising out of
or relating to this Agreement shall be finally decided by the California courts
having jurisdiction over labor and social matters.
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<PAGE>
10.2 SEVERABILITY. If any provision of this Agreement
shall be found by any arbitrator or court of competent jurisdiction to be
invalid or unenforceable, then the parties hereby waive such provision to the
extent that it is found to be invalid or unenforceable and to the extent that to
do so would not deprive one of the parties of the substantial benefit of its
bargain. Such provision shall, to the extent allowable by law and the preceding
sentence, be modified by such arbitrator or court so that it becomes enforceable
and, as modified, shall be enforced as any other provision hereof, all the other
provisions continuing in full force and effect.
10.3 REMEDIES. DDI, ISI and Thompson acknowledge that
the service to be provided by Thompson is of a special, unique, unusual,
extraordinary and intellectual character, which gives it peculiar value, the
loss of which cannot be reasonably or adequately compensated in damages in an
action at law. Accordingly, Thompson hereby consents and agrees that for any
breach or violation by Thompson of any of the provisions of this Agreement
(including, without limitation, Sections 3, 6 and 9), a restraining order and/or
injunction may be issued against Thompson, in addition to any other rights and
remedies DDI or ISI and its subsidiaries may have, at law or equity, including
without limitation the recovery of money damages.
10.4 NO WAIVER. The failure by either party at any
time to require performance or compliance by the other of any of its obligations
or agreements shall in no way affect the right to require such performance or
compliance at any time thereafter. The waiver by either party of a breach of any
provision hereof shall not be taken or held to be a waiver of any preceding or
succeeding breach of such provision or as a waiver of the provision itself. No
waiver of any kind shall be effective or binding, unless it is in writing and is
signed by the party against whom such waiver is sought to be enforced.
10.5 ASSIGNMENT. This Agreement and all rights
hereunder are personal to Thompson and may not be transferred or assigned by
Thompson at any time. Any attempt by Thompson to do so will be void and of no
effect. ISI and DDI may assign their rights, together with their obligations
hereunder, to any parent, subsidiary, affiliate or successor, or in connection
with any sale, transfer or other disposition of all or substantially all of
their business and assets, provided, however, that any such assignee assumes
ISI's or DDI's obligations hereunder.
10.6 WITHHOLDING. All sums payable to Thompson
hereunder shall be reduced by all federal, state, local and other withholding
and similar taxes and payments required by applicable law.
10.7 ENTIRE AGREEMENT. This Agreement constitutes the
entire and only agreement between the parties relating to employment of Thompson
with DDI and the noncompetition and nonsolicitation obligations of Thompson, and
this Agreement supersedes and cancels any and all previous contracts,
arrangements or understandings with respect thereto.
10.8 AMENDMENT. This Agreement may be amended,
modified, superseded, canceled, renewed or extended only by an agreement in
writing executed by all parties hereto.
10.9 NOTICES. All notices and other communications
required or permitted under this Agreement shall be in writing and hand
delivered, sent by telecopier, sent by registered mail, postage pre-paid, or
sent by nationally recognized express courier service. Such notices and other
communications shall be effective upon receipt if hand delivered or sent by
telecopier, five (5) days after mailing if sent by mail, and one (l) day after
dispatch if sent by express courier, to the following addresses, or such other
addresses as any party shall notify the other parties:
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<PAGE>
If to DDI: Dr. Design, Inc.
5415 Oberlin Drive
San Diego, CA 92121
Telecopier: (619) 457-1168
Attention: President
If to ISI: Integrated Systems, Inc.
3260 Jay Street
Santa Clara, CA 95054
Telecopier: 408-986-9946
Attention: Steven Sipowicz, CFO
If to Thompson: Marco J. Thompson
5415 Oberlin Drive
San Diego, CA 92121
Telecopier: (619) 457-1168
Attention: Marco J. Thompson
10.10 BINDING NATURE. This Agreement shall be binding
upon, and inure to the benefit of, the successors and personal representatives
of the respective parties hereto.
10.11 HEADINGS. The headings contained in this
Agreement are for reference purposes only and shall in no way affect the meaning
or interpretation of this Agreement. In this Agreement, the singular includes
the plural, the plural included the singular, the masculine gender includes both
male and female referents, and the word "or" is used in the inclusive sense.
10.12 COUNTERPARTS. This Agreement may be executed in
two or more counterparts, each of which shall be deemed to be an original but
all of which, taken together, constitute one and the same agreement.
10.13 GOVERNING LAW. This Agreement and the rights
and obligations of the parties hereto shall be construed in accordance with the
laws of California, without giving effect to the principles of conflict of laws.
IN WITNESS WHEREOF, ISI, DDI and Thompson have executed this Agreement as of the
date first above written.
"THOMPSON"
- -----------------------------------
MARCO J. THOMPSON
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<PAGE>
"DDI"
DR. DESIGN, INC.
By:
---------------------------------
Its:
---------------------------------
"ISI"
INTEGRATED SYSTEMS, INC.
By:
---------------------------------
Its:
---------------------------------
[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]
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<PAGE>
EXHIBIT A
EMPLOYEE INVENTION ASSIGNMENT AND CONFIDENTIALITY AGREEMENT
This Assignment Agreement (this "Agreement") is made and
entered into effective as of December __, 1995 by and between Dr. Design, Inc.,
a California corporation ("DDI") and Marco J. Thompson ("Thompson").
R E C I T A L S
A. Thompson is a shareholder and founder of DDI.
B. Thompson believes it is in the best interests of DDI to
merge DDI with a wholly owned subsidiary of Integrated Systems, Inc., a
California corporation ("ISI") resulting in DDI being a wholly owned subsidiary
of ISI (the "Merger"). Thompson acknowledges that ISI would not have entered
into or consummated the Merger unless Thompson entered into this Agreement.
NOW THEREFORE, Thompson hereby represents to, and agrees with
DDI as follows:
1. PURPOSE OF AGREEMENT. I understand that DDI is engaged in a
continuous program of research, development, production and marketing in
connection with its business and that it is critical for DDI to preserve and
protect its Proprietary Information (as defined below), its rights in Inventions
and in all related intellectual property rights. Accordingly, I am entering into
this Agreement as a condition of my employment with DDI, whether or not I am
expected to create inventions of value for DDI.
2. DISCLOSURE OF INVENTIONS. I will promptly disclose in confidence
to DDI all inventions, improvements, designs, original works of authorship,
formulas, processes, compositions of matter, computer software programs,
databases, mask works and trade secrets ("INVENTIONS") that I make or conceive
or first reduce to practice or create, either alone or jointly with others,
during the period of my employment, whether or not in the course of my
employment, and whether or not such Inventions are patentable, copyrightable or
protectible as trade secrets.
3. WORK FOR HIRE; ASSIGNMENT OF INVENTIONS. I acknowledge and agree
that any copyrightable works prepared by me within the scope of my employment
are "works for hire" under the Copyright Act and that DDI will be considered the
author and owner of such copyrightable works. I agree that all Inventions that
(a) are developed using equipment, supplies, facilities or trade secrets of DDI,
(b) result from work performed by me for DDI, or (c) relate to DDI's business or
current or anticipated research and development, will be the sole and exclusive
property of DDI and are hereby irrevocably assigned by me to DDI.
4. LABOR CODE 2870 NOTICE. I have been notified and understand that
the provisions of paragraphs 3 and 5 of this Agreement do not apply to any
Invention that qualifies fully under the provisions of Section 2870 of the
California Labor Code, which states as follows:
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<PAGE>
ANY PROVISION IN AN EMPLOYMENT AGREEMENT WHICH PROVIDES THAT AN
EMPLOYEE SHALL ASSIGN, OR OFFER TO ASSIGN, ANY OF HIS OR HER RIGHTS IN AN
INVENTION TO HIS OR HER EMPLOYER SHALL NOT APPLY TO AN INVENTION THAT EMPLOYEE
DEVELOPED ENTIRELY ON HIS OR HER OWN TIME WITHOUT USING THE EMPLOYER'S
EQUIPMENT, SUPPLIES, FACILITIES, OR TRADE SECRET INFORMATION EXCEPT FOR THOSE
INVENTIONS THAT EITHER: (1) RELATE AT THE TIME OF CONCEPTION OR REDUCTION TO
PRACTICE OF THE INVENTION TO THE EMPLOYER'S BUSINESS, OR ACTUALLY OR
DEMONSTRABLY ANTICIPATED RESEARCH OR DEVELOPMENT OF THE EMPLOYER, OR (2) RESULT
FROM ANY WORK PERFORMED BY EMPLOYEE FOR THE EMPLOYER. TO THE EXTENT A PROVISION
IN AN EMPLOYMENT AGREEMENT PURPORTS TO REQUIRE AN EMPLOYEE TO ASSIGN AN
INVENTION OTHERWISE EXCLUDED FROM BEING REQUIRED TO BE ASSIGNED UNDER CALIFORNIA
LABOR CODE SECTION 2870(a), THE PROVISION IS AGAINST THE PUBLIC POLICY OF THIS
STATE AND IS UNENFORCEABLE.
5. ASSIGNMENT OF OTHER RIGHTS. In addition to the foregoing
assignment of Inventions to DDI, I hereby irrevocably transfer and assign to
DDI: (a) all worldwide patents, patent applications, copyrights, mask works,
trade secrets and other intellectual property rights in any Invention; and (b)
any and all "Moral Rights" (as defined below) that I may have in or with respect
to any Invention. I also hereby forever waive and agree never to assert any and
all Moral Rights I may have in or with respect to any Invention, even after
termination of my work on behalf of DDI. "MORAL RIGHTS" mean any rights to claim
authorship of an Invention, to object to or prevent the modification of any
Invention, or to withdraw from circulation or control the publication or
distribution of any Invention, and any similar right, existing under judicial or
statutory law of any country in the world, or under any treaty, regardless of
whether or not such right is denominated or generally referred to as a "moral
right".
6. ASSISTANCE. I agree to assist DDI in every proper way to obtain
for DDI and enforce patents, copyrights, mask work rights, trade secret rights
and other legal protections for DDI's Inventions in any and all countries. I
will execute any documents that DDI may reasonably request for use in obtaining
or enforcing such patents, copyrights, mask work rights, trade secrets and other
legal protections. My obligations under this paragraph will continue beyond the
termination of my employment with DDI, provided that DDI will compensate me at a
reasonable rate after such termination for time or expenses actually spent by me
at ISI's request on such assistance. I appoint the Secretary of DDI as my
attorney-in-fact to execute documents on my behalf for this purpose, subject to
ISI paying me a commercially reasonable rate for my services only while I am not
employed with DDI or ISI.
7. PROPRIETARY INFORMATION. I understand that my employment by DDI
creates a relationship of confidence and trust with respect to any information
of a confidential or secret nature that may be disclosed to me by DDI that
relates to the business of DDI or to the business of any parent, subsidiary,
affiliate, customer or supplier of DDI or any other party with whom DDI agrees
to hold information of such party in confidence ("PROPRIETARY INFORMATION").
Such Proprietary Information includes but is not limited to Inventions,
marketing plans, product plans, business strategies, financial information,
forecasts, personnel information and customer lists.
8. CONFIDENTIALITY. At all times, both during my employment and
after its termination, I will keep and hold all such Proprietary Information in
strict confidence and trust, and I will not use or disclose any of such
Proprietary Information without the prior written consent of DDI, except as may
be necessary to perform my duties as an employee of DDI for the benefit of DDI.
Upon termination of my employment with DDI, I will promptly deliver to DDI all
documents and materials of any nature pertaining to my work with DDI and I will
not take with me any documents or materials or copies thereof containing any
Proprietary Information.
9. NO BREACH OF PRIOR AGREEMENT. I represent that my performance of
all the terms of this Agreement and my duties as an employee of DDI will not
breach any invention assignment,
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<PAGE>
proprietary information or similar agreement with any former employer or other
party. I represent that I will not bring with me to DDI or use in the
performance of my duties for DDI any documents or materials of a former employer
that are not generally available to the public or have not been legally
transferred to DDI.
10. DUTY NOT TO COMPETE. I understand that my employment with DDI
requires my undivided attention and effort. As a result, during my employment, I
will not, without DDI's express written consent, engage in any employment or
business other than for DDI, or invest in or assist in any manner any business
which directly or indirectly competes with the business or future business plans
of DDI.
11. NOTIFICATION. I hereby authorize DDI to notify my actual or
future employers of the terms of
this Agreement and my responsibilities hereunder.
12. NON-SOLICITATION. During, and for a period of one (1) year
after termination of, my employment with DDI, I will not directly or indirectly
solicit or take away suppliers, customers, employees or consultants of DDI for
my own benefit or for the benefit of any other party.
13. NAME & LIKENESS RIGHTS, ETC. I hereby authorize DDI to use,
reuse, and to grant others the right to use and reuse, my name, photograph,
likeness (including caricature), voice, and biographical information, and any
reproduction or simulation thereof, in any media now known or hereafter
developed (including but not limited to film, video and digital or other
electronic media), during my employment, for whatever purposes DDI deems
necessary.
14. INJUNCTIVE RELIEF. I understand that in the event of a breach
or threatened breach of this Agreement by me DDI may suffer irreparable harm and
will therefore be entitled to injunctive relief to enforce this Agreement.
15. GOVERNING LAW; SEVERABILITY. This Agreement will be governed
and interpreted in accordance with the internal laws of the State of California,
without regard to or application of choice of law rules or principles. In the
event that any provision of this Agreement is found by a court, arbitrator or
other tribunal to be illegal, invalid or unenforceable, then such provision
shall not be voided, but shall be enforced to the maximum extent permissible
under applicable law, and the remainder of this Agreement shall remain in full
force and effect.
16. NO DUTY TO EMPLOY; "AT WILL" EMPLOYMENT. I understand that this
Agreement does not constitute a contract of employment or obligate DDI to employ
me for any stated period of time. I understand that I am an "at will" employee
of DDI and that my employment can be terminated at any time, for any reason or
for no reason, by either DDI or myself except as otherwise specifically stated
in a separately executed employment agreement. This Agreement shall be effective
as of the first day of my employment by DDI, namely:
July 22, 1985.
DDI: THOMPSON:
By:
------------------------------- ------------------------------
Marco J. Thompson
Name:
------------------------------
Title:
-----------------------------
SIGNATURE PAGE TO EMPLOYMENT AGREEMENT
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<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
This Amendment shall amend the Agreement and Plan of Reorganization,
dated December 14, 1995 by and among Integrated Systems, Inc., a California
corporation ("ISI"), ISI Purchasing Corporation, a Delaware corporation and a
wholly owned subsidiary of ISI ("Newco") and Dr. Design, Inc., a California
corporation ("DDI") (the "Agreement").
1. AMENDED PROVISIONS. Notwithstanding any other provision of the
above-referenced Agreement to the contrary, the parties hereby agree to amend
Sections 4.19 and 8.22 of the Agreement to read as follows:
SECTION 4.19 SHALL BE AMENDED IN ITS ENTIRETY TO READ AS FOLLOWS
(CHANGED TEXT IS IN ITALICS):
"4.19 Assumption of Loan for Office Building. ISI shall assume the loan
obligations of Marco and Laura Thompson under a Small Business
Administration Loan dated April 10, 1989 and the Promissory Note with
the Bank of America dated December 28, 1988 (collectively, the "Loans")
in conjunction with the assignment of ownership of the Office Building
E, located at 5415 Oberlin Drive, San Diego, California (the "Office
Building") by Marco and Laura Thompson to ISI pursuant to the Office
Building Purchase Agreement by and between ISI and Marco and Laura
Thompson, attached hereto as Exhibit 4.19A (the "Office Building
Purchase Agreement"). The Lease dated January 1, 1989 between DDI and
Marco and Laura Thompson (the "Lease") shall be terminated
simultaneously with the execution of the Office Building Purchase
Agreement. Marco and Laura Thompson agree to relinquish their rights to
such number of shares of ISI Common Stock issued to them pursuant to
Section 1.1.1 hereof equal in value, as determined in accordance with
Section 1.1.1 hereof, to the amount by which the outstanding balance of
the Loans exceeds the fair market value of the Office Building, which
fair market value is determined pursuant to the appraisal provided by
an "MIA" certified appraiser, which is attached hereto as Exhibit
4.19B."
SECTION 8.22 SHALL BE AMENDED IN ITS ENTIRETY TO READ AS FOLLOWS
(CHANGED TEXT IS IN ITALICS):
"8.22 Office Building. Marco and Laura Thompson shall have transferred
physical possession and valid title in the Office Building to ISI pursuant to
the terms of the Office Building Purchase Agreement. The Lease shall have been
terminated."
2. ALL OTHER TERMS. Except as specifically amended herein, all other
terms of the Agreement shall remain unchanged and are hereby ratified and
confirmed in all respects.
The parties have entered into this Amendment effective this 26th day of
January, 1996, and such Amendment shall be effective on and after this date:
<PAGE>
"ISI" "DDI"
Integrated Systems, Inc. Dr. Design, Inc.
By: /s/ Naren K. Gupta By: /s/ Sharon Pinto
----------------------------- --------------------------------
Name: Naren K. Gupta Name: Sharon Pinto
----------------------------- --------------------------------
Its: Chairman Its: Vice President Administration
----------------------------- --------------------------------
"NEWCO"
ISI Purchasing Corporation
By: /s/ David St. Charles
----------------------------
Name: David St. Charles
----------------------------
Its: President and Chief Executive Officer
-----------------------------------------
2
EXHIBIT 2.02
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
-------------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AGREEMENT OF MERGER, WHICH MERGES:
"ISI PURCHASING CORPORATION", A DELAWARE CORPORATION, WITH AND INTO
"DR. DESIGN, INC." UNDER THE NAME OF "DR. DESIGN, INC.", A CORPORATION ORGANIZED
AND EXISTING UNDER THE LAWS OF THE STATE OF CALIFORNIA, AS RECEIVED AND FILED IN
THIS OFFICE THE TWENTY-SIXTH DAY OF JANUARY, A.D. 1996, AT 4:30 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
--------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 7806684
DATE: 1-26-96
<PAGE>
AGREEMENT OF MERGER OF
ISI PURCHASING CORPORATION,
A DELAWARE CORPORATION,
WITH AND INTO
DR. DESIGN, INC.,
A CALIFORNIA CORPORATION
This Agreement of Merger (this "Agreement") is entered into as of
January 26, 1996 by and between ISI Purchasing Corporation, a Delaware
corporation ("Newco") and a wholly-owned subsidiary of Integrated Systems, Inc.,
a California corporation ("Buyer"), and Dr. Design, Inc., a California
corporation (the "Company").
RECITALS
A. Buyer, Newco and Company have entered into an Agreement and Plan of
Reorganization, dated as of December 14, 1995 (the "Plan"), providing for
certain representations, warranties and agreements in connection with the
transactions contemplated hereby, in accordance with the General Corporation Law
of California (the "California Law"). All capitalized terms not herein defined
shall have the meaning ascribed to them in the Plan.
B. The Boards of Directors of Buyer, Newco and Company have determined
it to be advisable and in the respective best interests of Buyer, Newco and
Company and their respective shareholders that Newco be merged with and into
Company (the "Merger") so that Company will be the surviving corporation of the
Merger.
NOW, THEREFORE, Newco and Company hereby agree as follows:
1. THE MERGER
At the time of the filing of this Agreement (together with the
Officers' Certificates attached hereto) with the Secretary of State of the
States of California and Delaware (the "Effective Time"), Newco will be merged
with and into Company, and Company shall continue as the surviving corporation
(following the Merger, the Company is hereinafter sometimes referred to as the
"Surviving Corporation"), pursuant to the terms and conditions of this Agreement
and in accordance with applicable provisions of the laws of the States of
Delaware and California as follows:
1.1 ARTICLES OF INCORPORATION. The Articles of Incorporation of Company
immediately prior to the Effective Time, without amendment thereto, shall be the
Articles of Incorporation of the Surviving Corporation.
1.2 BYLAWS. The Bylaws of Company immediately prior to the Effective
Time, without amendment thereto, shall be the Bylaws of the Surviving
Corporation. The Bylaws of the Surviving Corporation thereafter may be amended
in accordance with their terms, the Articles of Incorporation of the Surviving
Corporation and as provided by the California Law.
1.3 CONVERSION OF SHARES. As of the Effective Time, by virtue of the
Merger and without any action on the part of any shareholder of Company, each of
the issued and outstanding shares of Company's Common Stock (the "Company
Shares") (other than any shares held by persons exercising dissenters' rights in
accordance with Chapter 13 of the California Law ("Dissenting Shares")) shall be
converted into the right to receive, subject to the provisions of Section 1.1.1
of the Plan, 0.148612 (the "Applicable Fraction") shares of fully paid and
nonassessable Buyer's Common Stock (the "Conversion Shares").
<PAGE>
1.4 ASSUMPTION OF OPTIONS. At the Effective Time, each option to
purchase shares of Company Common Stock (the "Company Options") that is
outstanding immediately prior to the Effective Time will, by virtue of the
Merger and without further action on the part of any holder thereof, be assumed
by Buyer and become exercisable for the number of shares of Buyer's Common Stock
that equals the number of shares of Company Common Stock subject to such Company
Option multiplied by the Applicable Fraction. The exercise price per share of
Buyer Common Stock purchasable under each such option will be equal to the
exercise price of the Company Option divided by the Applicable Fraction. All
other terms of the Company Option will remain unchanged.
1.5 FRACTIONAL SHARES. No fraction of a Conversion Share will be issued
by virtue of the Merger, but in lieu thereof each holder of Company Shares who
would otherwise be entitled to a fraction of a Conversion Share (after
aggregating all fractional Conversion Shares to be received by such holder)
shall receive from Buyer an amount of cash (rounded to the nearest whole cent)
equal to the product of (i) the price of a share of Buyer's Common Stock
determined pursuant to Section 1.1.1 of the Plan, multiplied by (ii) the
fraction of a Conversion Share to which each such holder would otherwise be
entitled.
1.6 NO FURTHER TRANSFER. At the Effective Time, the stock transfer
books of the Company shall be closed and no transfer of Company Shares shall
thereafter be made.
1.7 ESCROW. Of the aggregate number of Conversion Shares issuable by
virtue of the Merger to a shareholder, Buyer shall deposit in escrow a number of
Conversion Shares equal to ten percent (10%) of the total number of Conversion
Shares issuable by virtue of the Merger to such shareholder (the "Escrowed
Shares"), pursuant to the terms of a separate Escrow Agreement. In addition, ten
percent (10%) of the shares of Buyer's Common Stock issued upon exercise of
assumed Company Options will be deposited into escrow.
1.8 DISSENTERS' RIGHTS. Holders of Dissenting Shares who have complied
with all requirements for perfecting the rights of dissenting shareholders as
set forth in Section 1300 et. seq. of the California Law shall be entitled to
their rights under the California Law.
1.9 SURVIVING CORPORATION. Dr. Design, Inc., a California corporation,
will be the surviving corporation of the Merger.
2. SURRENDER OF CERTIFICATES
2.1 SURRENDER AND EXCHANGE OF OUTSTANDING CERTIFICATES. As soon as
practicable after the Effective Time, each holder of a certificate or
certificates representing Company Shares issued and outstanding immediately
prior to the Effective Time (other than Dissenting Shares) shall surrender such
certificate(s) to Buyer's transfer agent. Thereupon, each such holder shall be
entitled to receive in exchange therefor the number of shares of Buyer's Common
Stock represented by such certificate(s), less the Escrowed Shares. Buyer's
transfer agent shall issue to the Company's shareholders certificates for the
shares of Buyer's Common Stock issuable to the Company's shareholders in the
Merger as soon as practicable following such surrender. Each certificate which
immediately before the Effective Time evidenced Company Shares shall, from and
after the Effective Time until such certificate is surrendered to Buyer, or its
transfer agent, be deemed, for all corporate purposes, to evidence the right to
receive the consideration described above; provided, however, that until such
certificate is so surrendered by the holder thereof, no dividend or other
distribution payable to such holder after the Effective Time shall be paid in
respect of such certificates.
3. TERMINATION AND AMENDMENT
3.1 TERMINATION. Notwithstanding the approval of this Agreement by the
shareholders of Newco and Company, this Agreement may be terminated at any time
prior to the Effective Time by the mutual written agreement of Newco and
Company, and will terminate in the event the Plan is terminated in accordance
with its terms. In the event of the termination of this Agreement as provided
above, this Agreement will forthwith become void and there will be no liability
on the part of either Buyer, Newco and Company or their respective officers and
directors, except as otherwise provided in the Plan.
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<PAGE>
3.2 AMENDMENT. This Agreement may be amended by the parties hereto at
any time by execution of an instrument in writing signed on behalf of each of
the parties hereto.
4. MISCELLANEOUS
4.1 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.
4.2 PLAN. The Plan and this Agreement are intended to be construed
together in order to effectuate their purposes.
4.3 ASSIGNMENT; BINDING UPON SUCCESSORS AND ASSIGNS. Neither party
hereto may assign any of its rights or obligations under this Agreement without
the prior written consent of the other party hereto. This Agreement will be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
4.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of California (irrespective of
its choice of law principles).
4.5 FURTHER ASSIGNMENTS. After the Effective Time, Company and its
officers and directors may execute and deliver such deeds, assignments and
assurances and do all other things necessary or desirable to vest, perfect or
confirm title to Newco's property or rights in Company and otherwise to carry
out the purposes of the Plan, in the name of Newco or otherwise.
5. SERVICE OF PROCESS
After the Effective Time, the Company agrees that it may be served with
process in the State of Delaware in any proceeding for enforcement of any
obligation of Newco, as well as for enforcement of any obligation of Company
arising from the Merger, including any suit or other proceeding to enforce the
right of any stockholders as determined in appraisal proceedings pursuant to the
provisions of ss. 262 of the Delaware General Corporation Law, and shall
irrevocably appoint the Secretary of State of the State of Delaware as its agent
to accept service of process in any such suit or other proceedings. The address
to which copies of any such service of process upon the Secretary of State shall
be mailed to is:
Dr. Design, Inc.
5415 Oberlin Drive
San Diego, CA 92121
Attn: President
[THE REST OF THIS PAGE HAS INTENTIONALLY
BEEN LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
DR. DESIGN, INC.
By: /s/ Sharon Pinto By: /s/ Laura Thompson
---------------------------------- ----------------------------
Sharon Pinto, Vice President Laura Thompson, Secretary
ISI PURCHASING CORPORATION
By: /s/ David St. Charles By: /s/ Narendra Gupta
---------------------------------- ----------------------------
David St. Charles, President Narendra Gupta, Secretary
SIGNATURE PAGE TO AGREEMENT OF MERGER
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<PAGE>
OFFICER'S CERTIFICATE
Sharon Pinto hereby certifies that:
1. She is a Vice President of DR. DESIGN, INC., a California
corporation (the "Company").
2. The Agreement of Merger to which this certificate is
attached, after having been first duly approved by the Board of Directors and
shareholders of the Company, was duly signed on behalf of the Company by the
undersigned and Laura Thompson, Vice President and Secretary, respectively, of
the Company.
3. The Company has three (3) authorized classes of shares,
designated as Class A Common Stock, Class B Common Stock and Preferred Stock.
There are no issued and outstanding shares of Class B Common Stock or Preferred
Stock of the Company entitled to vote on the Agreement of Merger. The total
number of issued and outstanding shares of the Class A Common Stock of the
Corporation entitled to vote on the Agreement of Merger was 2,555,720.
4. The percentage vote required for Common Stock was more than
50% of the outstanding shares of the Common Stock.
5. The Agreement of Merger was approved by the vote of a
number of shares of Common Stock of the Company which equaled or exceeded the
vote required.
The undersigned declares under penalty of perjury under the
laws of the State of Delaware that the matters set forth in this Certificate are
true and correct of her own knowledge.
Executed at San Diego, California, this 25th day of January,
1996.
/s/ Sharon Pinto
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Sharon Pinto, Vice President
<PAGE>
OFFICER'S CERTIFICATE
David St. Charles hereby certifies that:
1. He is the President of ISI Purchasing Corporation, a
Delaware corporation ("Newco").
2. The Agreement of Merger to which this certificate is
attached, after having been first duly approved by the Board of Directors and
the sole shareholder of the Company, was duly signed on behalf of the Company by
the undersigned and by Narendra Gupta, Secretary of the Company.
3. Newco has one class of shares authorized, designated as
Common Stock. The total number of issued and outstanding shares of the Common
Stock of the Corporation entitled to vote on the Agreement of Merger was 1,000.
4. The percentage vote required for Common Stock was more than
50% of the outstanding shares of the Common Stock.
5. The Agreement of Merger was approved by the vote of a
number of shares of Common Stock of Newco which equaled or exceeded the vote
required.
The undersigned declares under penalty of perjury under the
laws of the State of Delaware that the matters set forth in this Certificate are
true and correct of his own knowledge.
Executed at Santa Clara, California, this 25th day of January,
1996.
/s/ David St. Charles
- ----------------------------------
David St. Charles, President
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements of Integrated Systems, Inc. on Form S-8 relating to the 1983
Incentive Stock Option Plan, 1988 Stock Option Plan, 1990 Employee Stock
Purchase Plan and the 1994 Directors Stock Option Plan of our reports dated
November 17, 1995, on our audits of the financial statements of Doctor Design,
Inc. as of and for the years ended June 30, 1995 and 1994, which reports are
included in the Form 8-K of Integrated Systems, Inc. dated February 5, 1996.
/s/ McGladrey & Pullen, LLP
San Diego, California
February 5, 1996
