-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JyHsmxdwDRXWLluSRSX9iuCGs2v4n28bq1UOylURLtvpIkSYScTXQ11SJC9m4NtU GNOyU5cxw31+Ub2oAv/hog== 0000950005-96-000090.txt : 19960223 0000950005-96-000090.hdr.sgml : 19960223 ACCESSION NUMBER: 0000950005-96-000090 CONFORMED SUBMISSION TYPE: S-8 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19960222 EFFECTIVENESS DATE: 19960312 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED SYSTEMS INC CENTRAL INDEX KEY: 0000775163 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942658153 STATE OF INCORPORATION: CA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: S-8 SEC ACT: 1933 Act SEC FILE NUMBER: 333-01145 FILM NUMBER: 96524023 BUSINESS ADDRESS: STREET 1: 3260 JAY ST CITY: SANTA CLARA STATE: CA ZIP: 95054-3309 BUSINESS PHONE: 4089801500 MAIL ADDRESS: STREET 1: 3260 JAY STREET CITY: SANTA CLARA STATE: CA ZIP: 95054-3309 S-8 1 FORM S-8 As filed with the Securities and Exchange Commission on February 22, 1996 Registration No. 33- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-8 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 INTEGRATED SYSTEMS, INC. (Exact name of Registrant as specified in its charter) CALIFORNIA 94-2658153 (State of incorporation) (I.R.S. employer identification no.) 3260 Jay Street Santa Clara, California 95054-3309 (Address of principal executive offices) OPTIONS GRANTED UNDER THE DOCTOR DESIGN, INC. 1991 STOCK OPTION PLAN AND ASSUMED BY INTEGRATED SYSTEMS, INC. (Full title of the Plan) Narendra K. Gupta Integrated Systems, Inc. 3260 Jay Street Santa Clara, California 95054-3309 (408) 980-1500 (Name, address and telephone number of agent for service) COPIES TO: Katherine T. Tallman, Esq. Fenwick & West Two Palo Alto Square Palo Alto, California 94306 CALCULATION OF REGISTRATION FEE ---------------------------------------- Proposed Proposed Maximum Maximum Title of Amount Offering Aggregate Amount of Securities to to be Price Per Offering Registration be Registered Registered Share Price Fee - -------------------------------------------------------------------------------- Common Stock 131,862(1) $1.9279(2) $254,217(2) $100.00(3) - -------------------------------------------------------------------------------- (1) Shares subject to options assumed as of January 26, 1996. (2) Weighted average per share exercise price of outstanding options assumed as of January 26, 1996. (3) Represents the statutory minimum filing fee, which is greater than 1/29 of 1% of $254,217. ITEM 3. INCORPORATION OF DOCUMENTS BY REFERENCE. The following documents filed with the Securities and Exchange Commission (the "Commission") are incorporated herein by reference: (a) The Registrant's latest annual report filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the latest prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the "1933 Act"), that contains audited financial statements for the Registrant's latest fiscal year for which such statements have been filed. (b) All other reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act since the end of the fiscal year covered by the annual report or the prospectus referred to in (a) above. (c) The description of the Registrant's Common Stock contained in the Registrant's registration statement filed with the Commission under Section 12 of the Exchange Act, including any amendment or report filed for the purpose of updating such description. All documents subsequently filed by the Registrant pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post-effective amendment which indicates that all securities registered hereby have been sold or which deregisters all securities then remaining unsold, shall be deemed to be incorporated by reference herein and to be a part hereof from the date of the filing of such documents. ITEM 4. DESCRIPTION OF SECURITIES. Not Applicable. ITEM 5. INTERESTS OF NAMED EXPERTS AND COUNSEL. Not applicable as to Interests of Named Experts and Counsel. The consolidated balance sheets as of February 28, 1994 and 1995 and the consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended February 28, 1995, and the related financial statement schedules incorporated by reference in this Registration Statement and appearing in Registrant's Annual Report on Form 10-K filed May 25, 1995 (File Number 0-18268) have been incorporated herein in reliance upon the report of Coopers & Lybrand L.L.P.,.independent accountants, given upon the authority of that firm as experts in accounting and auditing. ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The provisions of Section 317 of the California Corporations Code, Article VI of the Registrant's Articles of Incorporation and Article VI of the Registrant's By-laws provide for indemnification for expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that any person is or was a -1- director or officer of the Registrant. The Registrant's directors have also entered into Indemnity Agreements with the Registrant that give such directors contractual assurances regarding the scope of the indemnification and liability limitations set forth in the Registrant's Articles of Incorporation and By-laws. The indemnification may be sufficiently broad to permit indemnification of the Registrant's officers and directors for liabilities arising under the 1933 Act. In addition, Article V of the Registrant's Articles of Incorporation provides that the liability of the Registrant's directors shall be eliminated to the fullest extent permissible under California law. The Registrant maintains a director and officer liability insurance policy with a per annum policy limit of $1,000,000, all claims and coverages, and a deductible of $100,000 per annum. ITEM 7. EXEMPTION FROM REGISTRATION CLAIMED. Not applicable. ITEM 8. EXHIBITS. The following exhibits are filed herewith: 4.01 Registrant's Amended and Restated Articles of Incorporation. 4.02 Registrant's Bylaws, as amended to date (incorporated by reference to Exhibit 3.03 to the Registrant's Form 10-Q for the quarter ended August 31, 1993). 4.03 Doctor Design, Inc. 1991 Stock Option Plan, as amended to date. 5.01 Opinion of Fenwick & West. 23.01 Consent of Fenwick & West (included in Exhibit 5.01). 23.02 Consent of Coopers & Lybrand L.L.P. 24.01 Power of Attorney (see page 4). ITEM 9. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and -2- (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; provided, however, that paragraphs (1)(i) and (1)(ii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of the offering. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions discussed in Item 6 hereof, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereby, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. -3- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each individual and corporation whose signature appears below constitutes and appoints Narendra K. Gupta and Steven Sipowicz, and each of them, his, her or its true and lawful attorneys-in-fact and agents with full power of substitution, for him, her or it and in his, her or its name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement on Form S-8, and to file the same with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he, she or it might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his, her, its or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-8 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on this 22nd day of February, 1996. INTEGRATED SYSTEMS, INC. By: /s/ Naren Gupta ---------------------------- Narendra K. Gupta, Secretary Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- PRINCIPAL EXECUTIVE OFFICERS: /s/ Naren Gupta Secretary and Chairman of the Board of February 22, 1996 - ------------------------------------ Narendra K. Gupta Directors /s/ David P. St. Charles President, Chief Executive Officer and February 22, 1996 - ------------------------------------ David P. St. Charles Director PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: /s/ Steven Sipowicz Vice President, Finance and February 22, 1996 - ------------------------------------ Steven Sipowicz Chief Financial Officer -4- ADDITIONAL DIRECTORS: Director February 22, 1996 - --------------------------- John C. Bolger /s/ Vinita Gupta Director February 22, 1996 - --------------------------- Vinita Gupta Director February 22, 1996 - --------------------------- Thomas Kailath /s/ Richard C. Murphy Director February 22, 1996 - --------------------------- Richard C. Murphy
-5- Exhibit Index Exhibit Description 4.01 Registrant's Amended and Restated Articles of Incorporation. 4.02 Registrant's Bylaws, as amended to date (incorporated by reference to Exhibit 3.03 to the Registrant's Form 10-Q for the quarter ended August 31, 1993). 4.03 Doctor Design, Inc. 1991 Stock Option Plan, as amended to date. 5.01 Opinion of Fenwick & West. 23.01 Consent of Fenwick & West (included in Exhibit 5.01). 23.02 Consent of Coopers & Lybrand L.L.P. 24.01 Power of Attorney (see page 4). -6- EX-4.01 2 EXHIBIT 4.01 EXHIBIT 4.01 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF INTEGRATED SYSTEMS, INC. Narendra K. Gupta certifies that: 1. He is the president and secretary of Integrated Systems, Inc., a California corporation. 2. The Articles of Incorporation of this corporation are amended and restated to read as follows: I. The name of this Corporation is Integrated Systems, Inc. II. The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III. 1. AUTHORIZATION OF SHARES. This Corporation is authorized to issue two classes of stock to be designated, respectively, Common Stock and Preferred Stock, both without par value. The total number of shares of all classes which the Corporation is authorized to issue is 30,000,000 shares. The number of shares of Common Stock authorized is 25,000,000 shares and the number of shares of Preferred Stock authorized is 5,000,000 shares of which 672,322 shares are presently designated as Series A Convertible Preferred Stock ("Convertible Preferred Stock"). The rights, preferences, privileges and restrictions granted to and imposed upon the Common Stock and Convertible Preferred Stock are set forth below in Article IV. 2. DESIGNATION OF UNISSUED SERIES OF PREFERRED STOCK. The Preferred Stock may be divided into such number of series as the board of directors may determine. The board of directors of the Corporation may designate, fix the number of shares of and determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon, any series of Preferred Stock as to which there are no outstanding shares or rights to acquire shares (including the Convertible Preferred Stock which becomes so as a result of conversion of all outstanding shares of such series pursuant to Article IV, Section 5 hereof). As to any series of Preferred Stock, the number of shares of which is authorized to be fixed by the board of directors, the board may, within any limits and restrictions stated in the resolutions of the board originally fixing the number of shares constituting such series, increase or decrease (but not below the number of shares of such series then outstanding and as to which rights to acquire shares of such series are then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. IV. The relative rights, preferences, privileges and restrictions granted to or imposed upon the Common Stock and the Convertible Preferred Stock are as follows: 1. DIVIDENDS. (a) No dividends shall be declared and set aside for any shares of the Convertible Preferred Stock except in the event that the Board of Directors of the Corporation shall declare a dividend payable upon the then outstanding shares of the Common Stock, in which event the holders of each share of Convertible Preferred Stock shall be entitled to be paid a dividend in an amount per share of Convertible Preferred Stock equal to the amount of the dividend declared payable upon each outstanding share of Common Stock, multiplied by the largest number of whole shares of Common Stock into which each share of Convertible Preferred Stock held by each holder thereof could be converted pursuant to the provisions of Section 5 hereof, such number determined as of the record date for the determination of holders of Common Stock entitled to receive such dividend. -1- (b) Each holder of shares of Convertible Preferred Stock shall be deemed to have consented (i) for purposes of Sections 502, 503, and 506 of the California Corporations Code, and (ii) with respect to the rights of each such holder of Convertible Preferred Stock to receive distributions pursuant to Sections 1, 2 and/or 4(h) herein, to distributions made by the Corporation in connection with the repurchase of shares of Common Stock from employees, officers, directors, consultants, or other persons performing services for the Corporation or any subsidiary upon termination of their employment or services pursuant to agreements providing for the right of repurchase. 2. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, holders of each share of Convertible Preferred Stock then outstanding shall be entitled to be paid first out of the assets of the Corporation available for distribution to the holders of the Corporation's capital stock of all classes, whether such assets are capital, surplus, or earnings, before any sums shall be paid or any assets distributed among the holders of shares of Common Stock, in an amount equal to the greater of (i) $1.4874 per share of Convertible Preferred Stock plus all dividends thereon, if any, payable pursuant to Section 1, up to and including the date of full payment, or (ii) the amount per share of Convertible Preferred Stock that would have been payable had each such share, plus all dividends thereon, if any, payable pursuant to Section 1, been converted to Common Stock immediately prior to such event of liquidation, dissolution or winding up pursuant to the provisions of Section 4 hereof, up to and including the date of full payment, all such sums shall be paid before any sums shall be paid or any assets distributed among the holders of the shares of Common Stock. If the assets of the Corporation shall be insufficient to permit the payment in full to the holders of the Convertible Preferred Stock of the amount thus distributable, then the entire assets of the Corporation available for such distribution shall be distributed ratably among the holders of the Convertible Preferred Stock. After such payment shall have been made in full to the holders of the Convertible Preferred Stock or funds necessary for such payment shall have been set aside by the Corporation in trust for the account of holders of the Convertible Preferred Stock so as to be available for such payment, holders of the Convertible Preferred Stock shall be entitled to no further participation in the distribution of the assets of the Corporation and shall have no further rights of conversion, and the remaining assets available for distribution shall be distributed ratably among the holders of the Common Stock. (b) A consolidation or merger of the Corporation in which the holders of all capital stock of the Corporation outstanding immediately prior to such a consolidation or merger hold less than two-thirds of the capital stock of the surviving entity to such consolidation or merger, or a sale of all or substantially all of the assets of the Corporation, shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this Section 2; provided, however, that each holder of Convertible Preferred Stock shall have the right to elect the benefits of the provisions of Section 4(h) hereof in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section 2; provided, further, that in the event a consolidation or merger of the Corporation or sale of all or substantially all of the assets of the Corporation in which the aggregate consideration payable to the holders of capital stock of the Corporation is less than or equal to $2,850,000, is to be regarded as liquidation, dissolution or winding up pursuant to the terms hereof, then notwithstanding Section 2(a) hereof, the holders of Convertible Preferred Stock shall be entitled to receive an amount equal to $1.4874 per share multiplied by a fraction the numerator of which is the total amount of consideration payable to the holders of capital stock of the Corporation and the denominator of which is $2,850,000. (c) Whenever the distribution provided for herein shall be paid in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors of the Corporation. -2- 3. VOTING POWER. Each holder of Convertible Preferred Stock shall be entitled to that number of votes equal to the largest number of whole shares of Common Stock into which such holder's shares of Convertible Preferred Stock could be converted, pursuant to the provisions of Section 4 hereof (taking into account all dividends, if any, payable pursuant to Section 1 with respect to such Convertible Preferred Stock), at the record date for the determination of shareholders entitled to vote on such matter or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited. Except as otherwise expressly provided in Section 6 herein or as required by law, (i) the holders of shares of Convertible Preferred Stock and Common Stock shall be entitled to vote together as a class on all matters and (ii) the holders of shares of Convertible Preferred Stock shall have no rights to vote as a separate class on any corporate matters. 4. CONVERSION RIGHTS. The holders of the Convertible Preferred Stock shall have the following conversion rights: (a) General. (i) Subject to and in compliance with the provisions of this Section 4, any shares of the Convertible Preferred Stock and, at the option of the holder, all dividends thereon, if any, payable pursuant to Section 1, up to and including the date of conversion, may, at the option of the holder, be converted at any time or from time to time into fully-paid and nonassessable shares (calculated as to each conversion rounded upwards to the largest whole share) of Common Stock. The number of shares of Common Stock to which a holder of Convertible Preferred Stock shall be entitled upon conversion shall be the product obtained by multiplying the "Applicable Conversion Rate" (determined as provided in Section 4(c)) by the number of shares of Convertible Preferred Stock being converted. (ii) Notwithstanding the foregoing, the holders of Convertible Preferred Stock shall have the right to convert all or any portion of any dividends payable pursuant to Section 1 hereunder, into shares of Common Stock at any time upon written notice to the Corporation. The number of shares of Common Stock issuable upon any such conversion shall be the number of shares equal to the amount of the unpaid dividends being so converted dividend by the "Applicable Conversion Value" then in effect, (determined as provided in Section 4(d) hereof.) Upon receipt of any such notice, the Corporation shall promptly issue a certificate in the name of the holder of Convertible Preferred Stock for the number of shares of Common Stock so issuable, together with a check representing cash in lieu of any fractional share. (b) Conversion Following Underwritten Public Offering. (i) All outstanding shares of Convertible Preferred Stock and, at the option of the holder, all dividends thereon, if any, payable pursuant to Section 1, up to and including the date of conversion, shall, at the option of the Corporation and upon ten (10) days written notice to the holders thereof be converted automatically into the number of shares of Common Stock to which a holder of Convertible Preferred Stock shall be entitled upon conversion pursuant to Section 4(a) hereof without any further action by such holders and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent for the Common Stock, such conversion to be effective only upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation in which the Common Stock is sold at a price to the public of not less than $5.00 per share (such per share amounts to be equitably adjusted whenever there shall occur a stock split, combination, reclassification or other similar event affecting the Common Stock) and in which the aggregate net proceeds to the Corporation exceed $7,000,000. -3- (ii) Upon the occurrence of the conversion specified in Section 4(b)(i), the holders of such Convertible Preferred Stock shall surrender the certificates representing such shares at the office of the Corporation or of its transfer agent for the Common Stock. Thereupon, there shall be issued and delivered to such holder a certificate or certificates for the number of shares of Common Stock into which the shares of the Convertible Preferred Stock surrendered were convertible on the date on which such conversion occurred. The Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of the Convertible Preferred Stock being converted are either delivered to the Corporation or any such transfer agent or the holder notifies the Corporation or any such transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. (c) Applicable Conversion Rate. The conversion rate in effect at any time (the "Applicable Conversion Rate") shall be the quotient obtained by dividing the sum of (i) $1.4874 and (ii) at the election of the holder, an amount equal to the amount of unpaid dividends, if any, per share of Convertible Preferred Stock, payable pursuant to Section 1, by the "Applicable Conversion Value," calculated as, provided in Section 4(d). (d) Applicable Conversion Value. The " Applicable Conversion Value" in effect from time to time, except as adjusted in accordance with Section 4(e) hereof, shall be $1.4874. (e) Adjustments to Applicable Conversion Value. Upon the happening of an "Extraordinary Common Stock Event" (as hereinafter defined), the Applicable Conversion Value shall, simultaneously with the happening of such Extraordinary Common Stock Event, be adjusted by multiplying the then effective Applicable Conversion Value by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Extraordinary Common Stock Event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such Extraordinary Common Stock Event, and the product so obtained shall thereafter be the Applicable Conversion Value. The Applicable Conversion Value, as so adjusted, shall be readjusted in the same manner upon the happening of any successive Extraordinary Common Stock Events. "Extraordinary Common Stock Event" shall mean (i) the issue of additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivision of outstanding shares of Common Stock into a greater number of shares of the Common Stock, or (iii) combination of outstanding shares of the Common Stock into a smaller number of shares of the Common Stock. (f) Dividends. In the event the Corporation shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock or in assets (excluding cash dividends or distributions), and the holders of Convertible Preferred Stock have not received such dividend or distribution, then and in each such event provision shall be made so that the holders of Convertible Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities or such other assets of the Corporation that they would have received had their Convertible Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the Conversion Date (as that term is hereafter defined in Section 4(j)), retained such securities or such other assets receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this Section 4 with respect to the rights of the holders of the Convertible Preferred Stock. -4- (g) Recapitalization or Reclassification. If the Common Stock issuable upon the conversion of the Convertible Preferred Stock shall be changed into the same or different number of shares of any class or classes of stock of the Corporation, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for elsewhere in this Section 4, or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 4), then and in each such event the holder of each share of Convertible Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change by holders of the number of shares of Common Stock into which such share of Convertible Preferred Stock might have been converted (taking into account all dividends payable pursuant to Section 1 with respect to such Convertible Preferred Stock) immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (h) Capital Reorganization, Merger or Sale of Assets. If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section 4) or a merger or consolidation of the Corporation with or into another corporation, or the sale of all or substantially all of the Corporation's properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holders of the Convertible Preferred Stock shall thereafter be entitled to receive upon conversion of the Convertible Preferred Stock, the number of shares of stock or other securities or property of the Corporation, or of the successor corporation resulting from such merger, consolidation or sale, to which a holder of Common Stock issuable upon conversion would have been entitled on such capital reorganization, merger, consolidation, or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Convertible Preferred Stock after the reorganization, merger, consolidation or sale to the end that the provisions of this Section 4 (including adjustment of the Applicable Conversion Value then in effect and the number of shares purchasable upon conversion of the Convertible Preferred Stock) shall be applicable after that event in as nearly equivalent a manner as may be practicable. Each holder of Convertible Preferred Stock upon the occurrence of a capital reorganization, merger or consolidation of the Corporation, or the sale of all or substantially all its assets and properties as such events are more fully set forth in the first paragraph of this Section 4(h), shall have the option of electing treatment of his Convertible Preferred Stock under either this Section 4(h) or Section 2(b) hereof, notice of which election shall be submitted in writing to the Corporation at its principal offices no later than five (5) days before the effective date of such event. (i) Accountant's Certificate as to Adjustments. In each case of an adjustment or readjustment of the Applicable Conversion Rate, the Corporation will furnish each holder of Convertible Preferred Stock with a certificate, prepared by independent public accountants of recognized standing showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. (j) Exercise of Conversion Privilege. To exercise his conversion privilege, a holder of Convertible Preferred Stock shall surrender the certificate or certificates representing the shares being converted to the Corporation at its principal office, and shall have written notice to the Corporation at that office that such holder elects to convert such share. Such notice shall also state the name or names (with the address or addresses) in which the certificate or certificates for shares of Common Stock issuable upon such conversion shall be issued. The date on which the certificate or certificates for shares of Convertible Preferred Stock surrendered for conversion (accompanied by proper assignment thereof) is -5- received by the Corporation, shall be the "Conversion Date." As promptly as practicable after theConversion Date, the Corporation shall issue and shall deliver to the holder of the shares of Convertible Preferred Stock being converted, or on its written order, such certificate or certificates as it may request for the number of whole shares of Common Stock issuable upon the conversion of such shares of Convertible Preferred Stock in accordance with the provisions of this Section 4, cash in the amounts of all dividends payable pursuant to Section 1 on such shares of Convertible Preferred Stock, up to and including the Conversion Date, and cash, as provided in Section 4(k), in respect of any fraction of a share of Common Stock issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on this Conversion Date, and at such time the rights of the holder as holder of the converted shares of Convertible Preferred Stock shall cease and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares of Common Stock represented thereby. (k) Cash in Lieu of Fractional Shares. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon the conversion of shares of Convertible Preferred Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of Convertible Preferred Stock, the Corporation shall pay to the holder of the shares of Convertible Preferred Stock which were converted, a cash adjustment in respect of such fractional shares in an amount as determined in a reasonable manner prescribed by the Board of Directors at the close of business on the Conversion Date. The determination as to whether or not any fractional shares are issuable shall be based upon the total number of shares of Convertible Preferred Stock being converted at any one time by any holder thereof, not upon each share of Convertible Preferred Stock being converted. (l) Partial Conversion. In the event some but not all of the shares of Convertible Preferred Stock represented by a certificate or certificates surrendered by a holder are converted, the Corporation shall execute and deliver to or on the order of the holder, at the expense of the Corporation, a new certificate representing the number of shares of Convertible Preferred Stock which were not converted. (m) Reservation of Common Stock. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Convertible Preferred Stock, such number of its shares of Common stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Convertible Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Convertible Preferred Stock, the Corporation shall take such corporate action as be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for purpose. 5. CANCELLATION OF PREFERRED STOCK ON CONVERSION. All certificates of the Convertible Preferred Stock surrendered for conversion shall be appropriately canceled on the books of the Corporation, and the shares so converted represented by such certificates shall be restored to the status of authorized but unissued Preferred Stock of the Corporation, undesignated as to series and subject to designation by the Board of Directors of the Corporation pursuant to Article III, Section 2 hereof. 6. RESTRICTIONS AND LIMITATIONS. (a) Except as expressly provided herein or as required by law, so long as any shares of the Convertible Preferred Stock remain outstanding, the Corporation shall not, and shall not permit any subsidiary (which shall mean corporation or trust of which the Corporation directly or indirectly owns at the time all of the outstanding shares of every class of such corporation or trust other than directors' qualifying shares) without the vote or written consent by the holders of at least 51% of the then outstanding shares of the Convertible Preferred Stock (each share of Convertible Preferred Stock to be entitled to one vote in each instance) to: -6- (i)Redeem, purchase or otherwise acquire for value (or pay into or set aside for a sinking fund for such purpose), any share or shares of Convertible Preferred Stock; or (ii) Authorize or issue, or obligate itself to authorize or issue, any other equity security senior to or on a parity with the Convertible Preferred Stock as to liquidation preference, conversion rights, voting rights or otherwise. (b) The Corporation shall not amend its Articles of Incorporation without the approval by vote or written consent by the holders of at least 51% of the then outstanding shares of Convertible Preferred Stock, each share of Convertible Preferred Stock to be entitled to one vote in each instance, if such amendment would change any of the rights, preferences, privileges of or limitations provided for herein for the benefit of any shares of Convertible Preferred Stock. Without limiting the generality of the last preceding sentence, the Corporation will not amend its Articles of Incorporation without the approval by the holders of at least 51% of the then outstanding shares of Convertible Preferred Stock if such amendment would: (i) Change the relative seniority rights of the holders of Convertible Preferred Stock as to the payment of dividends in relation to the holders of any other capital stock of the Corporation; or (ii) Reduce the amount payable to the holders of Convertible Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, or change the relative seniority of the liquidation preferences of the holders of Convertible Preferred Stock to the rights upon liquidation of the holders of any other capital stock of the Corporation or change the dividend rights of the holders of Convertible Preferred Stock; or (iii) Cancel or modify the conversion rights of the holders of Convertible Preferred Stock provided for in Section 4 herein. 7. NO DILUTION OR IMPAIRMENT. The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Convertible Preferred Stock set forth herein, but will at all times in good faith assist in the carrying out of all terms and in the taking of all action that may be necessary or appropriate in order to protect the rights of the holders of the Convertible Preferred Stock against dilution or other impairment. Without limiting the generality of the foregoing, the Corporation (a) will take all action that may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and nonassessable shares of stock on the conversion of Convertible Preferred Stock from time to time outstanding; and (b) will not transfer all or substantially all of its properties and assets to any other person (corporate or otherwise), or consolidate with or merge into any other person or permit any such person to consolidate with or merge into the Corporation (if the Corporation is not the surviving person), unless such other person shall expressly agree in writing to be bound by all the terms of the Convertible Preferred Stock set forth herein. 8. NOTICES OF RECORD DATE. In the event of (a) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or -7- (b) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger, or consolidation of the Corporation, or any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or (c) any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, then and in each such event the Corporation shall mail or cause to be mailed to each holder of Convertible Preferred Stock a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right and a description of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, (iii) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up. Such notice shall be mailed at least 30 days prior to the date specified in such notice on which such dividend or other distribution or right is to be distributed or any reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding up is to be consummated. V. The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. VI. The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, by agreement or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. VII. This Corporation shall not have cumulative voting. This provision shall become effective only when this Corporation becomes a listed corporation within the meaning of Section 301.5 of the California Corporations Code. 3. The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the Board of Directors of this corporation. 4. The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the required vote of the shareholders in accordance with Sections 902 and 903 of the California Corporations Code. This Corporation has two classes of shares of capital stock outstanding; and the number of outstanding shares of Common Stock is 5,908,720 and the number of outstanding shares of Preferred Stock is 672,322. The percentage vote required was more than 50% of each class and of the outstanding shares. The number of shares voting in favor of the amendment and restatement of the Articles of Incorporation equaled or exceeded the vote required for each class of shares and for the outstanding shares. I further declare under penalty of perjury under the laws of the State of California that I have read the foregoing Certificate and know the contents thereof and that the matters set forth in this Certificate are true and correct of my knowledge. /s/ Naren K. Gupta ------------------------------------------ Date: January 23, 1990 Narendra K. Gupta, President and Secretary -8- STATE OF CALIFORNIA SECRETARY OF STATE CORPORATE DIVISION I, BILL JONES, Secretary of State of the State of California, hereby certify: That the annexed transcript has been compared with the corporate record on file in this office, of which it purports to be a copy, and that same is full, true and correct. IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the State of California this February 7, 1996 /s/ Bill Jones -------------------------------- Secretary of State -9- 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"). -10- 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 CANCELLATION OF SHARES OF NEWCO. At the Effetive Time, all of the previously issued and outstanding shares of Newco Common Stock that were issued and outstanding immediately prior to the Effective Time shall be automatically retired and cancelled. 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. -11- 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. 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/ Laura Thompson By: /s/ Marco Thompson ------------------------- ------------------------- Laura Thompson, Secretary Marco Thompson, President ISI PURCHASING CORPORATION By: /s/ Narendra Gupta By: /s/ David St. Charles ------------------------- ---------------------------- Narendra Gupta, Secretary David St. Charles, President SIGNATURE PAGE TO AGREEMENT OF MERGER -12- CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER Sharon Pinto and Laura Thompson hereby 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 25th day of January, 1996. /s/ Sharon Pinto /s/ Laura Thompson - ---------------------------- ------------------------- Sharon Pinto, Vice President Laura Thompson, Secretary -13- CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER David St. Charles and Narendra Gupta hereby 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 25th day of January, 1996. /s/ David St. Charles /s/ Narendra Gupta - ---------------------------- -------------------------- David St. Charles, President Narendra Gupta, Secretary -14- EX-4.03 3 EXHIBIT 4.03 EXHIBIT 4.03 DR. DESIGN, INC. 1991 STOCK OPTION PLAN 1. DESCRIPTION OF PLAN. This is the 1991 Stock Option Plan, dated August 10, 1991 (the "Plan"), of Dr. Design, Inc., a California corporation (the "Company"). Under this Plan, certain key employees, non-employee directors and consultants with important business relationships with the Company, or any present or future subsidiary of the Company, may be granted Options ("Options") to purchase shares of the common stock of the Company ("Common Stock") . A person who is granted an Option is referred to as an "Optionee". For purposes of this Plan, the term "subsidiary" shall have the same meaning as "subsidiary corporation" as such term is defined in Section 425(f) of the Internal Revenue Code of 1986, as amended (the "Code"), where the Company is the "employer corporation". It is intended that the Options under this Plan will either qualify for treatment as incentive stock Options under Section 422A of the Code and be designated "Qualified Stock Options" or not qualify for such treatment and be designated "Non-Qualified Stock Options." 2. PURPOSE OF PLAN. The purpose of the Plan is to provide additional incentives to certain key employees and other persons that will enable them to purchase Common Stock of the Company and thereby share and directly benefit from the Company's growth, development and financial success. In this way, the Plan will allow the Company to attract and retain key employees and other persons and encourage them to remain in the Company's service. 3. ADMINISTRATION. The Plan shall be administered by a committee (the "Committee") to be composed of not less than 2 members of the Board of Directors of the Company ("Board"), who are not eligible for selection as Optionees under the Plan. Members of the Committee shall be appointed, both initially and as vacancies occur, by the Board, to serve at the pleasure of the Board. The entire Board may serve as the Committee, if by the terms of this Plan all Board members are otherwise eligible to serve on the Committee. The Committee shall meet at such times and places as it determines, but at least once a year after the Company's fiscal year end. A majority of its members shall constitute a quorum, and the decision of a majority of those present at any meeting at which a quorum is present shall constitute the decision of the Committee. A memorandum signed by all of its members shall constitute the decision of the Committee without the necessity of holding an actual meeting. The Committee is authorized and empowered to administer the Plan and, subject to the Plan (i) to select the Optionees, to specify the number of shares of Common Stock with respect to which Options are granted to each Optionee, to specify the Option Price (as defined in Section 8) and the terms of the Options and in general to grant Options; (ii) to specify whether the Options granted will be for Class A - Voting or Class B - Non-voting Stock; (iii) to determine the dates upon which Options shall be granted and the terms and conditions thereof in a manner consistent with this Plan, which terms and conditions need not be identical as to the various Options granted; (iv) to determine which Options are to be Qualified Stock Options and Non-Qualified Stock Options; (v) to interpret the Plan; (vi) to prescribe, amend and rescind rules relating to the Plan; (vii) to determine the rights and obligations of Optionees under the Plan; and (viii) to accelerate the Vesting Schedule and/or the time during which an Option may be exercised, notwithstanding the provisions in the Option Agreement (as defined in Section 7) stating the time during which it may be exercised. -1- The above matters are not exclusive, and the Committee and/or the Board shall have the authority to determine any other matters incident to the administration of this Plan. The Board, and not the Committee, is authorized and empowered to determine whether any shares of Common Stock subject to repurchase by the Company or its nominees as provided in Section 16 will be actually repurchased by the Company. The interpretation and construction by the Committee of any provision of the Plan or of any Option granted under it shall be final. No member of the Committee or the Board shall be liable for any action or determination made in good faith with respect to this Plan or any Option granted under this Plan. 4. SHARES SUBJECT TO THE PLAN. The aggregate amount of Common Stock which may be purchased pursuant to Options granted under this Plan shall be One Million (1,000,000) shares of the Company's authorized but unissued or reacquired Common Stock, subject to adjustment as provided in Section 18 to reflect all stock splits, stock dividends or similar capital changes. If any Option shall expire or terminate for any reason without having been exercised in full, and/or if the Company repurchases any shares of Common Stock as provided herein, such unexercised shares and reacquired shares shall be available for granting additional Options under the Plan. 5. ELIGIBILITY. The persons who shall be eligible to receive grants of Qualified Stock Options under this Plan shall be the key employees of the Company or any of its subsidiaries, and those directors of the Company who are also key employees, but who are not members of the Committee. The persons who shall be eligible to receive grants of Non-Qualified Stock Options under this Plan shall be the key employees of the Company or any of its subsidiaries, any director of the Company, whether or not he or she is an employee of the Company (provided that he or she is not a member of the Committee), and consultants or advisers with important business relationships with the Company (provided that substantial bona fide services shall have been rendered to the Company by such advisers or consultants and such services shall not have been in connection with the offer and sale of securities in a capital raising transaction). The Committee shall have the right in its sole discretion to determine who is a "key employee" of the Company. The selection of Optionees and the criteria used to select Optionees shall also be within the sole discretion of the Committee. An Optionee who is granted in writing a leave of absence by the Board shall be deemed to have remained in the employ of the Company during such leave of absence for purposes of this Plan. Notwithstanding the foregoing, members of the Committee shall be ineligible for selection as participants in the Plan during their service on the Committee. More than one Option may be granted to any one Optionee. However, pursuant to Section 422A(d) of the Code, for Qualified Stock Options, no more than $100,000 of market value Common Stock (determined at time of granting the Option) plus a carryover amount, if applicable, can be granted to an Optionee in any one calendar year. Any portion of an Option that exceeds such amount shall be treated and deemed a Non-Qualified Stock Option. 6 . TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all purposes, be the date when the Committee determines to grant an Option. Notice of the determination shall be given to each Optionee to whom an Option is granted within a reasonable time after the date of such grant. 7. OPTION AGREEMENT. Each Option granted under this Plan shall be evidenced by a written stock Option agreement ("Option Agreement") executed by the Company and the Optionee. Each Option Agreement shall, among other things, (a) specify the number of shares of Common Stock granted to an Optionee and the purchase price per share, (b) designate whether the Options will be for Class A - - Voting or -2- Class B - Non-voting Common Stock, (c) contain each of the provisions and agreements of this Plan specifically required to be contained therein, (d) indicate whether such Option is to be a Qualified Stock Option or a Non-Qualified Stock Option, and if a Qualified Stock Option shall contain terms and conditions permitting such Option to qualify for treatment as an incentive stock Option under Section 422A of the Code, (e) contain the agreement of the Optionee to resell to the Company any Common Stock issued pursuant to the exercise of Options granted under this Plan pursuant to the Company's repurchase rights and/or rights of first refusal as provided in Sections 16 and 17 below, (f) specify the Vesting Schedule and Vesting Start Date (as described in Section 9 below), and (g) contain such other terms and conditions as the Committee deems desirable and which are not inconsistent with this Plan. The granting of an Option or the execution of an Option Agreement shall not require the Optionee to exercise such Option. 8. OPTION PRICE. Except as provided in Section 18 or Section 19, the purchase price per share (the "Option Price") of Common Stock underlying each Option shall be determined by the Committee, but shall not be less than 85% of the fair market value of such shares on the date the Option is granted. With respect to any Qualified Stock Option, the Option Price shall not be less than 100% of the fair market value of such shares on the date the Qualified Stock Option is granted; provided, however, that if the Optionee is a 10-percent shareholder of the Company (as defined in Section 422A(b) (6) of the Code) at the time such Qualified Stock Option is granted, the Option Price shall not be less than 110% of the fair market value. The fair market value shall be determined in good faith by the Committee or the Board in its sole discretion. 9. VESTING REQUIREMENTS. There shall be a vesting schedule ("Vesting Schedule") for all Options granted under this Plan. The Committee shall determine, in its sole discretion, the Vesting Schedule that shall apply to each Option granted under this Plan. The Vesting Schedule shall be based on a specified time period, certain performance or milestone goals, or such other criteria or factors selected by the Committee in its sole discretion. The Vesting Schedules may differ among the Options granted under this Plan; in other words, the Committee shall have the right, in its sole discretion, to designate different Vesting Schedules for different Optionees, and different Vesting Schedules for various Options granted to the same Optionee. In addition, the Committee has the right, in its sole discretion, to specify Vesting Schedules for certain Optionees consistent with or to accommodate vesting commitments that have been previously made and authorized by the Board subject to the adOption of this Plan, as embodied in the corporate minutes and records of the Company. The Vesting Schedule applied to each Option shall be set forth in the Option Agreement. Each Option Agreement shall specify a Vesting Start Date, which shall be determined by the Committee in its sole discretion. The Vesting Start Date is the beginning date from which the Vesting Schedule shall be calculated. The Vesting Schedule is basically a time period or other criteria during which Options and shares of Common Stock issued to Optionees shall vest. An Optionee shall have the right to exercise all or any portion of an Option at any time after it is granted. However, the Vesting Schedule shall determine the manner in which the unexercised portion of an Option and/or shares of Common Stock issued to an Optionee upon exercise of an Option shall vest. -3- The basic purpose of the Vesting Schedule is to determine the rights of an Optionee and the Company as to Options and/or issued shares of Common Stock upon an Optionee's termination or cessation of work for the Company. Specifically, upon an Optionee's termination or cessation of work for the Company as described in Section 12 below and in the Option Agreement, the Vesting Schedule shall apply as follows: any unexercised and unvested Options shall lapse and be forfeited by the Optionee upon the termination date. As to any vested Options, an Optionee shall have the right to exercise the remaining unexercised portion of a vested Option during the applicable Window Period (defined in Section 12 below). With respect to any issued and vested shares held by an Optionee at the termination date, that Optionee cannot sell or otherwise transfer the vested shares without first giving the Company the opportunity to exercise its Right of First Refusal under Section 17 of this Plan. In addition, as to any issued but unvested shares held by an Optionee at the termination date, the Company shall have the right to repurchase the unvested shares from the Optionee pursuant to Section 16 below. For example, assume that an Option for 1,000 shares is granted on October 1, 1991. The Committee determines that the Vesting Schedule for this Option shall be as follows: the Option or shares will fully vest in four (4) years from the Vesting Start Date. The Vesting Start Date is January 1, 1990, the date the Optionee was hired by the Company. According to this Vesting Schedule, no portion of an Option or shares issued under an Option shall vest before the one (1) year anniversary of the Vesting Start Date ("Holding Period). Upon the one (1) year anniversary of the Vesting Start Date (or expiration of the Holding Period), twenty-five percent (25%) of the Option or shares shall be deemed vested. Thereafter, the Option or shares shall vest at twenty-five percent (25%) for every subsequent year. In addition, after the first year, a pro rata portion of the annual twenty-five percent (25%) vesting shall be deemed to vest each month. Under the above example, on October 1, 1991, the date the Option was granted, the Optionee may exercise all or any portion of the Option since an Optionee has the right to purchase any shares under an Option at any time. An Optionee's ability to exercise an Option is not conditioned on whether the Option is vested or nonvested. Assume that Optionee purchases two hundred fifty (250) shares under the Option in 1991, and is terminated by the Company on December 31, 1992. On December 31, 1992, only fifty percent (50%) of the Option or shares shall be deemed vested, since twenty-five percent (25%) vested as of January 1, 1991 (the expiration of the Holding Period), and twenty-five percent (25%) vested for the year 1991. As a result, upon such termination, the two hundred fifty (250) shares previously purchased and issued to Optionee are vested shares, subject to the Company's Right of First Refusal in the event Optionee proposes to transfer or sell such shares. Since fifty percent (50%) or five hundred (500) shares of the Option are deemed vested as of the termination date, and two hundred fifty (250) shares have already been issued, Optionee has the right during the sixty (60) day Window Period specified in Section 12(b) of this Plan to purchase the remaining two hundred fifty (250) vested shares. If Optionee does not purchase the vested portion of the Option (250 shares) within the Window Period, then the Option shall automatically terminate upon the expiration of the Window Period. Using the same example above, assume that Optionee had purchased seven hundred fifty (750) shares under the Option before he/she was terminated. Since only fifty percent (50%) or five hundred (500) shares will be deemed vested as of the termination date, five hundred (500) of the issued shares shall be vested and two hundred fifty (250) of the issued shares shall be non-vested. In such event, the Company has the right to repurchase the two hundred fifty (250) unvested shares at the Option Price pursuant to Section 16 of this Plan, and the other five hundred (500) vested shares may be transferred by the Optionee subject to the Company's Right of First Refusal under Section 17 of this Plan. Since there is no remaining unexercised portion of the Option that is deemed vested as of the termination date, Optionee may not purchase any additional shares during a Window Period or after termination. -4- The above examples are only for informational purposes. The application of each Option will depend upon the specific provisions of the Vesting Schedule for each Option. 10. EXERCISE OF OPTIONS. Subject to all other provisions of this Plan, each Option shall be exercisable for the full number of shares of Common Stock specified in the grant and in the Option Agreement, or any part thereof, at any time after the Option is granted. However, an Optionee shall not exercise any Option, or part thereof, more frequently than once per calendar quarter; the preceding limitation shall not apply if the Common Stock becomes publicly traded upon an initial public offering of its securities pursuant to a registration statement filed by the Company under the Securities Act of 1933, as amended. No Option can be exercised after its termination date or after it is terminated pursuant to Section 12. Each Option shall terminate and expire, and shall no longer be subject to exercise, as the Committee may determine in granting such Option, but in no event later than ten (10) calendar years from the date the Option is granted. An Option can be exercised only by the Optionee to whom it is granted during his/her lifetime. After the death of an Optionee, the vested portion of the Option may be exercised, prior to its termination as provided in Section 12 below, only by his/her legal representative, legatee or heir who acquired the right to exercise the Option. 11. METHOD OF EXERCISING OPTIONS. An Option shall be exercised by the Optionee by delivering to the Company before the Option expires or terminates a written notice specifying the number of shares to be purchased. The Optionee's written notice must be accompanied by (a) payment of the full Option Price for the number of shares to be purchased in cash, by check or such other lawful consideration (including promissory notes or the assignment and transfer by the Optionee to the Company of outstanding shares of Common Stock previously held by the Optionee in a manner intended to comply with the provisions of Rule 16b-3 under the Securities and Exchange Act of 1934) as the Committee may approve in its sole discretion, (b) upon the Company's request, a letter or written statement from the Optionee in form and substance acceptable to the Company setting forth the investment intent and other representations of the Optionee, and (c) upon the Company's request, payment in cash or check of any taxes that the Company is required to withhold or collect as further discussed in Section 21. 12. TERMINATION OF OPTIONS. Any portion of an Option that has vested pursuant to the terms of an Option Agreement shall immediately terminate upon the first to occur of any of the following events: (a) the expiration or termination date specified in the Option Agreement; (b) the expiration of sixty (60) days from the date of an Optionee's termination or resignation of employment or voluntary leaving the employ of the Company ("Window Period") (other than by reason of death or disability), except if the Optionee is terminated for "Cause', as defined in Section 16 of this Plan, then the Option terminates upon the termination date; (c) the expiration of six (6) months from the date of an Optionee's termination or other cessation of employment ("Window Period") due to that Optionee having become disabled within the meaning of Section 22(e)(3) of the Code; (d) the expiration of twelve (12) months from the date of an Optionee's death ("Window Period") if his/her death occurs while being employed with the Company; (e) for Options granted to consultants or other non-employees who become members of the Board, if the Optionee is no longer a member of the Board; -5- (f) for Options granted to consultants or third parties who perform substantial bona fide services to the Company, if the Optionee has not provided services to the Company as an independent contractor, consultant or advisor for a period of time determined by the Committee or the Board in their sole discretion, at the time of granting the Option; and/or (g) the termination of an Option pursuant to Section 18. In addition to the above events, all Qualified Stock Options shall terminate no later than ten (10) years from the date the Option is granted, or no later than five (5) years from the date the Option is granted for Options granted to Optionees who own more than ten percent (10%) of the total combined voting power of all classes of the Company's stock at the time the Option is granted (as defined in Section 422A(b)(6) of the Code). Upon the termination of an Optionee for any reason or upon the happening of any of the events in subparagraphs (e), (f) or (g) above, all unexercised and unvested portions of an Option shall automatically lapse and shall not be entitled to be exercised at any further time. All unexercised and vested Options, or parts thereof, that are not exercised during a Window Period or prior to termination as provided above shall be forfeited by an Optionee and shall not be exercised after the Window Period or termination date, as the case may be. Upon such termination, all issued but unvested shares of Common Stock owned by an Optionee shall be subject to being repurchased by the Company at the Option Price pursuant to Section 16 of this Plan. In addition, upon such termination, all issued and vested shares of Common Stock owned by an Optionee shall only be subject to the Company's Right of First Refusal set forth in Section 17 of this Plan. 13. ADDITIONAL REQUIREMENTS FOR QUALIFIED STOCK OPTIONS. Subject to the other provisions of this Plan, all Optionees who are granted Qualified Stock Options must satisfy all the following requirements in order to receive the tax benefits of an incentive stock Option under the Code: (a) the Optionee must be continuously employed by the Company from the time the Option is granted until at least three (3) months before it is exercised (twelve (12) months if the Optionee is disabled within the meaning of Section 22(e)(3) of the Code); (b) the Optionee must hold the Common Stock until at least two (2) years after the Option is granted and one (1) year after it is exercised; and (c) the Optionee cannot exercise a current Qualified Stock Option while there is outstanding another Qualified Stock Option that was previously granted to the Optionee that has not been fully exercised. A Qualified Stock Option issued to an Optionee who fails to meet all of the three (3) requirements above is subject to being treated and taxed as a Non-Qualified Stock Option. 14. ISSUANCE OF COMMON STOCK. Notwithstanding anything to the contrary contained herein, the Company shall not be obligated to grant any Option under this Plan or to sell or issue any Common Stock pursuant to any Option or Option Agreement, unless the grant or sale is effectively registered or qualified, or exempt from registration or qualification under all applicable state and/or federal laws or rulings and regulations of any governmental regulatory body. Prior to the execution of an Option Agreement and/or issuance of the Common Stock, the Company shall have the right to require an Optionee to deliver to the Company written investment representations or other warranties deemed necessary or advisable by the Company to comply with the requirements of any exemption from such registration or other qualification of such shares. -6- The required representations and warranties may include without limitation representations and agreements that each Optionee (a) is purchasing such shares for investment and for his/her own account, and not with any present intention of selling or otherwise disposing of such shares; (b) has a pre-existing personal or business relationship with the Company or its officers or directors, or has sufficient business or financial experience to evaluate the risks involved in purchasing the Common Stock; (c) agrees to have a legend placed upon the face or reverse of any certificates evidencing such shares that restrict the transfer of such shares; and/or (d) agrees to such other matters as the Company requires or deems advisable. 15. NONTRANSFERABILITY. Unless otherwise provided in the Option Agreement, an Optionee shall not sell, assign, encumber, transfer or permit a levy or attachment on all or any part of his/her Qualified Stock Options or Non-Qualified Stock Options and/or any shares of Common Stock purchased thereunder to any person or entity at any time. The Option Agreement may, in some instances, provide that certain Options granted hereunder and/or shares of Common Stock previously issued to Optionee may be transferable by will or by the laws of descent and distribution upon the death of an Optionee/shareholder, and/or any Non-Qualified Stock Options may be transferable or assignable subject to the Company's Right of First Refusal to purchase the Common Stock prior to such transfer or assignment as provided in Section 17 below. The Option Agreement may also provide that an Optionee or shareholder holding Non-Qualified Stock Options or shares of Common Stock purchased under Non-Qualified Stock Options may have the right, with prior written notice to the Company, to transfer or assign such Options or shares of Common Stock to his/her spouse, children or a living trust for the benefit of their family, provided the Optionee/shareholder or his or her spouse is the sole trustee of the trust and the sole beneficiaries of the trust shall be the Optionee/shareholder, his or her spouse and/or their children, and further provided that any such transferee shall agree in writing to be bound by all the provisions of this Plan and the Option Agreement as a condition precedent to the transfer and receipt of the shares of Common Stock. In addition, in the event the Company's Common Stock is publicly traded, there will be additional restrictions imposed on the sale or transfer of Common Stock pursuant to Rule 144 of the Securities and Exchange Commission and other applicable laws, rules or regulations. 16. REPURCHASE OF STOCK. Upon the termination of an Optionee as an employee, independent contractor or consultant of the Company for "Cause" (as defined below), the Company and its assignees shall have the right, in their sole discretion, to repurchase ("Repurchase Right") some or all of any vested and/or unvested shares of Common Stock previously issued to an Optionee upon exercise of any Option ("Repurchase Shares"). Pursuant to Section 12 of this Plan, all unexercised portions of an Option, vested or non-vested, shall automatically lapse upon termination of an Optionee for "Cause". The Company shall exercise its Repurchase Right within sixty (60) days after the date the Optionee is terminated for "Cause" by paying to the Optionee in cash an amount per share equal to the Option Price. In addition to the above the Repurchase Right upon termination for "Cause", the Company shall also have a repurchase right as to all or any portion of issued shares that are unvested as of the termination date. In other words, if an Optionee is terminated or ceases to work for the Company for any reason, and has previously purchased shares of Common Stock that have not vested as of the termination date, then the Company shall have the right to repurchase ("Repurchase Right") some or all of the issued and unvested shares of Common Stock ("Unvested Shares") at the Option Price. The Company shall exercise its Repurchase Right for the Unvested Shares within sixty (60) days after the termination date by paying to the Optionee in cash an amount per share equal to the Option Price. -7- Upon termination for "Cause", or other termination whereby Optionee has Unvested Shares, the Optionee shall surrender and deliver to the Company the stock certificates for the Repurchase Shares and the Unvested Shares. Any new, substituted or additional securities or other property distributed with respect to the Repurchase Shares or Unvested Shares as a result of any stock split, recapitalization or adjustment under Section 18 below shall also be held by the Company until it decides whether to exercise its Repurchase Right. Any regular cash dividends on the Repurchase Shares or Unvested Shares shall be paid directly to the Optionee and shall not be held by the Company. The Repurchase Shares or Unvested Shares and any other assets or securities associated therewith shall be released to and retained by the Company and its assignees upon exercise of the Repurchase Right, or shall be released to the Optionee upon expiration of the sixty (60) day period if the Company has not exercised its Repurchase Right as to all of the Repurchase Shares or Unvested Shares. The Company shall exercise its Repurchase Right by delivering to the Optionee a written notice and paying the Option Price for the Repurchase Shares or Unvested Shares within the sixty (60) day period. In the event the Company does not exercise its Repurchase Right as provided herein, or exercises its Repurchase Right as to some but not all of the Repurchase Shares or Unvested Shares, the remaining Repurchase Shares and/or Unvested Shares shall still be subject to the Company's Right of First Refusal pursuant to Section 17 of this Plan. The term "Cause" shall mean (a) willful misconduct, gross negligence, theft, fraud or embezzlement; (b) alcoholism or illegal drug addiction, that the Board or Committee has reasonably determined causes the Optionee to be unable to perform his/her duties and responsibilities for the Company; and/or (c) the unauthorized use, disclosure or misappropriation, or attempt thereof, of any confidential information or trade secrets of the Company or any subsidiary thereof. 17. RIGHT OF FIRST REFUSAL. The Company shall have a right of first refusal over all Options and all Common Stock issued upon the exercise of Options ("Right of First Refusal"). If an Optionee desires at any time to sell or otherwise transfer all or any part of vested Options, vested shares of Common Stock previously issued to Optionee, and/or Unvested Shares that the Company does not elect to repurchase under Section 16, as the case may be, then prior to any such sale or transfer, the Optionee shall give the Company the right to purchase the vested Options, the vested shares of Common Stock and/or the Unvested Shares that have not been repurchased pursuant to the same terms and conditions specified in a bona fide written offer from a third party or entity that wishes to purchase the same from Optionee. The Company shall exercise its Right of First Refusal pursuant to the terms contained in the Option Agreement. The Company's Right of First Refusal shall terminate upon the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Securities Act of 1933, as amended, in connection with an initial underwritten offering of its securities to the general public. 18. RECAPITALIZATION, REORGANIZATION, MERGER OR CONSOLIDATION. Subject to any required shareholder action or approval, if the outstanding shares of Common Stock of the Company are increased, decreased or exchanged for different securities through a reorganization, merger, consolidation, recapitalization, reclassification, stock split, stock dividend or like capital adjustment, a proportionate adjustment shall be made (a) in the aggregate number of shares of Common Stock which may be purchased pursuant to the exercise of Options as provided in Section 4 hereof, and (b) in the number, price, and kind of shares subject to any outstanding Option granted under this Plan. Subject to any required shareholder action or approval, if the Company is the surviving corporation in any merger or consolidation, each outstanding Option shall survive and is exercisable pursuant to the terms of this Plan. -8- Upon the dissolution or liquidation of the Company or upon any reorganization, merger or consolidation in which the Company does not survive, this Plan and each outstanding Option shall terminate subject to the following provisions. In such event: (a) each Optionee who is not tendered an Option by the surviving corporation in accordance with all of the terms of provision (b) immediately below or who does not accept any such substituted Option which is so tendered, shall have the right until 30 days before the effective date of such dissolution, liquidation, reorganization, merger or consolidation in which the Company is not the surviving corporation, to exercise, in whole or in part, any unexpired and vested Option or Options issued to him/her which the Optionee is then capable of exercising pursuant to the provisions of the Option and of Sections 10 and 11 above; provided, however, that should the Board so elect in its sole and absolute discretion all Optionees may be given upon at least 30 days notice (x) the Option to exercise, in whole or in part, any unexpired Option, without regard to the Vesting Schedule requirements if the Board accelerates the vesting period, or (y) the Option to surrender such Option or Options to the Company for a price (which may be payable, in the sole discretion of the Committee, in cash or in securities of the Company or in a combination of both, and at times or in installments determined by the Company in its sole discretion), equal to the difference between the aggregate Option Price of the Option or Options without regard to the installment provisions and the aggregate fair market value (as determined in the manner provided in Section 8 above) of the shares subject to such Option or Options on the date one day before the effective date of such dissolution, liquidation, reorganization, merger or consolidation; or (b) upon at least 30 days notice in its sole and absolute discretion, the surviving corporation may, but shall not be so obligated, tender to any Optionee an Option or Options to purchase shares of the surviving corporation, and such new Option or Options shall contain such terms and provisions as shall be required to substantially preserve the rights and benefits of any Option then outstanding under the Plan. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. There shall be no pre-emptive rights regarding the Common Stock and/or any other privileges granting to Optionees/shareholders the right to maintain their percentage ownership in the Company upon the issuance of additional shares of Common Stock or any other change in capital structure. In other words, except as expressly provided above in this Section 18, an Optionee shall have no rights by reason of any subdivision or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class, and the number or price of shares of Common Stock subject to any Option shall not be affected by, and no adjustment shall be made by reason of, any dissolution, liquidation, reorganization, merger or consolidation, or any issuance by the Company of shares of stock of any class, or rights to purchase or subscribe for stock of any class, or securities convertible into shares of stock of any class. The grant of an Option under this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications or changes in its capital or business structures or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets. 19. SUBSTITUTE OPTIONS. If the Company at any time should succeed to the business of another corporation through a merger or consolidation, or through the acquisition or stock or assets of such corporation, Options may be granted under this Plan to Option holders of such corporation or its subsidiaries, in substitution for Options to purchase stock of such corporation held by them at the time of succession. The Board, in its sole and absolute discretion, shall determine the extent to which such substitute Options shall be granted (if at all), the person or persons to receive such substitute Options (who need not be all Option holders of such corporation), the number of Options to be received by each such person, the Option Price of such Option (which may be determined without regard to Section 8 hereof) and the terms and conditions of such substitute Options. -9- Provided, however, that the Option Price of each such substituted Option which is a Qualified Stock Option shall be an amount such that, in the sole and absolute judgment of the Board (and in compliance with Section 425(a) of the Code), the economic benefit provided by such Option is not greater than the economic benefit represented by the Option in the acquired corporation as of the date of the Company's acquisition of such corporation. Notwithstanding anything to the contrary herein, no Option shall be granted, nor any action taken, permitted or omitted, which would cause this Plan, or any Options granted hereunder as to which Rule 16b-3 under the Securities Exchange Act of 1934, as amended, may apply, not to comply with such Rule. 20. RIGHTS AS A SHAREHOLDER. An Optionee shall have no rights as a shareholder of the Company with respect to any shares covered by an Option until the Option Price is fully paid for the shares that are exercised under an Option. Within thirty (30) days of receipt of the Option Price, the Company shall issue and deliver to the Optionee the stock certificate for the shares purchased. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date the Option Price is received by the Company, except as expressly provided in Section 18. 21. WITHHOLDING OF TAXES. The Company or any applicable subsidiary or parent may deduct and withhold from the wages, salary, bonus or other income paid by the Company or such subsidiary or parent to the Optionee the requisite tax upon the amount of taxable income, if any, recognized by the Optionee due to the exercise of any part of an Option or the permitted sale of Common Stock issued to an Optionee under this Plan, all as may be required from time to time under any federal or state tax laws and regulations. This withholding of tax shall be made from the Company's (or such subsidiary's or parent's) concurrent or next payment of wages, salary, bonus or other income to the Optionee or by payment to the Company (or such subsidiary or parent) by the Optionee of the required withholding tax, as determined by the Committee. 22. EFFECTIVENESS AND TERMINATION OF PLAN. This Plan shall be effective on the date set forth on Page 1 above ("Effective Date") since that is the date when this Plan was adopted by the Board and approved by the shareholders of the Company. No Option shall be granted under this Plan on or after that date which is ten (10) years from the Effective Date. This Plan shall terminate when all shares of Common Stock which may be issued hereunder have been so issued or ten (10) years from the Effective Date, whichever is earlier. The Board, however, may in its sole discretion terminate this Plan at any time. No such termination, other than as provided for in Section 18, shall in any way affect any outstanding Option. 23. AMENDMENT OF PLAN. The Board shall have the right to amend this Plan in its sole discretion, subject to approval of the shareholders. With the consent of each Optionee affected, the Board may also make such changes in the terms and conditions of granted Options as it deems advisable. Such amendments and changes shall include without limitation acceleration of the time at which an Option may be vested. The Board, however, may not, without the approval of the shareholders (a) increase the maximum number of shares subject to Qualified Stock Options, except pursuant to Section 18, (b) decrease the Option Price requirement contained in Section 8 (except as contemplated by Section 19), (c) change the designation of the class of employees eligible to receive Qualified Stock Options, (d) modify the limits set forth in Section 5 regarding the value of Common Stock for which any Optionee may be granted Qualified Stock Options, unless the provisions of Section 422A(d) of the Code are likewise modified, or (e) in any manner materially increase the benefits accruing to participants under this Plan, or otherwise modify this Plan such that it fails to meet the requirements of Rule 16b-3 of the Securities and Exchange Commission for the exemption of the acquisition, cancellation, expiration or surrender of Options from the operation of Section 16(b) of the Securities Exchange Act of 1934. -10- 24. NOT AN EMPLOYMENT AGREEMENT. Nothing contained in this Plan or in any Option Agreement shall confer on any Optionee any guaranty, right or vested interest to be continued in the employ of the Company or one of its subsidiaries or limit the ability of the Company or any of its subsidiaries to terminate, with or without cause, in its sole discretion, the employment of any Optionee. 25. GOVERNING LAW. This Plan and any Option granted pursuant to this Plan shall be construed and enforced under the laws of the State of California. 26. ARBITRATION. All Optionees, shareholders and the Company shall attempt to resolve any dispute regarding this Plan in an amicable fashion. Any unresolved disputes regarding this Plan or the administration thereof shall be submitted to binding arbitration in San Diego, California, to be conducted in accordance with the rules of the American Arbitration Association ("AAA"). Any dispute shall be submitted to an arbitration panel consisting of three (3) members, one of whom shall be selected by the Company, one of whom shall be selected by the Optionee/shareholder, and one of whom shall be selected by the other two arbitrators. All arbitrators must have at least five (5) years experience in the computer electronic industry and/or the legal aspects pertaining to such industry. The parties shall be entitled to all rights and privileges to conduct discovery (i.e. interrogatories, production of documents, depositions, exchange of witnesses, and subpoenas), the right to have oral testimony at the arbitration hearing, and other rights as provided in the California Code of Civil Procedure. After discovery is concluded, the arbitrators shall hold a hearing in accordance with the AAA rules. The arbitration shall be governed under California law. The decision of a majority of the arbitrators shall control. The order or award of the arbitrators shall be final and shall be enforced in any court of competent jurisdiction. The prevailing party in the arbitration shall be entitled to recover from the other party its attorney's fees and costs incurred. 27. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Common Stock pursuant to Options may be used for any corporate purpose. The Board shall determine, in its sole discretion, how to use or apply such funds or proceeds. 28. ENTIRE PLAN. This is the entire Stock Option Plan of the Company and supersedes all prior or contemporaneous discussions, representations or agreements, whether oral or written. This Plan cannot be modified or amended except by the Board and/or the shareholders as provided above. 29. VALIDITY. If any provision of this Plan is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall remain in full force and effect, and the invalid provisions shall be revised to reflect the intent of the Company regarding the subject matter thereof. -11- EX-5.01 4 EXHIBIT 5.01 EXHIBIT 5.01 February 20, 1996 Integrated Systems, Inc. 3260 Jay Street Santa Clara, California 95054-3309 Gentlemen/Ladies: At your request, we have examined the Registration Statement on Form S-8 (the "Registration Statement") to be filed by you with the Securities and Exchange Commission on or about February 20, 1996 in connection with the registration under the Securities Act of 1933, as amended, of an aggregate of 131,862 shares of your Common Stock (the "Common Stock") to be sold by you pursuant to stock options granted under the Doctor Design, Inc. 1991 Stock Option Plan and assumed by you (the "Options"). The Options were assumed pursuant to the terms of an Agreement and Plan of Reorganization dated as of December 14, 1995 and amended January 26, 1996 (the "Reorganization Agreement") by and among you, ISI Purchasing Corporation, a Delaware corporation and your wholly owned subsidiary, and Doctor Design, Inc., a California corporation, and the related Agreement of Merger dated January 26, 1996, which together with the Reorganization Agreement effectuated a merger of ISI Purchasing Corporation with and into Doctor Design, Inc. As your counsel, we have examined the proceedings taken by you in connection with the assumption of the Options to purchase your Common Stock. It is our opinion that the number of shares of Common Stock that may be issued and sold by you pursuant to the Options as indicated above, when issued and sold in the manner referred to in the Prospectus associated with the Registration Statement, the Doctor Design, Inc. 1991 Stock Option Plan and the Options, will be legally issued, fully paid and non-assessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us, if any, in the Registration Statement and any amendments thereto. Very truly yours, /s/ Fenwick and West ----------------------------- Fenwick and West EX-23.01 5 EXHIBIT 23.01 EXHIBIT 23.01 Included in Exhibit 5.01 EX-23.02 6 EXHIBIT 23.02 EXHIBIT 23.02 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in this registration statement on Form S-8 of Integrated Systems, Inc., of our reports dated March 27, 1995, except for Note 7, as to which the date is March 31, 1995 on our audits of the financial statements and financial statement schedule of Integrated Systems, Inc. as of February 28, 1995 and 1994 and for the three years in the period ended February 28, 1995, which reports are included in Integrated Systems, Inc., 1995 Annual Report on Form 10-K. We also consent to the reference to our firm under the caption "Experts." /s/ Coopers & Lybrand L.L.P. - ---------------------------- Coopers & Lybrand L.L.P. San Jose, California February 20, 1996 EX-24.01 7 EXHIBIT 24.01 EXHIBIT 24.01 See Page 4 of S-8 Registration Statement -----END PRIVACY-ENHANCED MESSAGE-----