Document:

<PAGE>   1
                                                                    EXHIBIT 10.5

================================================================================

                          AGREEMENT AND PLAN OF MERGER
                                      among
                     SATURN ELECTRONICS & ENGINEERING, INC.
                              SSI ACQUISITION CORP.
                                       and
                             SMARTFLEX SYSTEMS, INC.
                            Dated as of July 6, 1999

================================================================================
<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                                              <C>
ARTICLE I.........................................................................................................2
         SECTION 1.01.  The Offer.................................................................................2
         SECTION 1.02.  Company Action............................................................................3

ARTICLE II........................................................................................................5
         SECTION 2.01.  The Merger................................................................................5
         SECTION 2.02.  Effective Time; Closing...................................................................5
         SECTION 2.03.  Effect of the Merger......................................................................5
         SECTION 2.04.  Articles of Incorporation; Bylaws.........................................................5
         SECTION 2.05.  Directors and Officers....................................................................6
         SECTION 2.06.  Conversion of Securities..................................................................6
         SECTION 2.07.  Employee and Director Stock Options.......................................................6
         SECTION 2.08.  Surrender of Shares; Stock Transfer Books.................................................7

ARTICLE III.......................................................................................................8
         SECTION 3.01.  Organization and Qualification; Subsidiaries..............................................8
         SECTION 3.02.  Articles of Incorporation and Bylaws......................................................9
         SECTION 3.03.  Capitalization............................................................................9
         SECTION 3.04.  Authority Relative to this Agreement.....................................................10
         SECTION 3.05.  No Conflict; Required Filings and Consents...............................................10
         SECTION 3.06.  Compliance...............................................................................11
         SECTION 3.07.  SEC Filings; Financial Statements........................................................11
         SECTION 3.08.  Absence of Certain Changes or Events.....................................................12
         SECTION 3.09.  Absence of Litigation....................................................................12
         SECTION 3.10.  Employee Benefit Plans...................................................................13
         SECTION 3.11.  Labor Matters............................................................................15
         SECTION 3.12.  Offer Documents; Schedule 14D-9; Proxy Statement.........................................15
         SECTION 3.13.  Tangible Property; Real Property and Leases..............................................16
         SECTION 3.14.  Trademarks, Patents and Copyrights.......................................................17
         SECTION 3.15.  Taxes....................................................................................17
         SECTION 3.16.  Environmental Matters....................................................................18
         SECTION 3.17.  Material Contracts.......................................................................18
         SECTION 3.18.  Brokers and Counsel......................................................................19
         SECTION 3.19.  Year 2000 Compliance.....................................................................19

ARTICLE IV.......................................................................................................20
         SECTION 4.01.  Corporate Organization...................................................................20
         SECTION 4.02.  Authority Relative to This Agreement.....................................................20
         SECTION 4.03.  No Conflict; Required Filings and Consents...............................................20
         SECTION 4.04.  Financing................................................................................21
         SECTION 4.05.  Offer Documents; Proxy Statement.........................................................21
         SECTION 4.06.  Brokers..................................................................................21
</TABLE>

<PAGE>   3

<TABLE>
<S>                                                                                                             <C>
ARTICLE V........................................................................................................22
         SECTION 5.01.  Conduct of Business by the Company Pending the Merger....................................22

ARTICLE VI.......................................................................................................24
         SECTION 6.01.  Special Shareholders' Meeting............................................................24
         SECTION 6.02.  Proxy Statement..........................................................................24
         SECTION 6.03.  Access to Information; Confidentiality...................................................24
         SECTION 6.04.  No Solicitation of Transactions..........................................................25
         SECTION 6.05.  Employee Benefits Matters; Employment Agreements.........................................25
         SECTION 6.06.  Directors' and Officers' Indemnification and Insurance...................................26
         SECTION 6.07.  Notification of Certain Matters..........................................................27
         SECTION 6.08.  Further Action; Reasonable Best Efforts..................................................27
         SECTION 6.09.  Public Announcements.....................................................................28
         SECTION 6.10.  Confidentiality Agreement................................................................28
         SECTION 6.11   Financial Statements.....................................................................28
         SECTION 6.12   SEC Reports..............................................................................28
         SECTION 6.13   Customer Calls...........................................................................28

ARTICLE VII......................................................................................................29
         SECTION 7.01.  Conditions to the Merger.................................................................29

ARTICLE VIII.....................................................................................................29
         SECTION 8.01.  Termination..............................................................................29
         SECTION 8.02.  Effect of Termination....................................................................31
         SECTION 8.03.  Fees and Expenses........................................................................31
         SECTION 8.04.  Amendment................................................................................31
         SECTION 8.05.  Waiver...................................................................................32

ARTICLE IX.......................................................................................................32
         SECTION 9.01.  Non-Survival of Representations, Warranties and Agreements...............................32
         SECTION 9.02.  Notices..................................................................................32
         SECTION 9.03.  Certain Definitions......................................................................33
         SECTION 9.04.  Severability.............................................................................34
         SECTION 9.05.  Entire Agreement, Assignment.............................................................34
         SECTION 9.06.  Parties in Interest......................................................................34
         SECTION 9.07.  Specific Performance.....................................................................34
         SECTION 9.08.  Governing Law............................................................................35
         SECTION 9.09.  Headings.................................................................................35
         SECTION 9.10.  Counterparts; Facsimile..................................................................35
</TABLE>

ANNEX A  Conditions to the Offer
SCHEDULE I
EXHIBIT A

                                       ii
<PAGE>   4

                            Glossary of Defined Terms

<TABLE>
<CAPTION>
                                                                                     Location of
     Defined Term                                                                     Definition
     ------------                                                                     ----------

<S>                                                                                   <C>
affiliate.......................................................................      ss. 9.03(a)
Affiliate Contract..............................................................      ss. 3.17
Agreement.......................................................................        Preamble
Attorney Engagement.............................................................      ss. 3.18
beneficial owner................................................................      ss. 9.03(b)
Blue Sky Laws...................................................................      ss. 3.05(b)
Board    .......................................................................        Recitals
Broker Agreement................................................................      ss. 3.18
business day....................................................................      ss. 9.03(c)
Certificate of Merger...........................................................      ss. 2.02
Certificates....................................................................      ss. 2.08(b)
Code     .......................................................................      ss. 3.10(a)
Company  .......................................................................        Preamble
Competing Proposal..............................................................      ss. 8.03(a)(i)
Competing Transaction...........................................................      ss. 6.04
Confidentiality Agreement.......................................................      ss. 6.03(b)
control  .......................................................................      ss. 9.03(d)
control by......................................................................      ss. 9.03(d)
Delaware Law....................................................................        Recitals
Disclosure Schedule.............................................................      ss. 3.01
Effective Time..................................................................      ss. 2.02
Environmental Law...............................................................      ss. 3.16(a)
ERISA    .......................................................................      ss. 3.10(a)
Exchange Act....................................................................      ss. 1.02(b)
Fee      .......................................................................      ss. 8.03(a)
GAAP     .......................................................................      ss. 3.07(b)
Hazardous Substances............................................................      ss. 3.16(a)
HSR Act  .......................................................................      ss. 3.05(b)
Indemnified Parties.............................................................      ss. 6.06(b)
IRS      .......................................................................      ss. 3.10(a)
Material Adverse Effect.........................................................      ss. 3.01(a)
Material Contracts..............................................................      ss. 3.17
Merger   .......................................................................        Recitals
Merger Consideration............................................................      ss. 2.06(a)
Minimum Condition...............................................................      ss. 1.01(a)
1998 Balance Sheet..............................................................      ss. 3.07(c)
Offer    .......................................................................        Recitals
Offer Documents.................................................................      ss. 1.01(b)
Offer to Purchase...............................................................      ss. 1.01(b)
Parent   .......................................................................        Preamble
Paying Agent....................................................................      ss. 2.08(a)
Per Share Amount................................................................        Recitals
</TABLE>
<PAGE>   5

<TABLE>
<S>                                                                                  <C>
person   .......................................................................     ss. 9.03(e)
Plans    .......................................................................     ss. 3.10(a)
Proprietary Rights..............................................................     ss. 3.14
Proxy Statement.................................................................     ss. 3.12
Purchaser.......................................................................       Preamble
Schedule 14D-1..................................................................     ss. 1.01(b)
Schedule 14D-9..................................................................     ss. 1.02(b)
SEC      .......................................................................     ss. 1.01(b)
SEC Reports.....................................................................     ss. 3.07(a)
Securities Act..................................................................     ss. 3.07(a)
SG Cowen .......................................................................     ss. 1.02(a)
Shareholder Agreements..........................................................       Recitals
Shareholders....................................................................       Recitals
Shares   .......................................................................       Recitals
Special Shareholders' Meeting...................................................     ss. 6.01
Spread   .......................................................................     ss. 2.07
Stock Option Plans..............................................................     ss. 2.07
Subsidiary......................................................................     ss. 3.01
subsidiary......................................................................     ss. 9.03(f)
Superior Proposal...............................................................     ss. 6.04
Surviving Corporation...........................................................     ss. 2.01
Transactions....................................................................     ss. 3.04
under common control with.......................................................     ss. 9.03(d)
WARN     .......................................................................     ss. 3.10(f)
Year 2000 Compliant.............................................................     ss. 3.19
</TABLE>

                                       ii
<PAGE>   6

          AGREEMENT AND PLAN OF MERGER, dated as of July 6, 1999 (this
"Agreement"), among SATURN ELECTRONICS & ENGINEERING, INC., a corporation
organized under the laws of Michigan ("Parent"), SSI ACQUISITION CORP., a
Delaware corporation and a wholly owned subsidiary of Parent ("Purchaser"), and
SMARTFLEX SYSTEMS, INC., a Delaware corporation (the "Company").

                              W I T N E S S E T H:

          WHEREAS, the Boards of Directors of Parent, Purchaser and the
Company have each unanimously determined that it is in the best interests of
their respective shareholders for Parent to acquire the Company upon the terms
and subject to the conditions set forth herein;

          WHEREAS, in furtherance of such acquisition, it is proposed
that Purchaser shall make a cash tender offer (the "Offer") to acquire all the
issued and outstanding shares of common stock, $.0025 par value, of the Company
(the "Shares") for U.S. $10.50 per Share (such amount being hereinafter referred
to as the "Per Share Amount") net to the seller in cash, upon the terms and
subject to the conditions of this Agreement and the Offer;

          WHEREAS, the Board of Directors of the Company (the "Board"),
including all the disinterested directors on the Board, has unanimously approved
the making of the Offer and resolved and agreed to recommend that holders of
Shares tender their Shares pursuant to the Offer;

          WHEREAS, also in furtherance of such acquisition, the Boards
of Directors of Parent, Purchaser and the Company have each unanimously approved
the merger (the "Merger") of Purchaser with and into the Company in accordance
with the Business Corporation Act of the State of Delaware ("Delaware Law")
following the consummation of the Offer and upon the terms and subject to the
conditions set forth herein;

          WHEREAS, to induce Parent and Purchaser to enter into this
Agreement, Parent has required that Purchaser and each of the shareholders of
the Company listed on Schedule I attached hereto (the "Shareholders") enter into
a Stock Tender and Voting Agreement, dated today's date (the "Shareholder
Agreements"), pursuant to which each Shareholder agrees, among other things, to
validly tender its Shares into, and not to withdraw its Shares from, the Offer,
and to vote its Shares in favor of the Merger, in each case subject to the terms
and conditions set forth therein; and

          WHEREAS, also in furtherance of such acquisition, the Boards
of Directors of the Parent, the Purchaser and the Company have each unanimously
approved the execution, delivery and performance of the Shareholder Agreements
in accordance with applicable law.

          NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements herein contained, and intending to be legally
bound hereby, Parent, Purchaser and the Company hereby agree as follows:
<PAGE>   7

                                    ARTICLE I

                                    THE OFFER

          SECTION 1.01.  The Offer. (a) Provided that this Agreement
shall not have been terminated in accordance with Section 8.01 and none of the
events set forth in Annex A hereto shall have occurred or be existing, Purchaser
shall commence the Offer as promptly as reasonably practicable after the date
hereof, but in no event later than five business days after the date hereof. The
obligation of Purchaser to accept for payment and pay for Shares tendered
pursuant to the Offer shall be subject to the condition (the "Minimum
Condition") that at least the number of Shares that combined with the Shares
already owned by Parent, Purchaser or any of their affiliates shall constitute a
majority of the then outstanding Shares on a fully diluted basis (including,
without limitation, all Shares issuable upon the conversion of any convertible
securities or upon the exercise of any options, warrants or rights) shall have
been validly tendered and not withdrawn prior to the expiration of the Offer and
also shall be subject to the satisfaction of the other conditions set forth in
Annex A hereto. Purchaser expressly reserves the right to waive any such
condition, to increase the price per Share payable in the Offer, and to make any
other changes in the terms and conditions of the Offer; provided, however, that,
without the prior written consent of the Company, no change may be made which
decreases the price per Share payable in the Offer or which changes or waives
the Minimum Condition or which changes the form of consideration to be paid in
the Offer or which extends the period that the Offer is outstanding for one or
more periods not to exceed thirty days in the aggregate or which reduces the
maximum number of Shares to be purchased in the Offer or which imposes
conditions to the Offer in addition to those set forth in Annex A hereto. The
Per Share Amount shall, subject to applicable withholding of taxes, be paid net
to the seller in cash, upon the terms and subject to the conditions of the
Offer. Subject to the terms and conditions of the Offer (including, without
limitation, the Minimum Condition), Purchaser shall pay, as promptly as
practicable after expiration of the Offer, for all Shares validly tendered into
and not withdrawn from, the Offer.

          (b)  As soon as reasonably practicable on the date of
commencement of the Offer, Purchaser shall file with the Securities and Exchange
Commission (the "SEC") a Tender Offer Statement on Schedule 14D-1 (together with
all amendments and supplements thereto, the "Schedule 14D-1") with respect to
the Offer and the other Transactions (as hereinafter defined), which shall have
been provided to the Company and to which the Company shall not have reasonably
objected. The Schedule 14D-1 shall contain or shall incorporate by reference an
offer to purchase (the "Offer to Purchase") and forms of the related letter of
transmittal and any related summary advertisement (the Schedule 14D-1, the Offer
to Purchase and such other documents, together with all supplements and
amendments thereto, being referred to herein collectively as the "Offer
Documents"). Each of Parent, Purchaser and the Company agree to correct promptly
any information provided by it for use in the Offer Documents which shall have
become false or misleading, and Parent and Purchaser further agree to take all
steps necessary to cause the Schedule 14D-1 as so corrected to be filed with the
SEC and the other Offer Documents as so

                                       2

<PAGE>   8

corrected to be disseminated to holders of Shares, in each case as and to the
extent required by applicable federal securities laws.

          SECTION 1.02.  Company Action. (a) The Company hereby approves
of and consents to the Offer and represents and warrants that (i) the Board, at
a meeting duly called and held on July 6, 1999, has unanimously (A) determined
that this Agreement, the Shareholder Agreements and the transactions
contemplated hereby and thereby, including, without limitation, each of the
Offer, the Merger and the tender of Shares pursuant to the Shareholder
Agreements, are fair to and in the best interests of the shareholders of the
Company, (B) approved and adopted this Agreement and the transactions,
including, without limitation, the Offer, the Merger and the tender of Shares
pursuant to the Shareholder Agreements, contemplated hereby and thereby, (C)
taken all action to render the provisions of the Rights Agreement, dated as of
July 17, 1996, between the Company and The First National Bank of Boston, as
Rights Agent, and of Section 203 of the Delaware Law inapplicable to the Offer,
the Merger and the Shareholder Agreements, and (D) recommend that the
shareholders of the Company accept the Offer and approve and adopt this
Agreement and the transactions, including, without limitation, the Merger,
contemplated hereby, and (ii) SG Cowen Securities Corporation ("SG Cowen") has
delivered to the Board an opinion to the effect that the consideration to be
received by the holders of Shares (other than Parent, Purchaser and their
affiliates) pursuant to each of the Offer and the Merger is fair to such holders
of Shares from a financial point of view, it being understood and acknowledged
that such opinion has been rendered to the Board and may only be relied upon by
the Board, the Company and any successors thereto. Subject only to the
provisions of Sections 6.04 and 8.01(e) below, the Company hereby consents to
the inclusion in the Offer Documents of the recommendation of the Board
described in the immediately preceding sentence; provided, however, that the
Board may withdraw such consent in the exercise of its fiduciary duties as
contemplated in Sections 6.04 and 8.01(e) below.

          (b)  As soon as reasonably practicable on the date of
commencement of the Offer, the Company shall file with the SEC a
Solicitation/Recommendation Statement on Schedule 14D-9 (together with all
amendments and supplements thereto, the "Schedule 14D-9") containing, subject
only to the provisions of Sections 6.04 and 8.01(d) below, the recommendation of
the Board described in Section 1.02(a) and shall disseminate the Schedule 14D-9
to the extent required by Rule 14d-9 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and any other applicable federal
securities laws. Each of the Company, Parent and Purchaser agree to correct
promptly any information provided by it for use in the Schedule 14D-9 which
shall have become false or misleading, and the Company further agrees to take
all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with
the SEC and disseminated to holders of Shares, in each case as and to the extent
required by applicable federal securities laws. Prior to the Company's filing of
the Schedule 14D-9, such Schedule shall have been provided to Purchaser and
Parent and shall not have been reasonably objected to.

          (c)  The Company shall promptly furnish Purchaser with mailing
labels containing the names and addresses of all record holders of Shares and
with security position listings of Shares held in stock depositories, each as of
a recent date, together with all other

                                       3
<PAGE>   9

available listings and computer files containing names, addresses and security
position listings of record holders and beneficial owners of Shares. The Company
shall furnish Purchaser with such additional information, including, without
limitation, updated listings and computer files of shareholders, mailing labels
and security position listings, and such other assistance as Parent, Purchaser
or their agents may reasonably request. Subject to the requirements of
applicable law, and except for such steps as are necessary to disseminate the
Offer Documents and any other documents necessary to consummate the Offer or the
Merger, Parent and Purchaser shall hold in confidence the information contained
in such labels, listings and files, shall use such information only in
connection with the Offer and the Merger and, if this Agreement shall be
terminated in accordance with Section 8.01, shall deliver to the Company, or
certify to the Company destruction of, all copies of such information then in
their possession.

          (d)  (i)  The Company will, promptly following the purchase and
payment for by Purchaser of all Shares validly tendered and not withdrawn
pursuant to the Offer, take all actions necessary to cause persons designated by
Parent to become directors of the Company so that the total number of persons so
designated equals that number of directors, rounded up to the next whole number,
which represents the product of (x) the total number of directors on the Board
of Directors of the Company multiplied by (y) the percentage that the number of
Shares so accepted for payment and paid for plus any Shares beneficially owned
by Parent, Purchaser or their respective affiliates on the date when Parent so
accepts for payment and pays for any Shares pursuant to the Offer bears to the
number of Shares outstanding at the time of such acceptance for payment and
payment. In furtherance thereof, the Company will increase the size of its Board
of Directors, or use best efforts to secure the resignation of directors, or
both, as is necessary to permit Parent's designees to be elected to the
Company's Board of Directors; provided, however, prior to the Effective Time (as
defined in Section 2.2), subject to the provisions of Section 1.02(d)(ii), the
Company's Board of Directors shall always have at least two members who are
directors of the Company as of the date hereof (the "Continuing Directors"). At
such time, the Company, if so requested, will cause persons designated by Parent
to constitute at least the same percentage of each committee of the Company's
Board of Directors as determined above in this Section 1.02(d)(i). The Company's
obligations to appoint designees to its Board of Directors shall be subject to
Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. The
Company shall promptly take all actions required pursuant to such section and
rule in order to fulfill its obligations under this Section 1.02(d)(i). Parent
and Purchaser will supply the Company with all information which the Company
shall reasonably request with respect to nominees to the Company's Board of
Directors in order for the Company to make the filing required by Section 14(f)
of the Exchange Act. Except with respect to the information provided by Parent
or Purchaser pursuant to the immediately preceding sentence, the Company agrees
that none of the information attached to the Offer Documents pursuant to Section
14(f) or Rule 14f-1 shall contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements contained therein, in light of the circumstances in which they were
made, not misleading.

               (ii) Following the election or  appointment  of the designees of
Parent pursuant to Section 1.02(d)(i) and prior to the Effective Time, any
amendment or termination of this Agreement, extension for the performance of the
obligations or other acts of Parent and

                                       4
<PAGE>   10

Purchaser under this Agreement, waiver of the rights of the Company under this
Agreement, or action taken by the Company pursuant to, or that is described in,
Article 8 and Sections 1.01(a), 6.06, 8.04 and 8.05, notwithstanding anything
herein to the contrary, will (if and to the extent that there are any then
serving Continuing Directors) require the approval of a majority of the
Continuing Directors. If, prior to the Effective Time, the number of Continuing
Directors is fewer than two, the remaining Continuing Director, if any, will be
entitled to appoint a director to fill the vacancy created and such appointee
will be a Continuing Director for the purpose of this Agreement. The Continuing
Directors may not be removed prior to the Effective Time except for cause.

                                   ARTICLE II

                                   THE MERGER

          SECTION 2.01.  The Merger. Upon the terms and subject to the
conditions set forth in Article VII, and in accordance with Delaware Law, at the
Effective Time (as hereinafter defined), Purchaser shall be merged with and into
the Company. As a result of the Merger, the separate corporate existence of
Purchaser shall cease and the Company shall continue as the surviving
corporation of the Merger (the "Surviving Corporation"), and shall continue to
be governed by the laws of the State of Delaware.

          SECTION 2.02.  Effective Time; Closing. As promptly as
practicable after the satisfaction or, if permissible, waiver of the conditions
set forth in Article VII, the parties hereto shall cause the Merger to be
consummated by filing a certificate of merger in substantially the form of
Exhibit A hereto, or in such other form as the parties shall otherwise agree
(the "Certificate of Merger"), with the Delaware Secretary of State, in such
form as is required by, and executed in accordance with the relevant provisions
of, Delaware Law (the date and time of such filings being, collectively, the
"Effective Time"). Prior to such filing, a closing shall be held at the offices
of Honigman Miller Schwartz and Cohn, 2290 First National Building, Detroit,
Michigan 48226, or such other place as the parties shall agree, for the purpose
of confirming the satisfaction or waiver, as the case may be, of the conditions
set forth in Article VII.

          SECTION 2.03.  Effect of the Merger. At the Effective Time, the
effect of the Merger shall be as provided in the applicable provisions of
Delaware Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the property, rights, privileges, powers and
franchises of the Company and Purchaser shall vest in the Surviving Corporation,
and all debts, liabilities, obligations, restrictions, disabilities and duties
of the Company and Purchaser shall become the debts, liabilities, obligations,
restrictions, disabilities and duties of the Surviving Corporation.

          SECTION 2.04.  Articles  of  Incorporation;   Bylaws.  (a)  The
Articles of Incorporation of Purchaser, as in effect immediately prior to the
Effective Time, shall be the Articles of Incorporation of the Surviving
Corporation until thereafter amended as provided by

                                       5
<PAGE>   11

applicable law and such Articles of Incorporation; provided, however, that, at
the Effective Time, Article I of the Articles of Incorporation of the Surviving
Corporation shall be amended to read as follows: "The name of the corporation is
Smartflex Systems, Inc. "

          (b)  The Bylaws of Purchaser, as in effect immediately prior to
the Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended as provided by law, the Articles of Incorporation of the
Surviving Corporation and such Bylaws.

          SECTION 2.05.  Directors and Officers. The directors of
Purchaser immediately prior to the Effective Time shall be the initial directors
of the Surviving Corporation, each to hold office in accordance with the
Articles of Incorporation and Bylaws of the Surviving Corporation, and the
officers of Purchaser immediately prior to the Effective Time shall be the
initial officers of the Surviving Corporation, in each case until their
respective successors are duly elected or appointed and qualified.

          SECTION 2.06.  Conversion  of  Securities.  At the  Effective  Time,
by virtue of the Merger and without any action on the part of Purchaser, the
Company or the holders of any of the Shares:

          (a)  Each Share issued and outstanding immediately prior to the
     Effective Time (other than any Shares to be cancelled pursuant to Section
     2.06(b)) shall be cancelled and shall be converted automatically into the
     right to receive an amount equal to the Per Share Amount in cash (the
     "Merger Consideration"), payable, without interest, to the holder of such
     Share, upon surrender, in the manner provided in Section 2.08, of the
     certificate that formerly evidenced such Share;

          (b)  Each Share owned by Purchaser, Parent or any direct or
     indirect wholly owned subsidiary of Parent or of the Company immediately
     prior to the Effective Time shall be cancelled and retired without any
     conversion thereof and no payment or distribution shall be made with
     respect thereto; and

          (c)  Each share of common stock, without par value, of
     Purchaser issued and outstanding immediately prior to the Effective Time
     shall be converted into and exchanged for one validly issued, fully paid
     and nonassessable share of Common Stock, $.0025 par value per share, of the
     Surviving Corporation.

          SECTION 2.07.  Employee and Director Stock Options. In accordance with
the terms of the Company's 1993 Equity Incentive Plan, 1994 Equity Incentive
Plan, 1995 Equity Incentive Plan and Acquisition Stock Plan (the "Stock Option
Plans"), each outstanding option to purchase Shares granted under the Stock
Option Plans shall, immediately prior to the Effective Time, become exercisable
regardless of the vesting schedule contained in any stock option agreement or in
any of the Stock Option Plans. Each outstanding option to purchase Shares
granted under the Stock Option Plans or otherwise shall be cancelled at the
Effective Time. In the event that any unexercised option is cancelled by the
Company, each holder of a cancelled option shall be entitled to receive, at the
Effective Time or as soon as practicable thereafter, from

                                       6
<PAGE>   12

the Company, in consideration for the cancellation of such option, an amount in
cash equal to the product of (i) the number of Shares previously subject to such
option and (ii) the excess, if any, of the Merger Consideration over the
exercise price per Share previously subject to such option (the "Spread").

          SECTION 2.08.  Surrender of Shares; Stock Transfer Books. (a)
Prior to the Effective Time, Purchaser shall designate a bank or trust company
to act as agent (the "Paying Agent") for the holders of Shares in connection
with the Merger to receive the funds to which holders of Shares shall become
entitled pursuant to Section 2.06(a), and at the Effective Time Purchaser shall
deposit with such Paying Agent an amount sufficient to pay the aggregate Merger
Consideration. Such funds shall be invested by the Paying Agent as directed by
the Surviving Corporation, provided that such investments shall be in
obligations of or guaranteed by the United States of America or of any agency
thereof and backed by the full faith and credit of the United States of America
or in commercial paper obligations rated A-1 or P-1 or better by Moody's
Investors Service, Inc. or Standard & Poor's Corporation, respectively.

          (b)  Promptly after the Effective Time, the Surviving
Corporation shall cause to be mailed to each person who was, at the Effective
Time, a holder of record of Shares entitled to receive the Merger Consideration
pursuant to Section 2.06(a) a form of letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the certificates
evidencing such Shares (the "Certificates") shall pass, only upon proper
delivery of the Certificates to the Paying Agent) and instructions for use in
effecting the surrender of the Certificates pursuant to such letter of
transmittal. Upon surrender to the Paying Agent of a Certificate, together with
such letter of transmittal, duly completed and validly executed in accordance
with the instructions thereto, and such other documents as may be required
pursuant to such instructions, the holder of such Certificate shall be entitled
to receive in exchange therefor the Merger Consideration for each Share formerly
evidenced by such Certificate, and such Certificate shall then be cancelled. No
interest shall accrue or be paid on the Merger Consideration payable upon the
surrender of any Certificate for the benefit of the holder of such Certificate.
If payment of the Merger Consideration is to be made to a person other than the
person in whose name the surrendered Certificate is registered on the stock
transfer books of the Company, it shall be a condition of payment that the
Certificate so surrendered shall be endorsed properly or otherwise be in proper
form for transfer and that the person requesting such payment shall have paid
all transfer and other taxes required by reason of the payment of the Merger
Consideration to a person other than the registered holder of the Certificate
surrendered or shall have established to the satisfaction of the Surviving
Corporation that such taxes either have been paid or are not applicable. In the
event any certificate representing Shares shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such certificate to be lost, stolen or destroyed, the Paying Agent will issue in
exchange for such lost, stolen or destroyed certificate the Merger Consideration
deliverable in respect thereof as determined in accordance with this Article II;
provided, however, the person to whom the Merger Consideration is paid shall, as
a condition precedent to the payment thereof, give the Surviving Corporation a
bond in such sum as it may direct or otherwise indemnify the Surviving
Corporation in a manner satisfactory to it against any claim that may be made
against the

                                       7
<PAGE>   13

Surviving Corporation with respect to the certificate alleged to have been lost,
stolen or destroyed.

          (c)  At any time following the sixth month after the
Effective Time, the Surviving Corporation shall be entitled to require the
Paying Agent to deliver to it any funds which had been made available to the
Paying Agent and not disbursed to holders of Shares (including, without
limitation, all interest and other income received by the Paying Agent in
respect of all funds made available to it) and, thereafter, such holders shall
be entitled to look only to the Surviving Corporation (subject to abandoned
property, escheat and other similar laws) only as general creditors thereof with
respect to any Merger Consideration that may be payable upon due surrender of
the Certificates held by them. Notwithstanding the foregoing, neither the
Surviving Corporation nor the Paying Agent shall be liable to any holder of a
Share for any Merger Consideration delivered in respect of such Share to a
public official pursuant to any abandoned property, escheat or other similar
law.

          (d)  At the close of business on the day of the Effective
Time, the stock transfer books of the Company shall be closed and, thereafter,
there shall be no further registration of transfers of Shares on the records of
the Company. From and after the Effective Time, the holders of Shares
outstanding immediately prior to the Effective Time shall cease to have any
rights with respect to such Shares except as otherwise provided herein or by
applicable law.

                                   ARTICLE III

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     The Company hereby represents and warrants to Parent and Purchaser that:

          SECTION 3.01.  Organization and Qualification; Subsidiaries.
Each of the Company and each subsidiary of the Company (a "Subsidiary"), is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has the requisite power and
authority and all necessary governmental approvals to own, lease and operate its
properties and to carry on its business as it is now being conducted, except
where the failure to be so organized, existing or in good standing or to have
such power, authority and governmental approvals would not, individually or in
the aggregate, have a Material Adverse Effect (as defined below). The Company
and each Subsidiary is duly qualified or licensed as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
the properties owned, leased or operated by it or the nature of its business
makes such qualification or licensing necessary, except for such failures to be
so qualified or licensed and in good standing that would not, individually or in
the aggregate, have a Material Adverse Effect. When used in connection with the
Company or any Subsidiary, the term "Material Adverse Effect" means any change
or changes, event(s), condition(s), development(s) or effect(s) that adversely
affects, or may be reasonably likely to adversely affect, individually or in the
aggregate, the business, operations, results of operations, properties,
condition, financial

                                       8

<PAGE>   14

condition, cash flows, assets or liabilities (including, without limitation,
contingent liabilities) of the Company and the Subsidiaries taken as a whole and
the value of the Shares, in any case, by an amount equal to at least $2,500,000;
provided, however, that a Material Adverse Effect shall not include any adverse
effect resulting from general economic conditions or conditions generally
affecting the contract manufacturing market. A true and complete list of all the
Subsidiaries, together with the jurisdiction of incorporation of each Subsidiary
and the percentage of the outstanding capital stock (calculated on a fully
diluted basis) of each Subsidiary owned by the Company, each other Subsidiary
and any third party, is set forth in Section 3.01 of the Disclosure Schedule,
which has been delivered prior to the date of this Agreement by the Company to
Parent (the "Disclosure Schedule"). Except as disclosed in such Section 3.01,
the Company does not directly or indirectly own any equity or similar interest
in, or any interest convertible into or exchangeable or exercisable for any
equity or similar interest in, any corporation, partnership, joint venture or
other business association or entity.

          SECTION 3.02.  Articles of Incorporation and Bylaws. The
Company has heretofore furnished to Parent a complete and correct copy of the
Articles of Incorporation and the Bylaws or equivalent organizational documents,
each as amended to date, of the Company and each Subsidiary. Such Articles of
Incorporation, Bylaws and equivalent organization documents are in full force
and effect. Neither the Company nor any Subsidiary is in violation of any
provision of its Articles of Incorporation, Bylaws or equivalent organizational
documents.

          SECTION 3.03.  Capitalization. The authorized capital stock of
the Company consists of 5,000,000 shares of preferred stock (none of which is
issued and outstanding) and 25,000,000 Shares. As of the date hereof, (i)
6,493,994 Shares are issued and outstanding, all of which are validly issued,
fully paid and nonassessable, (ii) no Shares are held by the Subsidiaries or in
the Company's treasury, and (iii) 994,502 Shares are reserved for issuance
pursuant to stock options granted pursuant to the Company's Stock Option Plans
or otherwise. Except as set forth in this Section 3.03 or Section 3.03 of the
Disclosure Schedule, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or unissued
capital stock of the Company or any Subsidiary or obligating the Company or any
Subsidiary to issue or sell any shares of capital stock of, or other equity
interests in, the Company or any Subsidiary (including, without limitation, any
securities which are convertible into or exchangeable for Shares of capital
stock of, or other equity interests in, the Company or any Subsidiaries). All
Shares subject to issuance as aforesaid, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
will be duly authorized, validly issued, fully paid and nonassessable. Except as
set forth in Section 3.03 of the Disclosure Schedule, there are no outstanding
contractual obligations of the Company or any Subsidiary to repurchase, redeem
or otherwise acquire any Shares or any capital stock of any Subsidiary or to
provide funds to, or make any investment (in the form of a loan, capital
contribution or otherwise) in, any Subsidiary or any other person. Each
outstanding share of capital stock of each Subsidiary is duly authorized,
validly issued, fully paid and nonassessable and, except as set forth in Section
3.03 of the Disclosure Schedule, is owned free and clear of all liens and
encumbrances.

                                       9

<PAGE>   15

          SECTION 3.04.  Authority Relative to this Agreement. Subject to
approval by the affirmative vote of the shareholders of the Company, the Company
has all necessary power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions, including,
without limitation, the Merger, contemplated hereby (the "Transactions"). The
execution and delivery of this Agreement by the Company and the consummation by
the Company of the Transactions have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of the
Company are necessary to authorize this Agreement or to consummate the
Transactions (other than, with respect to the Merger, the approval and adoption
of this Agreement by the affirmative vote of the holders of a majority of the
outstanding Shares as required by Delaware Law and the Company's Certificate of
Incorporation, and the filing and recordation of the Certificate of Merger as
required by Delaware Law). This Agreement has been duly and validly executed and
delivered by the Company and, assuming the due authorization, execution and
delivery by Parent and Purchaser, constitutes a legal, valid and binding
obligation of the Company.

          SECTION 3.05.  No Conflict; Required Filings and Consents.
Except as set forth in Section 3.05 of the Disclosure Schedule, (a) the
execution and delivery of this Agreement by the Company do not, and the
performance of this Agreement by the Company will not, (i) conflict with or
violate the Articles of Incorporation or Bylaws or equivalent organizational
documents of the Company or any Subsidiary, (ii) conflict with or violate any
law, rule, regulation, order, judgment or decree applicable to the Company or
any Subsidiary or by which any property or asset of the Company or any
Subsidiary is bound or subject or (iii) result in any breach of or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or other
encumbrance of any nature on any property or asset of the Company or any
Subsidiary pursuant to, any material note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Company or any Subsidiary is a party or by which the Company or any
Subsidiary or any property or asset of the Company or any Subsidiary is bound or
subject. Any costs and expenses which occur or are reasonably likely to occur as
a result of the failure to obtain the consent of the other parties to the
contracts and agreements listed in Section 3.05 of the Disclosure Schedule prior
to the Effective Time shall be borne by the Company and its Subsidiaries and
shall be considered in determining whether a Material Adverse Effect has
occurred.

          (b)  The execution and delivery of this Agreement by the
Company do not, and the performance of this Agreement by the Company will not,
require any consent, approval, authorization or permit of, or filing with, or
notification to, any governmental or regulatory authority, domestic or foreign,
except (i) for applicable requirements, if any, of the Exchange Act, state
securities or "blue sky" laws ("Blue Sky Laws") and state takeover laws, the
premerger notification requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations promulgated
thereunder (the "HSR Act") and the filing and recordation of the Certificate of
Merger as required by Delaware Law, and (ii) where failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or delay consummation of the Offer or the
Merger, or otherwise

                                       10
<PAGE>   16

prevent the Company from performing its obligations under this Agreement, or
would not, individually or in the aggregate, have a Material Adverse Effect.

          SECTION 3.06.  Compliance. Except as set forth in Section 3.06
of the Disclosure Schedule, neither the Company nor any Subsidiary is, in any
material respect, in conflict with, or in default or violation of, (i) any law,
rule, regulation, order, judgment or decree applicable to the Company or any
Subsidiary or by which any property or asset of the Company or any Subsidiary is
bound or subject or (ii) any material note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Company or any Subsidiary is a party or by which the Company or any
Subsidiary or any property or asset of the Company or any Subsidiary is bound or
subject.

          SECTION 3.07.  SEC Filings; Financial Statements. (a) The
Company has filed all forms, reports and documents required to be filed by it
with the SEC in the past three years, and has heretofore delivered to Parent, in
the form filed with the SEC, (i) its Annual Reports on Form 10-K for the fiscal
years ended December 31, 1996, 1997 and 1998, respectively, (ii) its Quarterly
Reports on Form 10-Q for the periods ended (x) March 31, June 30 and September
30 in 1997 and in 1998, and (y) March 31, 1999, (iii) all proxy statements
relating to the Company's meetings of shareholders (whether annual or special)
held in the past three years and (iv) all other forms, reports and other
registration statements (other than Quarterly Reports on Form 10-Q not referred
to in clause (ii) above) filed by the Company with the SEC in the past three
years (the forms, reports and other documents referred to in clauses (i), (ii),
(iii) and (iv) above being referred to herein, collectively, as the "SEC
Reports"). The most recent SEC Report filed by the Company is its Quarterly
Report on Form 10-Q for the period ended March 31, 1999. The SEC Reports (i)
were prepared in accordance with the requirements of the Securities Act of 1933,
as amended (the "Securities Act"), and the Exchange Act, as the case may be, and
the rules and regulations promulgated thereunder and (ii) did not, at the time
they were filed, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading. No Subsidiary is required to file any form,
report or other document with the SEC.

          (b)  Each of the consolidated financial statements (including, in
each case, any notes thereto) contained in the SEC Reports was prepared from the
books and records of the Company in accordance with generally accepted
accounting principles applied on a consistent basis ("GAAP") throughout the
periods indicated (except as may be indicated in the notes thereto and except,
in the case of unaudited statements, as may be permitted under the Exchange Act)
and each fairly presents the consolidated financial position, results of
operations and changes in shareholders' equity and cash flows of the Company and
the consolidated Subsidiaries as at the respective dates thereof and for the
respective periods indicated therein (subject, in the case of unaudited
financial statements, to normal year-end audit adjustments).

          (c)  Except as and to the extent set forth on the consolidated balance
sheet of the Company and the consolidated Subsidiaries as at December 31, 1998
including the notes thereto (the "1998 Balance Sheet"), or as reflected on the
consolidated balance sheet of the

                                       11

<PAGE>   17

Company and the consolidated Subsidiaries as at May 31, 1999 or in Section 3.07
of the Disclosure Schedule, neither the Company nor any Subsidiary has any
liability or obligation of any nature (whether accrued, absolute, contingent or
otherwise) which would be required to be reflected on a balance sheet, or in the
notes thereto, prepared in accordance with GAAP.

          SECTION 3.08.  Absence of Certain Changes or Events. Since
December 31, 1998, except as set forth in Section 3.08 of the Disclosure
Schedule or as contemplated by this Agreement or disclosed in any SEC Report
filed since December 31, 1998 and prior to the date of this Agreement, the
Company and the Subsidiaries have conducted their businesses only in the
ordinary course and in a manner consistent with past practice and, since
December 31, 1998, there has not been (i) any Material Adverse Effect with
respect to the Company, (ii) any damage, destruction or loss (whether or not
covered by insurance) with respect to any property or asset of the Company or
any Subsidiary and having, individually or in the aggregate, a Material Adverse
Effect with respect to the Company, (iii) any material change by the Company in
its accounting methods, principles or practices, with respect to the Company
(iv) any revaluation by the Company of any asset (including, without limitation,
any writing down of the value of inventory or writing off of notes or accounts
receivable), other than in the ordinary course of business consistent with past
practice, (v) any failure by the Company to revalue any asset in accordance with
GAAP consistent with past practice, (vi) any entry by the Company or any
Subsidiary into any commitment or transaction material to the Company and the
Subsidiaries taken as a whole, (vii) any declaration, setting aside or payment
of any dividend or distribution in respect of any capital stock of the Company
or any redemption, purchase or other acquisition of any of its securities,
(viii) other than as set forth in any contracts (as in effect on the date
hereof) referred to in Section 3.10, any increase in or establishment of any
bonus, insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards or restricted stock
awards), stock purchase or other employee benefit plan, or any other increase in
the compensation payable or to become payable to any officers or key employees
of the Company or any Subsidiary, except customary increases in compensation to
employees generally incurred in the ordinary course of business consistent with
past practice, (ix) any entering into, renewal, modification or extension of,
any material contract, arrangement or agreement with any affiliate of the
Company, or (x) any entering into, renewal, modification or extension of, any
contract, arrangement or agreement with any other party having, individually or
in the aggregate, a Material Adverse Effect with respect to the Company.

          SECTION 3.09.  Absence of Litigation. Except as set forth in
Section 3.09 of the Disclosure Schedule or as disclosed in the SEC Reports filed
prior to the date of this Agreement, there is no claim, action, proceeding or
investigation pending or, to the knowledge of the Company, threatened against
the Company or any Subsidiary, or any property or asset of the Company or any
Subsidiary, before any court, arbitrator or administrative, governmental or
regulatory authority or body, domestic or foreign, which (i) the amount in
controversy is or could reasonably be expected to be at least $50,000, (ii)
seeks to, or is reasonably likely to, delay or prevent the consummation of any
Transaction or (iii) which, if adversely determined against the Company would
limit, in any material respect, the Company's ability to conduct its business as
currently conducted. As of the date hereof, except as set forth in Section 3.09
of the Disclosure Schedule, neither the Company nor any Subsidiary nor any
property or asset of the Company or any Subsidiary is subject to any order,
writ, judgment, injunction, decree, determination or award. Except as set forth
in Section 3.09 of the Disclosure

                                       12
<PAGE>   18

Schedule, the Company and each Subsidiary has notified its insurance companies,
in accordance with the terms and conditions of its insurance policies, of any
pending or, to the knowledge of the Company, threatened litigation, and no
insurance company has denied coverage, reserved its rights to deny coverage or
otherwise advised the Company or any of its Subsidiaries of any defenses
available to such insurance company to deny coverage for any such pending or, to
the knowledge of the Company, threatened litigation.

          SECTION 3.10.  Employee Benefit Plans. (a) Section 3.10 of the
Disclosure Schedule contains a true and complete list of (i) all employee
benefit plans (within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) and all bonus, stock option,
stock purchase, restricted stock, incentive, deferred compensation, retiree
medical or life insurance, supplemental retirement, severance or other benefit
plans, programs or arrangements, and all employment, termination, severance or
other contracts or agreements to which the Company or any Subsidiary is a party,
with respect to which the Company or any Subsidiary has any obligation or which
are maintained, contributed to or sponsored by the Company or any Subsidiary for
the benefit of any current or former employee, officer or director of the
Company or any Subsidiary and (ii) each employee benefit plan for which the
Company or any Subsidiary could incur liability under Title IV of ERISA, or in
respect of which the Company or any Subsidiary remains secondarily liable under
Section 4204 of ERISA (collectively, the "Plans"). Except as set forth in
Section 3.10 of the Disclosure Schedule, no Plan is a "defined benefit plan"
within the meaning of Section 3(35) of ERISA and no Plan is subject to Title IV
of ERISA. Each Plan is in writing and the Company has previously furnished
Parent with a true and complete copy of each Plan and a true and complete copy
of each material document prepared in connection with each such Plan, including,
without limitation, (i) a copy of each trust or other funding arrangement, (ii)
each summary plan description and summary of material modifications, (iii) the
most recently filed Internal Revenue Service ("IRS") Form 5500, (iv) the most
recently received IRS determination letter for each such Plan, and (v) the most
recently prepared financial statement in connection with each such Plan. Except
as set forth in Section 3.10 of the Disclosure Schedule, neither the Company nor
any Subsidiary has any express or implied commitment (i) to create, incur
liability with respect to or cause to exist any other employee benefit plan,
program or arrangement, (ii) to enter into any contract or agreement to provide
compensation or benefits to any individual or (iii) to modify, change or
terminate any Plan, other than with respect to a modification, change or
termination required by ERISA or the Internal Revenue Code of 1986, as amended
(the "Code").

          (b)  Except as disclosed in Section 3.10 of the Disclosure
Schedule, none of the Plans (i) provides for the payment of separation,
severance, termination or similar-type benefits to any person, (ii) obligates
the Company or any Subsidiary to pay separation, severance, termination or other
benefits as a result of any Transaction or (iii) obligates the Company or any
Subsidiary to make any payment or provide any benefit that could be subject to a
tax under Section 4999 of the Code. Except as disclosed in Section 3.10 of the
Disclosure Schedule, none of the Plans provides for or promises retiree medical,
disability or life insurance

                                       13
<PAGE>   19

benefits to any current or former employee, officer or director of the Company
or any Subsidiary.

          (c)  Except as set forth in Section 3.10 of the Disclosure
Schedule, each Plan which is intended to be qualified under Section 401(a) or
401(k) of the Code has received a favorable determination letter from the IRS
that such Plan is so qualified, and each trust established in connection with
any Plan which is intended to be exempt from federal income taxation under
Section 501(a) of the Code has received a determination letter from the IRS that
such trust is so exempt. To the knowledge of the Company, no fact or event has
occurred since the date of any such determination letter from the IRS that could
adversely affect the qualified status of any such Plan or the exempt status of
any such trust. Each trust maintained or contributed to by the Company or any
Subsidiary which is intended to be qualified as a voluntary employees'
beneficiary association exempt from federal income taxation under Sections
501(a) and 501(c)(9) of the Code has received a favorable determination letter
from the IRS that it is so qualified and so exempt, and, to the knowledge of the
Company, no fact or event has occurred since the date of such determination by
the IRS that could adversely affect such qualified or exempt status.

          (d)  There has been no prohibited transaction (within the
meaning of Section 406 of ERISA or Section 4975 of the Code) with respect to any
Plan. Neither the Company nor any Subsidiary is currently liable or has
previously incurred any liability for any tax or penalty arising under Section
4971, 4972, 4979, 4980 or 4980B of the Code or Section 502(c) of ERISA, and no
fact or event exists which could give rise to any such liability. Neither the
Company nor any Subsidiary has incurred any liability under, arising out of or
by operation of Title IV of ERISA, including, without limitation, any liability
in connection with (i) the termination or reorganization of any employee pension
benefit plan subject to Title IV of ERISA or (ii) the withdrawal from any
Multiemployer Plan or Multiple Employer Plan, and no fact or event exists which
could give rise to any such liability.

          (e)  To the knowledge of the Company, each Plan is now and
has been operated in all respects in accordance with the requirements of all
applicable laws, including, without limitation, ERISA and the Code, and the
Company and each Subsidiary have performed all obligations required to be
performed by them under, are not in any respect in default under or in violation
of, and have no knowledge of any default or violation by any party to, any Plan.
All contributions, premiums or payments required to be made with respect to any
Plan have been timely made ,are fully deductible for income tax purposes and no
such deduction previously claimed has been challenged by any government entity.
The 1998 Balance Sheet reflects an accrual of all amounts of employer
contributions and premiums accrued but unpaid with respect to the Plans.

          (f)  The Company and the Subsidiaries have not incurred
any liability under, and have complied in all material respects with, the Worker
Adjustment Retraining Notification Act and the regulations promulgated
thereunder ("WARN") and do not reasonably expect to incur any such liability as
a result of actions taken or not taken prior to the Effective Time. Section
3.10(f) of the Disclosure Schedule lists (i) all the employees terminated or
laid off by the

                                       14

<PAGE>   20

Company or any Subsidiary during the 90 days prior to the date hereof and (ii)
all the employees of the Company or any Subsidiary who have experienced a
reduction in hours of work of more than 50% during any month during the 90 days
prior to the date hereof and describes all notices given by the Company and the
Subsidiaries in connection with WARN. The Company will, by written notice to
Parent and Purchaser, update Section 3.10(f) of the Disclosure Schedule to
include any such terminations, layoffs and reductions in hours from the date
hereof through the Effective Time and will provide Parent and Purchaser with any
related information which they may reasonably request.

          SECTION 3.11.  Labor Matters. Except as set forth in Section
3.11 of the Disclosure Schedule, (i) there are no controversies pending or, to
the knowledge of the Company, threatened between the Company or any Subsidiary,
on the one hand, and any of their respective employees or former employees, on
the other hand; (ii) neither the Company nor any Subsidiary is a party to any
collective bargaining agreement or other labor union contract applicable to
persons employed by the Company or any Subsidiary, nor, to the knowledge of the
Company, are there any activities or proceedings of any labor union to organize
any such employees; (iii) neither the Company nor any Subsidiary has breached or
otherwise failed to comply with any provision of any such agreement or contract
and there are no grievances outstanding against the Company or any Subsidiary
under any such agreement or contract; (iv) there are no unfair labor practice
complaints pending or, to the knowledge of the Company, threatened against the
Company or any Subsidiary before the National Labor Relations Board or any
current union representation questions involving employees of the Company or any
Subsidiary; and (v) there is no strike, slowdown, work stoppage or lockout, or,
to the knowledge of the Company, threat thereof, by or with respect to any
employees of the Company or any Subsidiary. Section 3.11 of the Disclosure
Letter sets forth an accurate and complete list of all agreements or
arrangements with employees, consultants (excluding attorneys and investment
banking firms) and agents of the Company or any Subsidiary, including (without
limitation, employment, consulting, severance, stay-bonus, termination or other
agreements or arrangements) where the total compensation to any such employee,
consultant or agent under any such agreement or arrangement (or series of
related agreements or arrangements) exceeds $100,000 in any year.

          SECTION 3.12.  Offer Documents; Schedule 14D-9; Proxy
Statement. Neither the Schedule 14D-9 nor any information supplied by the
Company for inclusion in the Offer Documents shall, at the respective times the
Schedule 14D-9, the Offer Documents, or any amendments or supplements thereto
are filed with the SEC or are first published, sent or given to shareholders of
the Company, as the case may be, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements made therein, in the light of the circumstances
under which they are made, not misleading. In the event that Purchaser has not
designated a majority of the members of the Board pursuant to the terms of
Section 1.02(d) above and a shareholder vote is required, neither the
information supplied by the Company for inclusion in the proxy statement to be
sent to the shareholders of the Company in connection with the Special
Shareholders' Meeting (as defined in Section 6.01 hereof), nor the information
statement to be sent to shareholders of the Company in connection with the
Merger (such proxy or information statement, as amended or

                                       15

<PAGE>   21

supplemented, being referred to herein as the "Proxy Statement") shall not, at
the date the Proxy Statement (or any amendment or supplement thereto) is first
mailed to shareholders of the Company, at the time of the Special Shareholders'
Meeting, if applicable and at the Effective Time, be false or misleading with
respect to any material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements made therein, in the
light of the circumstances under which they are made, not misleading or
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Special Shareholders' Meeting which shall
have become false or misleading. The Schedule 14D-9 and the Proxy Statement
shall comply in all material respects as to form with the requirements of the
Exchange Act and the rules and regulations thereunder. Notwithstanding the
foregoing, the Company makes no representation or warranty with respect to any
information which is supplied in writing by Parent or Purchaser or which is
excerpted from or derived from public sources other than the Company's public
filings with the SEC.

          SECTION 3.13.  Tangible Property; Real Property and Leases. (a)
The Company and the Subsidiaries have good and marketable title to all their
tangible properties and assets, free and clear of all liens and encumbrances,
with only such exceptions as are set forth in Section 3.13 of the Disclosure
Schedule, and subject to (i) liens for taxes, assessments or governmental
charges not yet due, (ii) liens incident to construction, common carriers, and
public warehouse storage, which are either not delinquent or are being contested
in good faith by the Company by appropriate proceedings and as to which
appropriate reserves have been established on the 1998 Balance Sheet, (iii)
liens or deposits in connection with workers' compensation, unemployment, or
other insurance, social security laws, or to secure customs' duties, public or
statutory obligations in lieu of surety, stay or appeal bonds, or to secure
performance of contracts or bids (other than contracts for the payment of money
borrowed), or deposits required by law or governmental regulations or by any
court order, decree, judgment or rule as condition to the transaction of
business or the exercise of any right, privilege or license or (iv) other liens
or deposits of a like nature made in the ordinary course of business.

          (b)  No parcel of real property owned or leased by the
Company or any Subsidiary is subject to any governmental decree or order to be
sold nor is being condemned, expropriated or otherwise taken by any public
authority with or without payment of compensation therefor, nor, to the
knowledge of the Company, has any such condemnation, expropriation or taking
been proposed or threatened.

          (c)  All leases of real property leased for the use or
benefit of the Company or any Subsidiary to which the Company or any Subsidiary
is a party having a term in excess of ten years or requiring rental payments in
excess of U.S. $100,000 during the period of the lease and all amendments and
modifications thereto are in full force and effect and have not been modified or
amended, and there exists no default under any such lease by the Company or any
Subsidiary, nor any event which with notice or lapse of time or both would
reasonably be expected to constitute a default thereunder by the Company or any
Subsidiary, nor, to the knowledge of the Company, does there exist any default,
or any event which with notice or lapse of time or both would reasonably be
expected to constitute a default thereunder, by any other party to any such
lease. Section 3.13 of the Disclosure Schedule sets forth an accurate and
complete list of each

                                       16
<PAGE>   22

parcel of real property owned or leased by the Company or any Subsidiary and of
the leases and other documents described in the immediately preceding sentence,
and accurate and complete copies of each such lease and other documents have
been provided to the Parent.

          SECTION 3.14.  Trademarks, Patents and Copyrights. Except as
set forth in Section 3.14 of the Disclosure Schedule, the Company and the
Subsidiaries own or possess adequate licenses or other valid rights to use all
material patents, patent rights, trademarks, trademark rights, trade names,
trade dress, trade name rights, copyrights, servicemarks, trade secrets,
applications for trademarks and for servicemarks, mask works, know-how and other
proprietary rights and information (collectively, "Proprietary Rights") used or
held for use in connection with the business of the Company and the Subsidiaries
as conducted since June 30, 1997, as currently conducted or as contemplated to
be conducted, and the Company is unaware of any assertion or claim challenging
the validity of any of such Proprietary Rights. Except as set forth in Section
3.14 of the Disclosure Schedule, the conduct of the business of the Company and
the Subsidiaries did not, does not and will not conflict in any way with any
Proprietary Rights of any third party that, individually or in the aggregate,
would have a Material Adverse Effect with respect to the Company. Except as set
forth in Section 3.14 of the Disclosure Schedule, there are no infringements of
any Proprietary Rights owned by or licensed by or to the Company or any
Subsidiary. Except as set forth in Section 3.14 of the Disclosure Schedule,
neither the Company nor any Subsidiary has licensed or otherwise permitted the
use by any third party of any Proprietary Rights.

          SECTION 3.15.  Taxes. The Company and the Subsidiaries have
filed all federal, state, local and foreign tax returns and reports (as defined
below) required to be filed by them and have paid and discharged all taxes (as
defined below) that have become due as of the date hereof, other than such
payments as are being contested in good faith by appropriate proceedings and
other than such payments as to which adequate reserves are set forth on the 1998
Balance Sheet. Neither the IRS nor any other taxing authority or agency,
domestic or foreign, is now asserting or, to the knowledge of the Company,
threatening to assert against the Company or any Subsidiary any deficiency or
claim for additional taxes or interest thereon or penalties in connection
therewith. To the knowledge of the Company's management, no tax return or
taxable period of the Company is under examination by any taxing authority, and
Company has not received written notice of any pending audit by any taxing
authority. Except as set forth on Schedule 3.15 of the Disclosure Schedule, the
Company is not a party to any agreement or contract which would result in
payment of any "excess parachute payment" within the meaning of Section 280G of
the Code. The Company has not been and is not a United States real property
holding company (as defined in Section 897(c)(2) of the Code) during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code). Neither
the Company nor any Subsidiary has granted any waiver of any statute of
limitations with respect to, or any extension of a period for the assessment of,
any federal, state, county, municipal or foreign income tax which is currently
in effect. The accruals and reserves for taxes reflected in the 1998 Balance
Sheet are adequate to cover all taxes accruable through such date (including
interest and penalties, if any, thereon) in accordance with GAAP. Neither the
Company nor any Subsidiary has made an election under Section 341(f) of the Code
or agreed to have Section 341(f)(2) of the Code apply to any disposition of a
subsection (f) asset owned by the Company or any of the Subsidiaries. For

                                       17
<PAGE>   23

purposes of this Agreement, "taxes" shall mean all taxes or other like
assessments including, without limitation, income, withholding, gross receipts,
excise, real or personal property, asset, sales, use, license, payroll,
transaction, capital, net worth and franchise taxes imposed by or payable to any
federal, state, county, local or foreign government, taxing authority,
subdivision or agency thereof, including interest, penalties, additions to tax
or additional amounts thereto. For purposes of this Agreement, "tax return"
shall mean any report, return, declaration or other information required to be
supplied to a taxing authority in connection with taxes. The Transactions,
including the Offer and the Merger, will not cause any change in the taxes
payable by any Subsidiary of the Company.

          SECTION 3.16.  Environmental Matters. (a) For purposes of this
Agreement, the following terms shall have the following meanings: (i) "Hazardous
Substances" means (A) any asbestos or asbestos-containing material, petroleum
and petroleum products, including crude oil and any fractions thereof, natural
gas, natural gas liquids, synthetic gas, polychlorinated biphenyls or radon; (B)
any pollutant or contaminant; or (C) any substance with respect to which a
federal, state or local agency requires environmental investigation, monitoring,
reporting or remediation; and (ii) "Environmental Law" means any federal, state,
foreign, county or local law relating to (A) releases or threatened releases of
Hazardous Substances or materials containing Hazardous Substances; (B) the
manufacture, handling, transport, use, treatment, storage or disposal of
Hazardous Substances or materials containing Hazardous Substances; or (C)
otherwise relating to pollution of the environment or the protection of human
health.

          (b)  Except as described in Section 3.16 of the Disclosure
Schedule: (i) neither the Company or any of its Subsidiaries, nor any of their
operations, have violated any applicable Environmental Law; (ii) the Company and
each Subsidiary has all material permits and licenses required under any
applicable Environmental Law and is in compliance with all such permits and
licenses; (iii) the soils, surface and ground waters at the properties owned or
leased, currently or in the past, by the Company and each Subsidiary are not
contaminated with any Hazardous Substance; (iv) neither the Company nor any
Subsidiary has received any notice of violation of liability under any
Environmental Law which liability remains unresolved; (v) true, correct and
complete copies of all environmental surveys, reports, assessments and similar
materials which were prepared by or on behalf of the Company, any of its
Subsidiaries or any affiliate of either the Company or any Subsidiary, have been
made available to Parent; and (vi) neither the Company nor any Subsidiary has
contractually assumed any liability of any other person involving Hazardous
Substances or Environmental Laws. Any costs which occur or are reasonably likely
to occur relating to the matters reflected in Section 3.16 of the Disclosure
Schedule shall be borne by the Company and its Subsidiaries and, to the extent
such costs are in excess of $50,000, such excess shall be considered in
determining whether a Material Adverse Effect has occurred.

          SECTION 3.17.  Material Contracts. Each contract or agreement
to which the Company or any of the Subsidiaries is a party that is material to
the Company or any Subsidiary (a "Material Contract"), or that is between the
Company or any Subsidiary, on the one hand, and any director, officer or
affiliate of the Company, on the other hand (an "Affiliate Contract") is in full
force and effect and is enforceable against the parties thereto (including the
Company and

                                       18
<PAGE>   24
the Subsidiaries) in accordance with its terms and no condition or state of
facts exists that, with notice or the passage of time, or both, would constitute
a material default by the Company or any Subsidiary or, to the knowledge of the
Company, any third party under such Material Contracts. The Company or the
applicable Subsidiary and, to the knowledge of the Company, any third party
thereto, has duly complied in all material respects with the provision of each
Material Contract to which it is a party. An accurate and complete list of each
Material Contract and each Affiliate Contract is set forth in Section 3.17 of
the Disclosure Schedule, and accurate and complete copies of each Material
Contract and each Affiliate Contract have been provided to the Parent. The term
Material Contract shall include any agreement, lease, contract, note, mortgage,
indenture, arrangement or other obligation (or any series of related agreements,
lease, contracts, notes, mortgages, indentures, arrangements or other
obligations) entered into by the Company or any of its Subsidiaries (i) of a
nature which would be required to be included as an Exhibit in a registration
statement filed with the SEC under the Securities Act, pursuant to Item
601(b)(10) of Regulation S-K (other than this Agreement); (ii) which involves
the leasing or rental of any significant portion of the real property currently
utilized by the Company or any of the Subsidiaries; (iii) under which the
Company or any Subsidiary has incurred or may incur indebtedness for borrowed
money; (iv) under which the Company or any Subsidiary is leasing any equipment
or other tangible personal property; or (v) which requires the Company or any of
its Subsidiaries to expend funds in excess of $100,000 in any one-year period
and which is not terminable at will by the Company or its Subsidiary, other than
those which relate to the purchase of inventory by the Company or any of its
Subsidiary, each of which shall only be deemed a Material Contract in the event
that it requires the Company or any of its Subsidiaries to expend funds in
excess of $1,000,000 in any one-year period and which is not terminable at will
by the Company or its Subsidiary.

          SECTION 3.18.  Brokers and Counsel. No broker, finder or
investment banker (other than SG Cowen) is entitled to any brokerage, finder's
or other fee or commission in connection with the Transactions based upon
arrangements made by or on behalf of the Company. The Company has heretofore
furnished to Parent a complete and correct copy of all agreements among the
Company or any of its Subsidiaries, on the one hand, and SG Cowen (the "Broker
Agreement") or Stradling Yocca Carlson & Rauth on the other hand (the "Attorney
Engagement") pursuant to which such firms would be entitled to any payment
relating to the Transactions.

          SECTION 3.19.  Year 2000 Compliance. All computer software,
computerized systems, manufacturing equipment and other systems owned or used by
the Company or any Subsidiary, or licensed by the Company or any Subsidiary, as
licensor or as licensee, other than any shrinkwrap software available to retail
customers, and each product sold by the Company, is "Year 2000 Compliant" (as
hereinafter defined), except as disclosed in Section 3.19 of the Disclosure
Schedule. For purposes of this Agreement, "Year 2000 Compliant" shall mean (i)
all such software and systems shall operate in 4-digit year format and, in all
material respects, without errors in the recognition, calculation and processing
of date data relating to century recognition, leap years, single and
multi-century formulae, date values and interfaces of date-related
functionality's; (ii) all date processing shall be conducted in a four-digit
year format and all date sorting that includes a "year field" or "year category"
shall be based upon a four-digit

                                       19

<PAGE>   25
year format; and (iii) any date arithmetic programs or calculators in the
software shall operate in all material respects in accordance with the related
user documentation in the Year 2000, and the years following, without degrading
functionality or performance. The Company and each Subsidiary have taken
appropriate steps to obtain assurances from customers, vendors, suppliers and
licensors as to their Year 2000 Compliance.

                                   ARTICLE IV

             REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER

          Parent and Purchaser hereby, jointly and severally, represent
and warrant to the Company that:

          SECTION 4.01.  Corporate Organization. Each of Parent and
Purchaser is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation and has the requisite
power and authority and all necessary governmental approvals to own, lease and
operate its properties and to carry on its business as it is now being
conducted, except where the failure to be so organized, existing or in good
standing or to have such power, authority and governmental approvals would not,
individually or in the aggregate, have a material adverse effect on the business
or operations of Parent and Purchaser and their respective subsidiaries, taken
as a whole.

          SECTION 4.02.  Authority Relative to This Agreement. Each of
Parent and Purchaser has all necessary corporate power and authority to execute
and deliver this Agreement, to perform its obligations hereunder and to
consummate the Transactions. The execution and delivery of this Agreement by
Parent and Purchaser and the consummation by Parent and Purchaser of the
Transactions have been duly and validly authorized by all necessary corporate
action and no other corporate proceedings on the part of Parent or Purchaser are
necessary to authorize this Agreement or to consummate the Transactions (other
than with respect to the Merger, the filing and recordation of the Certificate
of Merger as required by Delaware Law). This Agreement has been duly and validly
executed and delivered by Parent and Purchaser and, assuming the due
authorization, execution and delivery by the Company, constitutes a legal, valid
and binding obligation of each of Parent and Purchaser enforceable against each
of Parent and Purchaser in accordance with its terms.

          SECTION 4.03.  No Conflict; Required Filings and Consents. (a)
The execution and delivery of this Agreement by Parent and Purchaser do not, and
the performance of this Agreement by Parent and Purchaser will not, (i) conflict
with or violate the Certificate of Incorporation or Bylaws (or equivalent
documents) of either Parent or Purchaser, (ii) conflict with or violate any law,
rule, regulation, order, judgment or decree applicable to Parent or Purchaser or
by which any property or asset of either of them is bound or affected, or (iii)
result in any breach of or constitute a default (or an event which with notice
or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or result in
the creation of a lien or other encumbrance on any property or asset of Parent
or Purchaser pursuant to, any note, bond, mortgage, indenture,

                                       20
<PAGE>   26

contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Parent or Purchaser is a party or by which Parent or
Purchaser or any property or asset of either of them is bound or subject.

          (b)  The execution and delivery of this Agreement by Parent and
Purchaser do not, and the performance of this Agreement by Parent and Purchaser
will not, require any consent, approval, authorization or permit of, or filing
with or notification to, any governmental or regulatory authority, domestic or
foreign, except (i) for applicable requirements, if any, of the Exchange Act,
Blue Sky Laws and state takeover laws, the HSR Act and filing and recordation of
the Certificate of Merger as required by Delaware Law and (ii) where failure to
obtain such consents, approvals, authorizations or permits, or to make such
filings or notifications, would not prevent or delay consummation of the Offer
or the Merger, or otherwise prevent Parent or Purchaser from performing their
respective obligations under this Agreement.

          SECTION 4.04.  Financing.  Parent has, or has commitments to obtain,
sufficient funds to permit Purchaser to acquire all the outstanding Shares in
the Offer and the Merger, evidence of which has been provided to the Company.

          SECTION 4.05.  Offer Documents; Proxy Statement. The Offer
Documents will not, at the time the Offer Documents are filed with the SEC or
are first published, sent or given to shareholders of the Company, as the case
may be, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made therein, in the light of the circumstances under which they are
made, not misleading. The information supplied by Parent for inclusion in the
Proxy Statement and the information statement to be sent to the Company's
shareholders will not, on the date the Proxy Statement (or any amendment or
supplement thereto) is first mailed to shareholders of the Company, at the time
of the Special Shareholders' Meeting, if applicable, and at the Effective Time,
contain any statement which, at such time and in light of the circumstances
under which it is made, is false or misleading with respect to any material
fact, or omits to state any material fact required to be stated therein or
necessary in order to make the statements therein not false or misleading or
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Special Shareholders' Meeting which shall
have become false or misleading. Notwithstanding the foregoing, Parent and
Purchaser make no representation or warranty with respect to any information
supplied by the Company or any of its representatives which is contained in any
of the foregoing documents or the Offer Documents. The Offer Documents shall
comply in all material respects as to form with the requirements of the Exchange
Act and the rules and regulations thereunder.

          SECTION 4.06.  Brokers. No broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in connection
with the Transactions based upon arrangements made by or on behalf of Parent or
Purchaser.

                                       21

<PAGE>   27

                                    ARTICLE V

                     CONDUCT OF BUSINESS PENDING THE MERGER

          SECTION 5.01.  Conduct of Business by the Company Pending the
Merger. The Company covenants and agrees that, between the date of this
Agreement and the Effective Time, unless Parent shall otherwise agree in
writing, the businesses of the Company and the Subsidiaries shall be conducted
only in, and the Company and the Subsidiaries shall not take any action except
in, the ordinary course of business and in a manner consistent with past
practice; and the Company shall use its best efforts to preserve substantially
intact the business organization of the Company and the Subsidiaries, to keep
available the services of the current officers, employees and consultants of the
Company and the Subsidiaries and to preserve the current relationships of the
Company and the Subsidiaries with customers, suppliers and other persons with
which the Company or any Subsidiary has significant business relations. By way
of amplification and not limitation, except as contemplated by this Agreement or
by Section 5.01 of the Disclosure Schedule, neither the Company nor any
Subsidiary shall, between the date of this Agreement and the Effective Time,
directly or indirectly do, or propose to do, any of the following without the
prior written consent of Parent:

          (a)  amend or otherwise change its Articles of Incorporation or Bylaws
     or equivalent organizational documents;

          (b)  issue, sell, pledge, dispose of, grant, encumber, or authorize
     the issuance, sale, pledge, disposition, grant or encumbrance of (i) any
     shares of capital stock of any class of the Company or any Subsidiary, or
     any options, warrants, convertible securities or other rights of any kind
     to acquire any shares of such capital stock, or any other ownership
     interest (including, without limitation, any phantom interest), of the
     Company or any Subsidiary (except for the issuance of a maximum of 994,502
     Shares issuable pursuant to stock options outstanding or any rights to
     purchase Shares under the Company's 1995 Employee Stock Purchase Plan in
     effect on the date hereof) or (ii) any material assets of the Company or
     any Subsidiary, except for sales in the ordinary course of business and in
     a manner consistent with past practice;

          (c)  declare, set aside, make or pay any dividend or other
     distribution, payable in cash, stock, property or otherwise, with respect
     to any of its capital stock;

          (d)  reclassify, combine, split, subdivide or redeem, purchase or
     otherwise acquire, directly or indirectly, any of its capital stock;

          (e)  (i)  acquire (including, without limitation, by merger,
     consolidation, or acquisition of stock or assets or any other business
     combination) any corporation, partnership, other business organization or
     any division thereof or any assets; (ii) incur any indebtedness for
     borrowed money or issue any debt securities or assume, guarantee or
     endorse, pledge in respect of or otherwise as an accommodation become
     responsible

                                       22

<PAGE>   28

     for the obligations of any person, or make any loans or advances, except in
     the ordinary course of business and consistent with past practice, but in
     no event shall there be more than $1,000,000 of indebtedness outstanding at
     any one time in addition to the total amount of indebtedness outstanding as
     of the date of this Agreement; (iii) enter into any contract or agreement
     which is outside of the ordinary course of business, consistent with past
     practice, or which requires payments by the Company or the Subsidiaries in
     an aggregate amount of more than U.S. $100,000, other than contracts or
     agreements relating to the purchase of inventory by the Company or the
     Subsidiaries in the ordinary course of business, which contracts or
     agreements will not be subject to such $100,000 limitation; (iv) terminate,
     cancel or permit any change in, or agree to any change in, any Material
     Contract, except in the ordinary course of business consistent with past
     practice; (v) terminate, cancel or permit any change in, or agree to any
     change in, any Affiliate Agreement, Broker Agreement or Attorney
     Engagement; (vi) other than the proposed capital expenditures described in
     Schedule 5.01(e) of the Disclosure Schedule, authorize any single capital
     expenditure which is in excess of U.S. $100,000 or capital expenditures
     which are, in the aggregate, in excess of U.S. $250,000 for the Company and
     the Subsidiaries taken as a whole; or (vii) enter into or amend any
     contract, agreement, commitment or arrangement with respect to any matter
     set forth in this Section 5.01(e);

          (f)  increase the compensation payable or to become payable to its
     directors, officers or employees, except for normal increases consistent
     with past practices in salaries or wages of employees of the Company or any
     Subsidiary who are not officers of the Company, or grant any severance or
     termination pay to, or enter into any employment, severance, termination,
     stay-bonus or similar agreement with, any director, officer or other
     employee of the Company or any Subsidiary, or establish, adopt, enter into
     or amend any collective bargaining, bonus, profit sharing, thrift,
     compensation (including any sales compensation plan), stock option,
     restricted stock, pension, retirement, deferred compensation, employment,
     termination, severance or other plan, agreement, trust, fund, policy or
     arrangement for the benefit of any director, officer or employee, or
     communicate to employees, accrue any benefits under or otherwise implement
     the Company's 1999 Executive Incentive Plan;

          (g)  take any action, other than (i) reasonable and usual actions in
     the ordinary course of business and consistent with past practice or (ii)
     as required by the SEC, with respect to accounting policies or procedures
     (including, without limitation, procedures with respect to the payment of
     accounts payable and collection of accounts receivable);

          (h)  make any tax election or settle or compromise any material
     federal, state, local or foreign income tax liability;

          (i)  pay, discharge or satisfy any material claim, liability or
     obligation (absolute, accrued, asserted or unasserted, contingent or
     otherwise), other than the payment, discharge or satisfaction, in the
     ordinary course of business and consistent with past practice, of
     liabilities reflected or reserved against in the 1998 Balance Sheet or

                                       23
<PAGE>   29

     subsequently incurred in the ordinary course of business and consistent
     with past practice or incurred in connection with the Transactions; or

          (j)  announce an intention, enter into any formal or informal
     agreement, or otherwise make a commitment, to do any of the foregoing.

                                   ARTICLE VI

                              ADDITIONAL AGREEMENTS

          SECTION 6.01.  Special Shareholders' Meeting. The Company,
acting through the Board, shall, in accordance with applicable law and the
Company's Articles of Incorporation and Bylaws, unless not required under
applicable "short-form" merger provisions of Delaware Law, (i) duly call, give
notice of, convene and hold a special meeting of its shareholders as soon as
practicable following consummation of the Offer for the purpose of considering
and taking action on this Agreement and the transactions contemplated hereby
(the "Special Shareholders' Meeting") and (ii) subject to the provisions of
Sections 6.04 and 8.01 below, (A) include in the Proxy Statement the unanimous
recommendation of the Board that the shareholders of the Company approve and
adopt this Agreement and the Transactions, including, without limitation, the
Merger and (B) use its best efforts to obtain such approval and adoption. At the
Special Shareholders' Meeting (or by consent if a shareholders meeting is not
required), Parent and Purchaser shall cause all Shares then owned by them and
their subsidiaries to be voted in favor of the approval and adoption of this
Agreement and the Transactions, including, without limitation, the Merger.

          SECTION 6.02.  Proxy Statement. As soon as practicable
following consummation of the Offer, the Company shall file the Proxy Statement
with the SEC under the Exchange Act, unless not required under applicable
"short-form" merger provisions of Delaware Law, and shall use its best efforts
to have the Proxy Statement cleared by the SEC. Parent, Purchaser and the
Company shall cooperate with each other in the preparation of the Proxy
Statement, and the Company shall notify Parent promptly of the receipt of any
comments of the SEC with respect to the Proxy Statement and of any requests by
the SEC for any amendment or supplement thereto or for additional information
and shall provide to Parent promptly copies of all correspondence between the
Company or any representative of the Company and the SEC. The Company shall give
Parent and its counsel the opportunity to review the Proxy Statement prior to
its being filed with the SEC and shall give Parent and its counsel the
opportunity to review all amendments and supplements to the Proxy Statement and
all responses to requests for additional information and replies to comments
prior to their being filed with, or sent to, the SEC. Each of the Company,
Parent and Purchaser agrees to use its best efforts, after consultation with the
other parties hereto, to respond promptly to all such comments of and requests
by the SEC and to cause the Proxy Statement and all required amendments and
supplements thereto to be mailed to the holders of Shares entitled to vote at
the Special Shareholders' Meeting at the earliest practicable time.

                                       24

<PAGE>   30

          SECTION 6.03.  Access to Information; Confidentiality. (a) From
the date hereof to the Effective Time, the Company shall, and shall cause the
Subsidiaries and the officers, directors, employees, auditors and agents of the
Company and the Subsidiaries to, afford the officers, employees and agents of
Parent and Purchaser access at all reasonable times to the officers, employees,
agents, properties, offices, plants and other facilities, books and records of
the Company and each Subsidiary, shall instruct its independent auditors to make
available its accountants' work papers to the officers, employees and agents of
Parent and Purchaser, and shall furnish Parent and Purchaser with all financial,
operating and other data and information as Parent or Purchaser, through its
officers, employees or agents, may reasonably request.

          (b)  All information obtained by Parent or Purchaser pursuant to this
Section 6.04 shall be kept confidential, by Purchaser, by Parent and by any
other party which is to be afforded access pursuant to Section 6.03(a), in
accordance with the confidentiality agreement, dated February 2, 1999, as
amended on February 3, 1999 (the "Confidentiality Agreement"), between Parent
and the Company.

          SECTION 6.04.  No Solicitation of Transactions. Neither the
Company nor any Subsidiary shall, directly or indirectly, through any officer,
director, agent or otherwise, solicit, initiate or encourage the submission of
any proposal or offer from any person relating to any acquisition or purchase of
all or any material portion of the assets of, or any equity interest in (other
than pursuant to the exercise of options outstanding on the date hereof), the
Company or any Subsidiary or any merger, consolidation, business combination,
reorganization, recapitalization or similar transaction involving the Company or
any Subsidiary (each a "Competing Transaction") or participate in any
discussions or negotiations regarding, or furnish to any other person any
information with respect to, or otherwise cooperate in any way with, or assist
or participate in, facilitate or encourage, any effort or attempt by any other
person to do or seek any of the foregoing. The Company and each of its
Subsidiaries will cease and cause to be terminated any existing activities,
discussions or negotiations by or on its behalf with any other person conducted
heretofore with respect to any Competing Transaction and will promptly notify
Parent following receipt of any request by any person relating to any possible
Competing Transaction or information concerning the Company. The Company agrees
that it will not disclose any of the terms of this Agreement or the matters
referred to herein to any other prospective acquiror of the Company until the
Effective Time or earlier if this Agreement is terminated in accordance with its
terms, except to the extent such disclosure is contemplated by this Agreement or
is otherwise required by law or the regulations of the Nasdaq Stock Market.
Nothing contained in this Section 6.04 shall prohibit the Board from furnishing
information to, or entering into discussions or negotiations with, any person in
connection with an unsolicited (from the date of this Agreement) proposal
involving a fully-financed (as represented by such person) Competing Transaction
which is made in writing by such person and which, if consummated, would provide
consideration per Share to the shareholders of the Company in excess of the Per
Share Amount (a "Superior Proposal"), if, and only to the extent that, the Board
determines in good faith, based upon the advice of SG Cowen and the written
advice of Stradling Yocca Carlson & Rauth, that such action is required for the
Board to comply with its fiduciary duties to shareholders under Delaware Law.

                                       25

<PAGE>   31

          SECTION 6.05.  Employee Benefits Matters; Employment Agreements. For a
period of one year from the Effective Time, Parent shall, or shall cause the
Company or the Surviving Corporation to, maintain the Plans (other than the
Stock Option Plans, the Company's 1995 Employee Stock Purchase Plan and the
Company's 1999 Key Employees Stock Ownership Plan) which the Company maintains
for the benefit of, or which are open to, a majority of the employees of the
Company on the terms in effect on the date hereof, or such other plans,
arrangements or programs as will provide employees with benefits that in the
aggregate are substantially equivalent to those provided under the Plans (other
than the Stock Option Plans, the Company's 1995 Employee Stock Purchase Plan and
the Company's 1999 Key Employees Stock Ownership Plan) as in effect on the date
hereof. In addition, Parent shall, or shall cause the Surviving Corporation to,
assume and agree to perform those agreements and policies listed in Schedule
6.05 of the Disclosure Schedule in the same manner and to the same extent that
the Company is required to perform such agreements and policies as of the date
hereof, and Parent shall not, and shall cause the Surviving Corporation to not,
withdraw or modify the obligations of Parent or the Surviving Corporation
thereunder, as the case may be, without obtaining the prior consent of the other
party or parties thereto, or the current beneficiaries thereof.

          SECTION 6.06.  Directors' and Officers' Indemnification and Insurance.

          (a)  The Articles of Incorporation and Bylaws of the Surviving
Corporation shall contain provisions no less favorable with respect to
indemnification than are set forth in Article VII of the Bylaws of the Company,
which provisions shall not be amended, repealed or otherwise modified for a
period of six years from the Effective Time in any manner that would affect
adversely the rights thereunder of individuals who at the Effective Time were
directors, officers, employees, fiduciaries or agents of the Company, unless
such modification shall be required by law. Any determinations made pursuant to
Section 3 of Article VII of the Bylaws of the Company with respect to the
appropriateness of indemnification shall be made in good faith.

          (b)  The Company shall, to the extent permitted by Delaware Law,
indemnify and hold harmless, and, after the Effective Time, the Surviving
Corporation shall, to the extent permitted by Delaware Law, indemnify and hold
harmless, each present and former director, officer, employee, fiduciary and
agent of the Company and each Subsidiary (collectively, the "Indemnified
Parties") against all costs and expenses (including reasonable attorneys' fees),
judgments, fines, losses, claims, damages, liabilities and settlement amounts
paid in connection with any claim, action, suit, proceeding or investigation
(whether arising before or after the Effective Time), whether civil, criminal,
administrative or investigative, arising out of or pertaining to any action or
omission in their capacity as an officer, director, employee, fiduciary or
agent, whether occurring before or after the Effective Time, for a period of six
years after the date hereof. In the event of any such claim, action, suit,
proceeding or investigation, (i) the Company or the Surviving Corporation, as
the case may be, shall pay the reasonable fees and expenses of counsel selected
by the Indemnified Parties, which counsel shall be reasonably satisfactory to
the Company or the Surviving Corporation, promptly after statements therefor are
received and (ii) the Company and the Surviving Corporation shall cooperate in
the defense of any such matter; provided, however, that neither the Company nor
the Surviving Corporation shall be liable for any settlement effected without
its written consent (which consent shall not be

                                       26
<PAGE>   32
unreasonably withheld); provided further that neither the Company nor the
Surviving Corporation shall be obligated pursuant to this Section 6.06(b) to pay
the fees and expenses of more than one counsel for all Indemnified Parties in
any single action except to the extent that two or more of such Indemnified
Parties shall have conflicting interests in the outcome of such action; and
provided further that, in the event that any claim for indemnification is
asserted or made within such six-year period, all rights to indemnification in
respect of such claim shall continue until the disposition of such claim.

          (c)  Prior to the Effective Time the Company shall, and
after the Effective Time the Surviving Corporation shall, make reasonable
advances to the Indemnified Parties to cover expenses for which such Indemnified
Parties would otherwise be entitled to indemnification pursuant to this Section
6.06, subject to receipt of an undertaking by the Indemnified Parties to
reimburse the Company for all such amounts advanced if it is subsequently
determined that the Company is not required to indemnify such Indemnified Party.

          (d)  The Surviving Corporation shall use its best efforts
to maintain in effect for six years from the Effective Time, if available, the
current directors' and officers' liability insurance policies maintained by the
Company (provided that the Surviving Corporation may substitute therefor
policies of at least the same coverage containing terms and conditions which are
not materially less favorable) with respect to matters occurring on or prior to
the Effective Time; provided, however, that in no event shall the Surviving
Corporation be required to expend pursuant to this Section 6.06(d) more than an
amount per year equal to 150% of current annual premiums paid by the Company for
such insurance, which amount shall be increased by 5% for each year hereafter.

          (e)  In the event the Company or the Surviving Corporation
or any of their respective successors or assigns (i) consolidates with or merges
into any other person and shall not be the continuing or surviving corporation
or entity of such consolidation or merger or (ii) transfers all or substantially
all of its properties and assets to any person, then, and in each such case,
proper provision shall be made so that the successors and assigns of the Company
or the Surviving Corporation, as the case may be, or at Parent's option, Parent,
shall assume the obligations set forth in this Section 6.06.

          SECTION 6.07.  Notification of Certain Matters. The Company
shall give prompt notice to Parent, and Parent shall give prompt notice to the
Company, of (i) the occurrence, or non-occurrence, of any event the occurrence,
or non-occurrence, of which causes any representation or warranty contained in
this Agreement to be untrue or inaccurate in any material respect and (ii) any
failure of the Company, Parent or Purchaser, as the case may be, to comply with
or satisfy any material covenant, condition or agreement to be complied with or
satisfied by it hereunder.

          SECTION 6.08.  Further Action; Reasonable Best Efforts. Upon
the terms and subject to the conditions hereof (including, without limitation,
Section 6.04), each of the parties hereto shall (i) make promptly its respective
filings, and thereafter make any other required submissions, under the HSR Act
with respect to the Transactions and (ii) use its reasonable best

                                       27
<PAGE>   33
efforts to take, or cause to be taken, all appropriate action, and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the Transactions,
including, without limitation, using its reasonable best efforts to obtain all
licenses, permits (including, without limitation, environmental permits),
consents, approvals, authorizations, qualifications and orders of governmental
authorities and parties to contracts with the Company and the Subsidiaries as
are necessary for the consummation of the Transactions and to fulfill the
conditions to the Offer and the Merger. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement, the proper officers and directors of each party to this
Agreement shall use their reasonable best efforts to take all such action.

          SECTION 6.09.  Public Announcements. Parent and the Company shall
consult with each other before issuing any press release or otherwise
making any public statements with respect to this Agreement or any Transaction
and shall not issue any such press release or make any such public statement
prior to such consultation, except as may be required by law or any listing
agreement with a national securities exchange or The Nasdaq Stock Market to
which Parent or the Company is a party.

          SECTION 6.10.  Confidentiality  Agreement.  Upon the  acceptance  for
payment of Shares pursuant to the Offer, the Confidentiality Agreement shall be
deemed to have terminated without further action by the parties thereto.

          SECTION 6.11   Financial Statements. As soon as they are made
available to senior management of the Company, the Company shall make available
to Parent copies of all internally generated monthly, quarterly and annual
financial statements, consisting of consolidated balance sheets, and statements
of income and of cash flows.

          SECTION 6.12   SEC Reports. The Company shall timely file all
quarterly, annual and other reports and information required to be filed by it
with the SEC under the Exchange Act for all periods through and including the
Effective Time and, promptly after making such filing, shall provide Parent with
an accurate and complete copy thereof. The delivery to Parent of copies of any
such reports and information shall constitute a representation and warranty by
the Company to Parent that such report or information was prepared in accordance
with the requirements of the Exchange Act and did not, at the time it was filed,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements made
therein, in light of the circumstances in which they were made, not misleading.

          SECTION 6.13   Customer Calls. The Company shall, and shall
cause each of its Subsidiaries and the officers, directors, employees and agents
of the Company and its Subsidiaries to, participate with Parent in visiting and
communicating with customers of the Company and its Subsidiaries, as reasonably
requested by Parent prior to the Effective Time.

                                       28

<PAGE>   34

                                   ARTICLE VII

                            CONDITIONS TO THE MERGER

          SECTION 7.01.  Conditions to the Merger. The respective obligations
of each party to effect the Merger shall be subject to the satisfaction at or
prior to the Effective Time of the following conditions:

          (a)  Shareholder Approval. This Agreement and the Transactions,

     including, without limitation, the Merger, shall have been approved and
     adopted by the affirmative vote of the shareholders of the Company (unless
     the vote of the shareholders is not required by Delaware Law);

          (b)  No Order. No foreign, United States or state governmental
     authority or other agency or commission or foreign, United States or state
     court of competent jurisdiction shall have enacted, issued, promulgated,
     enforced or entered any law, rule, regulation, executive order, decree,
     injunction or other order (whether temporary, preliminary or permanent)
     which is then in effect and has the effect of making the acquisition of
     Shares by Parent or Purchaser or any affiliate of either of them or the
     consummation of the Merger illegal or otherwise restricting, preventing or
     prohibiting consummation of the Transactions;

          (c)  Offer. Purchaser or its permitted assignee shall have
     purchased all Shares validly tendered and not withdrawn pursuant to the
     Offer; provided, however, that this condition shall only be applicable to
     the obligations of Parent or Purchaser if Purchaser's failure to purchase
     such Shares is not in breach of this Agreement or the terms of the Offer;
     and

          (d)  HSR Act and Foreign Antitrust Laws. Any waiting period
     (and any extension thereof) applicable to the consummation of the Merger
     under the HSR Act shall have expired or been terminated, and consummation
     of the Merger shall not result in a violation of any applicable material
     foreign antitrust or competition law, rule or regulation.

                                  ARTICLE VIII

                        TERMINATION, AMENDMENT AND WAIVER

          SECTION 8.01. Termination. This Agreement may be terminated and the
Merger and the other Transactions may be abandoned at any time prior to the
Effective Time, notwithstanding any requisite approval and adoption of this
Agreement and the transactions contemplated hereby by the shareholders of the
Company:

                                       29
<PAGE>   35

          (a)  By mutual written consent duly authorized by the Boards of
     Directors of Parent, Purchaser and the Company; or

          (b)  By Parent, Purchaser or the Company if (i) the Effective
     Time shall not have occurred on or before December 31, 1999; provided,
     however, that the right to terminate this Agreement under this Section
     8.01(b) shall not be available to any party whose failure to fulfill any
     obligation under this Agreement has been the cause of, or resulted in, the
     failure of the Effective Time to occur on or before such date or (ii) any
     court of competent jurisdiction in the United States or other governmental
     authority shall have issued an order, decree, ruling or taken any other
     action restraining, enjoining or otherwise prohibiting the Offer or the
     Merger and such order, decree, ruling or other action shall have become
     final and nonappealable; or

          (c)  By Parent, upon approval of its Board of Directors, if (i)
     due to an occurrence or circumstance that would result in a failure to
     satisfy any condition set forth in Annex A hereto, Purchaser shall have (A)
     failed to commence the Offer within 60 days following the date of this
     Agreement, (B) terminated the Offer without having accepted any Shares for
     payment thereunder or (C) failed to pay for Shares pursuant to the Offer
     within 90 days following the commencement of the Offer; unless such action
     or inaction under (A), (B) or (C) shall have been caused by or resulted
     from the failure of Parent or Purchaser to perform in any material respect
     any covenant or agreement of either of them contained in this Agreement or
     the material breach by Parent or Purchaser of any representation or
     warranty of either of them contained in this Agreement or (ii) prior to the
     purchase of Shares pursuant to the Offer, the Board or any committee
     thereof shall have publicly withdrawn or modified in a manner adverse to
     Purchaser or Parent or, after receipt of a proposal involving a Competing
     Transaction, upon the request of Parent, shall not have, within four
     business days after receipt of Parent's request, publicly reaffirmed, its
     approval or recommendation of the Offer, this Agreement, the Merger, the
     Shareholder Agreements or any other Transaction, or shall have recommended
     another merger, consolidation, business combination, recapitalization,
     reorganization or similar transaction involving, or acquisition of, the
     Company or its assets, or another tender offer or exchange offer for
     Shares, or shall have resolved to do any of the foregoing; or

          (d)  By the Parent, upon approval of its Board of Directors, if
     the Company shall have materially breached its obligations under Section
     6.04 above; or

          (e)  By the Company, upon approval of the Board, if Parent or
     Purchaser shall materially breach any of its obligations hereunder and
     shall fail to cure such breach within ten days after written notice thereof
     from the Company or if due to an occurrence or circumstance that would
     result in a failure to satisfy any of the conditions set forth in Annex A
     hereto, Purchaser shall have (A) failed to commence the Offer within 60
     days following the date of this Agreement, (B) terminated the Offer without
     having accepted any Shares for payment thereunder or (C) failed to pay for
     Shares pursuant to the Offer within 90 days following the commencement of
     the Offer, unless such action or inaction under (A), (B), and (C) shall
     have been caused by or resulted from the failure of the

                                       30
<PAGE>   36

     Company to perform in any material respect any covenant or agreement of it
     contained in this Agreement or the material breach by the Company of any
     representation or warranty of it contained in this Agreement; or

                  (f) by the Company or Parent, prior to the purchase of Shares
         pursuant to the Offer, if the Board, in full compliance with the
         provisions of Section 6.04 above, shall have approved the execution by
         the Company of a definitive agreement relating to a Superior Proposal.

          SECTION 8.02.  Effect of Termination. In the event of the termination
of this Agreement pursuant to Section 8.01, this Agreement shall forthwith
become void, and there shall be no liability on the part of any party hereto,
except as set forth in Sections 8.03 and 9.01, and nothing herein shall relieve
any party from liability for any breach hereof.

          SECTION 8.03.  Fees and Expenses.  (a) In the event that

          (i)  any person shall have commenced a tender or exchange offer
     for 25% or more (or which, assuming the maximum amount of securities which
     could be purchased, would result in any person beneficially owning 25% or
     more) of the then outstanding Shares or otherwise publicly announced a
     Competing Transaction for the direct or indirect acquisition of the Company
     or all or substantially all of its assets and (w) the Board does not
     recommend against the Competing Transaction, (x) the Offer shall have
     remained open for at least 20 business days, (y) the Minimum Condition
     shall not have been satisfied and (z) this Agreement shall have been
     terminated pursuant to Section 8.01; or

          (ii) this Agreement is terminated (x) pursuant to Section 8.01(c)(ii)
     or (y) pursuant to Section 8.01(d) or (z) pursuant to Section 8.01(f);

then, in any such event, the Company shall pay Parent promptly (but in no event
later than one business day after the first of such events shall have occurred)
a fee of U.S. $2,500,000 (the "Fee"), which amount shall be payable in
immediately available funds.

          (b)  Except as set forth above, all costs and expenses incurred in
connection with this Agreement and the Transactions shall be paid by the party
incurring such expenses, whether or not any Transaction is consummated.

          SECTION 8.04.  Amendment. This Agreement may be amended by the
parties hereto by action taken by or on behalf of their respective Boards of
Directors at any time prior to the Effective Time; provided, however, that,
after the approval and adoption of this Agreement and the transactions
contemplated hereby by the shareholders of the Company, no amendment may be made
which would reduce the amount or change the type of consideration into which
each Share shall be converted upon consummation of the Merger. This Agreement
may not be amended except by an instrument in writing signed by the parties
hereto.

                                       31
<PAGE>   37

          SECTION 8.05.  Waiver. At any time prior to the Effective Time,any
party hereto may (i) extend the time for the performance of any obligation or
other act of any other party hereto, (ii) waive any inaccuracy in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any agreement or condition
contained herein. Any such extension or waiver shall be valid if set forth in an
instrument in writing signed by the party or parties to be bound thereby.

                                   ARTICLE IX

                               GENERAL PROVISIONS

          SECTION 9.01. Non-Survival of Representations, Warranties and
Agreements. The representations, warranties and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this Agreement
pursuant to Section 8.01, as the case may be, except that the agreements set
forth in Articles II and IX and in Section 6.06 shall survive the Effective Time
indefinitely and those set forth in Section 8.03 and Article IX shall survive
termination indefinitely.

          SECTION 9.02. Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given (and shall
be deemed to have been duly given upon receipt) by delivery in person, by
facsimile, by United States express mail (postage prepaid, return receipt
requested) or by overnight courier guaranteeing next business day delivery to
the respective parties at the following addresses (or at such other address for
a party as shall be specified in a notice given in accordance with this Section
9.02):

          if to Parent or Purchaser:

               Saturn Electronics & Engineering, Inc.
               255 Rex Boulevard
               Auburn Hills, Michigan  48326
               Attention:  Wallace K. Tsuha, President,
                    Chief Executive Officer and Chairman of the Board
               Facsimile:  (248) 853-2645

          with a copy to:

               Honigman Miller Schwartz and Cohn
               2290 First National Building
               660 Woodward Avenue
               Detroit, Michigan  48226
               Attention:  Donald J. Kunz, Esq.
               Facsimile:  (313) 465-7455

                                       32
<PAGE>   38

          if to the Company:

               Smartflex Systems, Inc.
               14312 Franklin Avenue
               Tustin, California  92781
               Attention:  William Healey, President,
                    Chief Executive Officer and Chairman of the Board
               Facsimile:  (714) 838-3130

          with a copy to:

               Stradling Yocca Carson & Rauth
               660 Newport Center Drive
               Suite 1600
               Newport Beach, California  92660
               Attention:  Nick E. Yocca, Esq.
               Facsimile:  (949) 725-4100

          SECTION 9.03.  Certain Definitions.  For purposes of this Agreement,
the term:

          (a)  "affiliate" of a specified person means a person who directly or
     indirectly through one or more intermediaries controls, is controlled by,
     or is under common control with, such specified person;

          (b)  "beneficial owner" with respect to any Shares means a person who
     shall be deemed to be the beneficial owner of such Shares (i) which such
     person or any of its affiliates or associates (as such term is defined in
     Rule 12b-2 promulgated under the Exchange Act) beneficially owns, directly
     or indirectly, (ii) which such person or any of its affiliates or
     associates has, directly or indirectly, (A) the right to acquire (whether
     such right is exercisable immediately or subject only to the passage of
     time), pursuant to any agreement, arrangement or understanding or upon the
     exercise of consideration rights, exchange rights, warrants or options, or
     otherwise, or (B) the right to vote pursuant to any agreement, arrangement
     or understanding or (iii) which are beneficially owned, directly or
     indirectly, by any other persons with whom such person or any of its
     affiliates or associates or person with whom such person or any of its
     affiliates or associates has any agreement, arrangement or understanding
     for the purpose of acquiring, holding, voting or disposing of any Shares;

          (c)  "business day" means any day on which the principal offices of
     the SEC in Washington, D.C. are open to accept filings, or, in the case of
     determining a date when any payment is due, any day on which banks are not
     required or authorized to close in the City of New York;

          (d)  "control" (including the terms "controlled by" and "under common
     control with") means the possession, directly or indirectly or as trustee
     or executor, of the power

                                       33
<PAGE>   39

     to direct or cause the direction of the management and policies of a
     person, whether through the ownership of voting securities, as trustee or
     executor, by contract or credit arrangement or otherwise;

          (e)  "person" means an individual, corporation, partnership,
     limited partnership, syndicate, person (including, without limitation, a
     "person" as defined in Section 13(d)(3) of the Exchange Act), trust,
     association or entity or government, political subdivision, agency or
     instrumentality of a government; and

          (f)  "subsidiary" or "subsidiaries" of the Company, the Surviving
     Corporation, Parent or any other person means an affiliate controlled by
     such person, directly or indirectly, through one or more intermediaries.

          SECTION 9.04.  Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the Transactions is not affected in any manner materially adverse
to any party. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the Transactions be consummated as originally contemplated to the
fullest extent possible.

          SECTION 9.05.  Entire Agreement, Assignment. This Agreement
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes, except as set forth in Sections 6.03(b) and 6.10,
all prior agreements and undertakings, both written and oral, among the parties,
or any of them, with respect to the subject matter hereof; provided, however,
the third full paragraph of page 3 of the Confidentiality Agreement shall not be
deemed to reduce or modify the Company's obligations with respect to any
representation or warranty made pursuant to this Agreement. This Agreement shall
not be assigned by operation of law or otherwise, except that Parent and
Purchaser may assign all or any of their rights and obligations hereunder to any
affiliate of Parent provided that no such assignment shall relieve the assigning
party of its obligations hereunder if such assignee does not perform such
obligations.

          SECTION 9.06.  Parties in Interest. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto, and nothing
in this Agreement, express or implied, is intended to or shall confer upon any
other person any right, benefit or remedy of any nature whatsoever under or by
reason of this Agreement, other than Section 6.06 (which is intended to be for
the benefit of the persons covered thereby and may be enforced by such persons).

          SECTION 9.07.  Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.

                                       34
<PAGE>   40

          SECTION 9.08.  Governing Law. The Merger and the rights of the
shareholders of the Company, this Agreement shall be governed by, and construed
in accordance with, the laws of the State of Delaware regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws.

          SECTION 9.09.  Headings. The descriptive  headings  contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.

          SECTION 9.10.  Counterparts; Facsimile. This Agreement may be
executed in one or more counterparts (including by facsimile signature), each of
which shall be an original and all of which, when taken together, shall be one
and the same agreement.

                                       35
<PAGE>   41

          IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.

                                        SATURN ELECTRONICS &
                                        ENGINEERING, INC.

Attest:

/s/ Jereen G. Trudell                   By: /s/ W. Tsuha
----------------------------------         ------------------------------------
Name: Jereen G. Trudell                    Name: Wallace K. Tsuha, Jr.
                                           Title: President, Chief Executive
                                                  Officer and Chairman of the
                                                  Board

                                        SSI ACQUISITION CORP.

Attest:

/s/ Jereen G. Trudell                   By: /s/ W. Tsuha
----------------------------------         ------------------------------------
Name: Jereen G. Trudell                    Name: Wallace K. Tsuha, Jr.
                                           Title: President, Chief Executive
                                                  Officer and Chairman of the
                                                  Board

                                        SMARTFLEX SYSTEMS, INC.
Attest:

/s/ John Hohener                         By: /s/ William L. Healey
----------------------------------         ------------------------------------
Name: John Hohener                         Name: William L. Healey
                                           Title: President

                                       36
<PAGE>   42

                                                                         ANNEX A

                             Conditions to the Offer

          Notwithstanding any other provision of the Offer, Purchaser shall not
be required to accept for payment or pay for any Shares tendered pursuant to the
Offer, and may terminate or amend the Offer and may postpone the acceptance for
payment of and payment for Shares tendered, if (i) the Minimum Condition shall
not have been satisfied, (ii) any applicable waiting period under the HSR Act
shall not have expired or been terminated prior to the expiration of the Offer,
(iii) acceptance for payment of and payment for Shares tendered would result in
a violation of any applicable material foreign antitrust or competition law,
rule or regulation, or (iv) at any time on or after the date of this Agreement,
and prior to the acceptance for payment of Shares, any of the following
conditions shall exist:

          (a)  there shall have been entered any order, preliminary or
     permanent injunction, decree, judgment or ruling in any action or
     proceeding before any court or governmental, administrative or regulatory
     authority or agency, which makes illegal or otherwise directly or
     indirectly restrains or prohibits or makes materially more costly the
     making of the Offer, the acceptance for payment of, or payment for, any
     Shares by Parent, Purchaser or any other affiliate of Parent, or the
     consummation of any other Transaction;

          (b)  there shall have occurred any Material Adverse Effect with
     respect to the Company;

          (c)  (i)  the Board or any committee thereof (x) shall have
     publicly withdrawn or modified in a manner adverse to Parent or Purchaser
     the approval or recommendation of the Offer, the Merger, the Shareholder
     Agreements or the Agreement, (y) after the Company's receipt of a proposal
     involving a Competing Transaction, shall have failed to reaffirm such
     approval or recommendation upon request by Parent within four business days
     after the Company's receipt of Parent's request or (z) shall have approved
     or recommended any takeover proposal or any other acquisition of Shares
     other than the Offer and the Merger, or (ii) the Board or any committee
     thereof shall have resolved to do any of the foregoing;

          (d)  there shall have been any breach of warranty by, the
     Company in the Agreement as a result of which, individually or in the
     aggregate, there is, or may reasonably be expected to occur a Material
     Adverse Effect with respect to the Company;

          (e)  the Company shall have failed to perform in any material
     respect any obligation or to comply in any material respect with any
     material agreement or material covenant of the Company to be performed or
     complied with by it under the Agreement;

                                       37
<PAGE>   43

          (f)  the Agreement shall have been terminated in accordance with its
     terms; or

          (g)  Purchaser and the Company shall have agreed (i) that Purchaser
     shall terminate the Offer or (ii) that Purchaser shall postpone the
     acceptance for payment of or payment for Shares thereunder which, in the
     sole judgment of Purchaser, in any such case, and regardless of the
     circumstances (including any action or inaction by Parent or any of its
     affiliates) giving rise to any such condition, makes it inadvisable to
     proceed with such acceptance for payment or payment.

          The foregoing conditions are for the sole benefit of Purchaser and
Parent and may be asserted by Purchaser or Parent regardless of the
circumstances giving rise to any such condition or may be waived by Purchaser or
Parent in whole or in part at any time and from time to time in their sole
discretion. The failure by Parent or Purchaser at any time to exercise any of
the foregoing rights shall not be deemed a waiver of any such right; the waiver
of any such right with respect to particular facts and other circumstances shall
not be deemed a waiver with respect to any other facts and circumstances; and
each such right shall be deemed an ongoing right that may be asserted at any
time and from time to time.

                                       38
<PAGE>   44

                                   SCHEDULE I

William Healey
William Bendush
Alan King
William Klein
Gary Liebl
Anthony Richardson
John Hohener
Richard Bell
James Cogan
Christopher Rollison
Cheryl Moreno

                                       39<PAGE>   1

                                                                    EXHIBIT 10.6

                             SPLIT-DOLLAR AGREEMENT
                                     BETWEEN
                     SATURN ELECTRONICS & ENGINEERING, INC.,
                                WALLACE K TSUHA,
                                       AND
           SHERMAN CRUZ, TRUSTEE OF THE WALLACE K. TSUHA IRREVOCABLE
                    LIFE INSURANCE TRUST OF DECEMBER 13, 1991

         THIS AGREEMENT made and entered into as of the 15th day of July, 1999
by and among SATURN ELECTRONICS & ENGINEERING, INC., a Michigan Corporation,
with principal offices and place of business in the State of Michigan, located
at 255 Rex Blvd., Auburn Hills, MI 48326 (hereinafter referred to as the
"Corporation"), WALLACE K. TSUHA, an individual residing in the State of
Michigan, (hereinafter referred to as "Employee"), and SHERMAN CRUZ, TRUSTEE OF
THE WALLACE K. TSUHA IRREVOCABLE LIFE INSURANCE TRUST OF DECEMBER 13, 1991
(hereinafter referred to as the "Owner").

         WITNESSETH THAT:

         WHEREAS, the Employee is employed by the Corporation; and

         WHEREAS, the Employee wishes to provide life insurance protection for
his family in the event of his death, under a policy of life insurance insuring
his life (hereinafter referred to as the "Policy"), which is described in
Exhibit A attached hereto and by this reference made a part hereof, and which
shall be issued by NORTHWESTERN MUTUAL LIFE (hereinafter referred to as the
"Insurer"); and

         WHEREAS, the Corporation is willing to pay a portion of the premiums
due on the Policy as an additional employment benefit for the Employee, on the
terms and conditions hereinafter set forth; and

         WHEREAS, Owner is the Owner of the Policy and, as such, possesses all
incidents of ownership in and to the Policy; and

         WHEREAS, the Corporation wishes to have the Policy collaterally
assigned to it by the Owner, in order to secure the repayment of the amounts
which it will pay toward the premiums on the Policy; and

         WHEREAS, the parties intend that by such Collateral Assignment the
Corporation shall receive only the right to such repayment, with the Owner
retaining all other ownership rights in the Policy, as specified herein;

                                       1

<PAGE>   2

         NOW THEREFORE, in consideration of the mutual promises contained
herein, the parties hereto agree as follows:

1.       PURCHASE OF POLICY. The Owner has purchased the Policy from the Insurer
         in the total face amount of TWENTY MILLION ($20,000,000.00) DOLLARS.
         The parties hereto have taken all necessary action to cause the Insurer
         to issue the Policy, and shall take any further action which may be
         necessary to cause the Policy to conform to the provisions of this
         Agreement. The parties hereto agree that the Policy shall be subject to
         the terms and conditions of this Agreement and of the Collateral
         Assignment filed with the Insurer relating to the Policy. The Parties
         further agree that they may convert the Policy to a new policy, if the
         parties to this Agreement agree to such a conversion. If the Policy is
         converted to a new policy, any change in the face amount and/or policy
         number shall be listed on Exhibit A hereof.

2.       OWNERSHIP OF POLICY.

         a.   The Owner shall be the sole and absolute owner of the Policy, and
              may exercise all ownership rights granted to the Owner thereof by
              the terms of the Policy, except as may otherwise be provided
              herein.

         b.   It is the intention of the parties to this Agreement and the
              Collateral Assignment executed by the Owner to the Corporation in
              connection herewith that the Owner shall retain all rights which
              the Policy grants to the Owner thereof; the sole right of the
              Corporation hereunder shall be to be repaid the amounts which it
              has paid toward the premiums on the Policy. Specifically, but
              without limitation, the Corporation shall neither have nor
              exercise any right as a collateral assignee of the Policy which
              could in any way defeat or impair the Owner's right to receive the
              Cash Surrender Value or the Death Proceeds of the Policy in excess
              of the amount due the Corporation hereunder. All provisions of
              this Agreement and of such Collateral Assignment shall be
              construed so as to carry out such intention.

3.       POLICY DIVIDENDS. Any dividend declared on the Policy shall be applied
         to purchase paid-up additional insurance on the life of the Employee.
         The parties hereto agree that the dividend election provision of the
         Policy shall conform to the provisions hereof.

4.       PAYMENT OF PREMIUMS.

         a.   Thirty (30) days prior to the due date of each Policy premium,
              the Owner shall notify the Corporation and the Employee of the
              exact amount due from the Corporation and Employee hereunder. The
              amount of premium payable by Employee shall be an amount at least
              equal to the annual cost of current life insurance protection on
              the life of Employee, measured by the lower of the PS 58 Rate, set
              forth in Rev. Rul. 55-747, 1955-2 C.B. 228, (or the corresponding

                                       2

<PAGE>   3

              applicable provision of any future Revenue Ruling), or the
              Insurer's current published premium rate for annually
              renewable term insurance for standard risks. Either the Employee
              or the Owner, on behalf of the Employee, shall pay such required
              contribution to the Corporation prior to the premium due date. If
              neither the Employee nor the Owner makes such timely payment, the
              Corporation, in its sole discretion, may elect to make the
              Employee's portion of the premium payment, which payment shall be
              recovered by the Corporation as provided herein.

         b.   On or before the due date of each Policy premium, or within the
              grace period provided therein, the Corporation shall pay the full
              amount of the premium to the Insurer, and shall upon request,
              promptly furnish the Employee evidence of timely payment of such
              premium. The Corporation shall annually furnish the Employee a
              statement of the amount of income reportable by the Employee for
              Federal and State income tax purposes, if any, as a result of the
              insurance protection provided the Owner as the Policy Beneficiary.

5.       COLLATERAL ASSIGNMENT. To secure the repayment of the Corporation of
         the amount of the premiums on the Policy paid by it hereunder, the
         Owner has, contemporaneously herewith, assigned the Policy to the
         Corporation as collateral, under a separate document, which Collateral
         Assignment specifically provides that the sole right of the Corporation
         thereunder is to be repaid the amounts it has paid toward premiums on
         the Policy hereunder. Such repayment shall be made from the Cash
         Surrender Value of the Policy (as defined by the Insurer) if this
         Agreement is terminated or the Owner surrenders or cancels the Policy,
         or from the death proceeds of the Policy if the Employee should die
         while the Policy and Agreement remain in force. Furthermore, if Owner
         has taken any loans from the policy, either through the Insurer, or by
         pledging the Policy with a third party, Owner may be required by the
         Corporation to repay said loans, under the terms of this Agreement, if
         either the Net Cash Surrender Value or the Net proceeds are not
         sufficient to repay the Corporation for the premiums it has paid. In no
         event shall the Corporation have any right to borrow against or make
         withdrawals from the Policy, to surrender or cancel the Policy, nor to
         take any action which would impair or defeat the rights of the Owner
         in and to the Policy. The Collateral Assignment of the Policy to the
         Corporation hereunder shall not be terminated, altered or amended by
         the Owner while this Agreement is in effect. The parties hereto agree
         to take all action necessary to cause such Collateral Assignment to
         conform to the provisions of this Agreement.

6.       LIMITATION ON OWNER'S RIGHTS IN POLICY.

         a.   The Owner shall take no action with respect to the Policy which
              would in any way compromise or jeopardize the Corporation's right
              to be repaid the amounts it has paid toward premiums on the Policy
              while this Agreement is in effect.

                                       3
<PAGE>   4

         b.   With the prior written approval of the Corporation, the Owner may
              pledge or assign the Policy, subject to the terms and conditions
              of this Agreement, in order to secure a loan from the Insurer or
              from a third party, in an amount which shall not exceed the Cash
              Surrender Value of the Policy (as defined therein) as of the date
              to which premiums have been paid, less the amount paid toward the
              premiums on the Policy by the Corporation hereunder. Interest
              charges on such loan shall be the responsibility of and be paid by
              the Owner. For any policy year in which the Owner borrows
              hereunder, the Corporation shall be correspondingly relieved of
              its obligations to pay any amounts towards premiums hereunder for
              such policy year, to the extent of such borrowing.

         c.   The Owner shall have the sole right to surrender or cancel the
              Policy, and to receive the full Cash Surrender Value of the
              Policy, remaining after any interest of the Corporation has first
              been satisfied hereunder, directly from the Insurer. Upon the
              surrender or cancellation of the Policy, the Corporation shall
              have the unqualified right to receive a portion of the Cash
              Surrender Value equal to the total amount of the premiums paid by
              it hereunder. If the Owner has obtained any loans from the
              Insurer, or from third parties by pledging the Policy, and the
              Cash Surrender Value is not sufficient to repay the Corporation
              for the premiums that it has paid, Owner shall repay said loans in
              order to increase the Cash Surrender Value available to repay the
              Corporation. Provided, however, the obligation owed to the
              Corporation shall not be larger than the Cash Surrender Value of
              the Policy, taking into account the repayment of any and all loans
              received by the Owner. Immediately upon receipt of such cash value
              of the Policy from the Insurer, the Owner shall pay to the
              Corporation the portion of such cash value to which it is entitled
              hereunder and shall retain the balance, if any; upon such receipt
              and payment, this Agreement shall thereupon terminate.

7.       COLLECTION OF DEATH PROCEEDS.

         a.   Upon the death of the Employee, the Corporation and the Owner
              shall cooperate to take whatever action is necessary to collect
              the provided under the Policy; when such benefit has been
              collected and paid as provided herein, this Agreement shall
              thereupon terminate.

         b.   Upon the death of the Employee, the Corporation shall have the
              unqualified right to receive a portion of such equal to the total
              amount of premiums paid by it hereunder. If the Owner has
              outstanding loans, which have reduced the proceeds below the
              amount of premiums that the Corporation has paid, Owner shall be
              required to repay said loans in order to increase the available
              funds needed to repay the Corporation. The balance of the provided
              under the Policy, if any, shall be paid directly to the Owner, in
              the manner and in the amount or amounts provided in the
              beneficiary designation provision of the Policy. In no event shall

                                       4

<PAGE>   5

              the amount payable to the Corporation hereunder exceed the Policy
              proceeds payable at the death of the Employee, taking into account
              the repayment of any and all loans by the Owner. No amount shall
              be paid from such to the Owner until the full amount due the
              Corporation hereunder has been paid. The parties hereto agree that
              the beneficiary designation provision of the Policy shall conform
              to the provisions hereof.

         c.   Notwithstanding any provision hereof to the contrary, in the event
              that, for any reason whatsoever, no is payable under the Policy
              upon the death of the Employee and in lieu thereof the Insurer
              refunds all or a portion of the premiums paid for the Policy, the
              Corporation shall first receive its full premium contributions
              that it has paid hereunder, before the Owner receives its share,
              and then the Owner shall have the unqualified right to the balance
              of any refunded premiums. Owner and Employee shall take all
              actions necessary to comply with the policy requirements to assure
              that the and/or the Cash Surrender Value will be available.

8.       TERMINATION OF THE AGREEMENT DURING THE EMPLOYEE'S LIFETIME.

         a.   This Agreement shall terminate during the Employee's lifetime
              without notice upon the occurrence of any of the following events:
              (a) total cessation of the Corporation's business; (b) bankruptcy,
              receivership or dissolution of the Corporation; (c) failure of
              both the Employee and the Owner to timely pay to the Corporation
              the Employee's portion of the premium, if any, due hereunder,
              unless the Corporation elects to make such payment on behalf of
              the Employee, as provided herein.

         b.   In addition, either the Owner or the Employee may terminate this
              Agreement, while no premium under the Policy is overdue, by
              written notice to the other parties hereto. Such termination shall
              be effective as of the date of such notice.

         c.   Furthermore, if the parties decide to convert the current Policy
              to a new policy, such conversion shall not act to terminate this
              Agreement.

         d.   If the Policy terminates for any reason, this Agreement also
              terminates.

         e.   Provided, however, if the Corporation merges with another entity,
              but the Corporation is the surviving entity, or as a result of an
              acquisition, the name of the Corporation is changed, such event
              shall not by itself act to terminate this Agreement.

                                       5

<PAGE>   6

         f.   In the event the Corporation desires to become a public company,
              the Corporation reserves the right to review this Agreement at the
              time of an initial public offering and, at its option, terminate
              this Agreement by sending written notice to the other parties
              hereto.

9.       DISPOSITION OF THE POLICY ON TERMINATION OF THE AGREEMENT DURING THE
         EMPLOYEE'S LIFETIME.

         a.   For sixty (60) days after the date of the termination of this
              Agreement during the Employee's lifetime, the Owner shall have the
              option of obtaining the release of the Collateral Assignment of
              the Policy to the Corporation. To obtain such a release, the Owner
              shall repay to the Corporation the total amount of the premium
              payments made by the Corporation hereunder. Upon receipt of such
              amount, the Corporation shall release the Collateral Assignment
              of the Policy, by the execution and delivery of an appropriate
              instrument of release.

         b.   If the Owner fails to exercise such option within such sixty (60)
              day period, then, at the request of the Corporation, the Owner
              shall execute any document or documents required by the Insurer to
              transfer the interest of the Owner in the Policy to the
              Corporation. Thereafter, neither the Owner nor the Owner's
              successors, assigns or beneficiaries shall have any further
              interest in and to the Policy, either under the terms thereof or
              under this Agreement. Alternatively, the Corporation may enforce
              its right to be repaid the amount of the premiums on the policy
              paid by it from the Cash Surrender Value of the Policy under the
              Collateral Assignment of the Policy; provided that in the event
              the Cash Surrender Value of the Policy exceeds the amount due the
              Corporation, such excess shall be paid to the Owner.

10.      INSURER NOT A PARTY. The Insurer shall be fully discharged from its
         obligations under the Policy by payment of the Policy to the
         beneficiary or beneficiaries named in the Policy, subject to the terms
         and conditions of the Policy. In no event shall the Insurer be
         considered a party to this Agreement, or any modification or amendment
         hereof. No provision of this Agreement, any modification or amendment
         hereof, shall in any way be construed as enlarging, varying, or in any
         other way affecting the obligations of the Insurer as expressly
         provided in the Policy, except insofar as the provisions hereof are
         made a part of the Policy by the Collateral Assignment executed by
         the Owner and filed with the Insurer in connection herewith.

                                       6

<PAGE>   7

11.      NAMED FIDUCIARY, DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND
         ADMINISTRATION.

         a.   The Corporation is hereby designated as the named fiduciary under
              this Agreement. The named fiduciary shall have authority to
              control and manage the operation and administration of this
              Agreement, and shall be responsible for establishing and carrying
              out a funding policy and method consistent with the objectives of
              this Agreement.

         b.   (1)   Claim. A party to this Agreement who believes that he or she
                    is being denied a benefit to which he or she is entitled
                    under this Agreement (hereinafter referred to as a
                    "Claimant") may file a written request for such benefit with
                    the Corporation, setting forth his or her claim. The request
                    must be addressed to the Secretary of the Corporation at its
                    then principal place of business.

              (2)   Claim Decision. Upon receipt of a claim, the Corporation
                    shall advise the Claimant that a reply will be forthcoming
                    within ninety (90) days and shall, in fact, deliver such
                    reply within such period. The Corporation may, however,
                    extend the reply period for an additional ninety (90) days
                    for reasonable cause.

                    If the claim is denied in whole or in part, the Corporation
                    shall adopt a written opinion, using language calculated to
                    be understood by the Claimant, setting forth: (a) the
                    specific reason or reasons for such denial; (b) the
                    specified reference to pertinent provisions of this
                    Agreement on which such denial is based; (c) a description
                    of any additional material or information necessary for the
                    Claimant to perfect his or her claim and an explanation why
                    such material or such information is necessary; (d)
                    appropriate information as to the steps to be taken if the
                    Claimant wishes to submit the claim for review; and (e) the
                    time limits for requesting a review under subsection (3) and
                    for review under subsection (4) hereof.

              (3)   Request for Review. Within sixty (60) days after the receipt
                    by the Claimant of the written opinion described above, the
                    Claimant may request in writing that the Secretary of the
                    Corporation review the determination of the Corporation.
                    Such request must be addressed to the Secretary of the
                    Corporation, at its then principal place of business. The
                    Claimant or his or her duly authorized representative may,
                    but need not, review the pertinent documents and review and
                    submit issues and comments in writing for consideration by
                    the Corporation. If the claimant does not request a review
                    of the Corporation's determination by the Secretary of the
                    Corporation within such sixty (60) day period, he or she

                                       7
<PAGE>   8
              shall be barred and estopped from challenging the Corporation's
              determination.

         (4)  Review of Decision. Within sixty (60) days after the Secretary's
              receipt of a request for review, he or she will review the
              Corporation's determination. After considering all the materials
              presented by the Claimant, the Secretary will render a written
              opinion, setting forth the specific reasons for the decision and
              containing specific references to the pertinent provisions of this
              Agreement on which the decision is based. If special circumstances
              require that the sixty (60) day time period be extended, the
              Secretary will so notify the Claimant and will render the decision
              as soon as possible, but no later than one hundred twenty (120)
              days after receipt of the request for review. The Secretary's
              decision shall be final and binding upon the Claimant.

12.  AMENDMENT. This Agreement may not be amended, altered or modified,
     except by a written instrument signed by the parties hereto, or their
     respective successors or assigns, and may not be otherwise terminated
     except as provided herein.

13.  BINDING EFFECT. This Agreement shall be binding upon and inure to the
     benefit of the Corporation and its successors and assigns, and the
     Employee, the Owner, and their respective successors, assigns, heirs,
     executors, administrators and beneficiaries.

14.  NOTICE. Any notice, consent or demand required or permitted to be given
     under the provisions of this Agreement shall be in writing, and shall be
     signed by the party giving or making the same. If such notice, consent or
     demand is mailed to a party hereto, it shall be sent by United States
     Certified Mail, postage prepaid or sent by Federal Express, Airborne, or
     UPS, addressed to such party's last known address as shown on the records
     of the Corporation or faxed to such party at said party's last known fax
     number. The date of such mailing shall be deemed the date of notice,
     consent or demand.

15.  GOVERNING LAW. This Agreement, and the rights of the parties hereunder,
     shall be governed by and construed in accordance with the laws of the
     State of Michigan.

                      THIS SPACE INTENTIONALLY LEFT BLANK

                                       8

<PAGE>   9

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement, in
duplicate, as of the day and year first above written.

                                             SATURN ELECTRONICS & ENGINEERING,
                                             INC. ("Corporation")

                                             /s/ Donald J. Cowie
------------------------------               -----------------------------------
                                             Donald J. Cowie, C.F.O.

------------------------------

                                             WALLACE K. TSUHA ("Employee")

                                             /s/ Wallace K. Tsuha, Jr.
------------------------------               -----------------------------------

------------------------------

                                             SHERMAN CRUZ, TRUSTEE OF THE
                                             WALLACE K. TSUHA IRREVOCABLE
                                             LIFE INSURANCE TRUST OF DECEMBER
                                             13, 1991 ("Owner")

                                             /s/ Sherman Cruz
------------------------------               -----------------------------------
                                             Sherman Cruz, Trustee

------------------------------

                                       9

<PAGE>   10

                                   EXHIBIT A

                                 LIFE INSURANCE

INSURER: Northwesten Mutual Life

INSURED: Wallace K. Tsuha

POLICY NUMBER: 14000573

FACE AMOUNT: TWENTY MILLION ($20,000,000.00)

DIVIDEND OPTION:

DATE OF ISSUE:

INSURER:
        ------------------------------------------------------------------------

INSURED:
        ------------------------------------------------------------------------

POLICY NUMBER:
              ------------------------------------------------------------------

FACE AMOUNT:
            --------------------------------------------------------------------

DIVIDEND:
         -----------------------------------------------------------------------

OPTION:
       -------------------------------------------------------------------------

DATE OF ISSUE:
              ------------------------------------------------------------------

                                       10

<PAGE>   11

INSURER:
        ------------------------------------------------------------------------

INSURED:
        ------------------------------------------------------------------------

POLICY NUMBER:
              ------------------------------------------------------------------

FACE AMOUNT:
            --------------------------------------------------------------------

DIVIDEND:
         -----------------------------------------------------------------------

OPTION:
       -------------------------------------------------------------------------

DATE OF ISSUE:
              ------------------------------------------------------------------

INSURER:
        ------------------------------------------------------------------------

INSURED:
        ------------------------------------------------------------------------

POLICY NUMBER:
              ------------------------------------------------------------------

FACE AMOUNT:
            --------------------------------------------------------------------

DIVIDEND:
         -----------------------------------------------------------------------

OPTION:
       -------------------------------------------------------------------------

DATE OF ISSUE:
              ------------------------------------------------------------------

                                       11

<PAGE>   12

INSURER:
        ------------------------------------------------------------------------

INSURED:
        ------------------------------------------------------------------------

POLICY NUMBER:
              ------------------------------------------------------------------

FACE AMOUNT:
            --------------------------------------------------------------------

DIVIDEND:
         -----------------------------------------------------------------------

OPTION:
       -------------------------------------------------------------------------

DATE OF ISSUE:
              ------------------------------------------------------------------

                                       12

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00005-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00005-of-00352.parquet"}]]