FindLaw - Agreement and Plan of Merger - HPL Technologies Inc. and Covalar Technologies Group Inc.

AGREEMENT AND PLAN OF MERGER

        This AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered into as of January 29, 2002, by and among HPL Technologies, Inc., a Delaware corporation ("Parent"), HPL Acquisition Sub, Inc., a Delaware corporation ("Merger Sub"), and Covalar Technologies Group, Inc., a Texas corporation (the "Company"), with respect to the following facts:

RECITALS

        A.    The respective boards of directors of Parent, Merger Sub and the Company have approved and declared advisable the merger of the Company with and into Merger Sub (the "Merger"), upon the terms and subject to the conditions set forth herein, and have determined that the Merger and the other transactions are fair to, and in the best interests of, their respective shareholders.

        B.    Pursuant to the Merger, among other things, the holders of the outstanding shares of common stock, $0.01 par value, of the Company ("Company Common Stock") shall be entitled to receive the Merger Consideration, as hereinafter defined.

        C.    For United States Federal income tax purposes, it is intended that the Merger will qualify as a reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and this Agreement is hereby adopted by the parties as a plan of reorganization for purposes of Section 368 of the Code.

        The parties hereto agree as follows:

ARTICLE I

THE MERGER

        1.1    The Merger.    At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement and the applicable provisions of the Texas Business Corporation Act (the "TBCA") and the Delaware General Corporation Law (the "DGCL"), (i) the Company shall merge with and into Merger Sub, (ii) the separate corporate existence of the Company shall cease and (iii) Merger Sub shall be the surviving corporation. Merger Sub, as the surviving corporation after the Merger, is hereinafter sometimes referred to as the "Surviving Corporation."

        1.2    Closing; Effective Time.    The closing of the Merger (the "Closing") will take place at 10:00 a.m., California time, on a date to be specified by the parties (the "Closing Date"), which shall be no later than the second business day after satisfaction or waiver of the conditions set forth in Articles VI and VII (other than those conditions that by their terms are to be satisfied at the Closing, but subject to the satisfaction or waiver of those conditions), and subject to Section 5.12, at the offices of Heller Ehrman White & McAuliffe LLP, 4350 La Jolla Village Drive, San Diego, California, unless another date or place is agreed to in writing by the parties hereto. At the Closing, the parties shall cause the Merger to be consummated by filing a Certificate of Merger and Articles of Merger substantially in the form of Exhibits A and B, respectively, attached hereto (collectively, the "Merger Filings") with the Secretary of State of the State of Delaware and the Secretary of State of the State of Texas, respectively, in accordance with the relevant provisions of the DGCL and the TBCA (the time of such filing, or such later time as may be agreed in writing by the parties and specified in the Merger Filings, being the "Effective Time").

        1.3    Effects of the Merger.    The effects of the Merger shall be as provided in this Agreement, the of Merger Filings and the applicable provisions of the DGCL and the TBCA. Without limiting the

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foregoing, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation.

        1.4    Articles of Incorporation; Bylaws.    

        (a)  From and after the Effective Time, the Articles of Incorporation of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation of the Surviving Corporation; provided, however, that the name of the Surviving Corporation shall be changed to HPL Texas, Inc., a Delaware corporation, as of the Effective Time.

        (b)  From and after the Effective Time, the bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation.

        1.5    Directors and Officers of the Surviving Corporation.    The directors and officers of Merger Sub immediately prior to the Effective Time shall serve as the initial directors and officers of the Surviving Corporation, until their respective successors are duly elected and qualified.

ARTICLE II

CONVERSION OF SHARES

        2.1    Conversion of Stock.    As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of Company Common Stock:

        (a)  Subject to Sections 5.12 and 7.2(d), each issued and outstanding share of Company Common Stock (other than shares to be cancelled in accordance with Section 2.1(b)) shall be converted into the right to receive (i) that amount of cash (the "Cash Consideration") equal to the quotient obtained by dividing (A) $10,000,000 less the Company's documented out-of-pocket expenses, including without limitation the Company's due diligence examination of Parent and its business and assets, but excluding the fees and expenses of the financial audit of the Company for the year ended December 31, 2001, incurred in connection with this Agreement and the transactions contemplated hereby, which shall be agreed in writing by Parent and the Company prior to the Effective Time (provided such written agreement shall not be deemed to be a waiver by Parent of any right to make a claim for Damages (as defined in Section 9.1) in connection with such out-of-pocket expenses) by (B) the total number of issued and outstanding shares of Company Common Stock at the Effective Time (the "Outstanding Company Shares"), and (ii) that number of validly issued, fully paid and non-assessable shares (hereinafter referred to as the "Stock Consideration" and, together with the Cash Consideration, the "Merger Consideration") of Parent common stock, $.001 par value ("Parent Common Stock") equal to the quotient obtained by dividing (A) an amount equal to 1,900,000 shares of Parent Common Stock (the "Base Stock Number") less the number of Option Shares (as defined in Section 5.10(a)), by (B) the number of Outstanding Company Shares. As of the Effective Time, all Outstanding Company Shares shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate which immediately prior to the Effective Time represented any Outstanding Company Shares (each, a "Company Certificate") shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration for each Outstanding Company Share and cash in lieu of fractional shares of Parent Common Stock to which such holder is entitled pursuant to Section 2.4, in each case to be issued or paid in consideration therefor upon surrender of such Company Certificate in accordance with Section 2.3, without interest. Notwithstanding the foregoing, if between the date of this Agreement and the Effective Time the outstanding shares of Parent Common Stock shall have been changed into a different number of shares or a different class, by reason of the occurrence or record date of any stock dividend, subdivision, reclassification, recapitalization, split, combination, exchange of shares or similar transaction, the Stock Consideration (and the Escrow Shares

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and the Adjusted Stock Consideration, each as defined below) shall be appropriately adjusted to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination, exchange of shares or similar transaction.

        (b)  Each share of Company Common Stock that is owned at the Effective Time by the Company, Parent, Merger Sub or any Subsidiary (as defined in Section 2.10) thereof, shall automatically be canceled and retired and shall cease to exist, and no shares of Parent Common Stock or other consideration shall be delivered in exchange therefor.

        (c)  At the Effective Time, to the extent that any shares of Company Common Stock are subject to restrictions on transfer, vesting, or otherwise, the shares of Parent Common Stock issued in exchange therefor in the Merger shall be subject to substantially similar restrictions; provided, however, that any rights to repurchase unvested shares shall be adjusted in number and price to reflect the Merger Consideration to be issued for Company Common Stock.

        2.2    Escrow.    Subject to Section 7.2(d), 200,000 shares of the aggregate Stock Consideration otherwise issuable to the holders of Outstanding Company Shares (the "Escrow Shares") shall be issued in the name of Mark Harward, as Shareholder Representative (as defined in Section 9.7(a) and delivered to Comerica Bank (the "Escrow Agent") within 10 days from the Closing to be held for a period of one year from the Closing Date pursuant to the terms of that certain Escrow Agreement attached hereto as Exhibit C (the "Escrow Agreement"). The Escrow Shares shall be held by the Escrow Agent in accordance with the Escrow Agreement to satisfy any claims for indemnification made by Parent or the Surviving Corporation pursuant to Article IX hereof. The certificate representing the Escrow Shares will be endorsed in blank or with blank stock powers attached.

        2.3    Exchange of Company Stock Certificates.    

        (a)  Promptly after the Effective Time, Parent shall cause to be mailed to each holder of Outstanding Company Shares a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Company Certificates shall pass, only upon proper delivery of the Company Certificates to Parent) and instructions for surrender of the Company Certificates. Upon surrender to Parent of a Company Certificate(s), together with a letter of transmittal duly executed and a Lock-up Agreement (as defined in Section 2.8 below),, the holder of Outstanding Company Shares shall be entitled to receive in exchange therefor: (i) a certificate for Parent Common Stock (a "Parent Certificate") evidencing the whole number of shares of Parent Common Stock equal to the Adjusted Stock Consideration multiplied by the number of Outstanding Company Shares held by such holder; (ii) cash in an amount equal to the Cash Consideration multiplied by the number of Outstanding Company Shares held by such holder; and (iii) cash in lieu of fractional shares as provided in Section 2.4. No Parent Certificate will be issued to a Person (as defined in Section 2.10) who is not the registered owner of a surrendered Company Certificate, unless (i) the Company Certificate so surrendered has been properly endorsed or otherwise is in proper form for transfer, and (ii) such Person shall either (A) pay any transfer or other tax required by reason of such issuance or (B) establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. Until surrendered in accordance with the provisions of this Section 2.3, from and after the Effective Time, each Company Certificate shall be deemed to represent, for all purposes other than payment of dividends declared or accrued prior to the Effective Time, the right to receive a certificate representing the number of full shares of Parent Common Stock and the amount of cash as determined in accordance with this Section 2.3(a) and cash in lieu of fractional shares as provided in Section 2.4, without interest.

        (b)  The "Adjusted Stock Consideration" shall be that number of shares of Parent Common Stock equal to the quotient obtained by dividing (i) (A) the Base Stock Number less (B) the number of Escrow Shares and (C) less the number of Option Shares by (ii) the Outstanding Company Shares.

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        (c)  No dividend or other distribution declared with respect to Parent Common Stock with a record date after the Effective Time will be paid to holders of Outstanding Company Shares which have not surrendered their Company Certificates until such holders surrender their Company Certificates. Upon the surrender of such Company Certificates, there shall be paid to such holders, promptly after such surrender, the amount of dividends or other distributions, without interest, declared with a record date after the Effective Time and not paid because of the failure to surrender Company Certificates for exchange.

        (d)  Notwithstanding anything to the contrary in this Agreement, none of Parent or the Surviving Corporation shall be liable to any holder of Outstanding Company Shares for shares of Parent Common Stock, cash or cash in lieu of fractional shares delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

        (e)  In the event that any Company Certificates shall have been lost, stolen or destroyed, Parent shall issue and pay in respect of such lost, stolen or destroyed Company Certificates, upon the making of an affidavit of that fact by the holder thereof, a Parent Certificate evidencing full shares of Parent Common Stock, cash in accordance with Section 2.3(a) and cash in lieu of fractional shares, if any, as provided in section 2.4, and any dividends or distributions payable hereunder; provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Company Certificate to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent with respect to the Company Certificates alleged to have been lost, stolen or destroyed.

        2.4    Fractional Shares.    No fractional shares of Parent Common Stock shall be issued in connection with the Merger and no dividends or other distributions of Parent shall relate to such fractional shares and such fractional shares shall not entitle the owner thereof to voting or to any rights as a shareholder of Parent. Instead, each holder of Outstanding Company Shares who would otherwise be entitled to a fractional share of Parent Common Stock (after aggregating all fractional shares of Parent Common Stock to be received by such holder as determined in accordance with Section 2.3(a)) shall receive from Parent an amount of cash (rounded down to the nearest whole cent) equal to the product of (i) such fractional share, multiplied by (ii) the Parent Closing Price. For purposes of this Agreement, "Parent Closing Price" shall mean the closing sale price of a share of Parent Common Stock as reported on the Nasdaq National Market at the close of trading on the last trading day before the Closing.

        2.5    Withholding Rights.    Parent shall be entitled to deduct and withhold from the consideration otherwise payable to any holder of Outstanding Company Shares pursuant to Section 2.1(a) or the Escrow Agreement such amounts as may be required to be deducted and withheld with respect to the making of such payment under the Code or under any state or local tax law. If any withholding obligation may be avoided by such holder providing information to Parent, Parent shall request such information before withholding. To the extent that amounts are so withheld and paid over to the appropriate taxing authority, Parent will be treated as though it withheld from the type of consideration from which withholding is required an appropriate amount otherwise payable pursuant to this Agreement to any holder of Outstanding Company Shares in order to provide for such withholding obligation. If withholding is required from Parent Common Stock, Parent shall be treated as having sold such Parent Common Stock on behalf of the holder(s) of Outstanding Company Shares for an amount of cash equal to the fair market value of such consideration at the time of such deemed sale and paid such cash proceeds to the appropriate taxing authority.

        2.6    Tax Consequences.    For United States income tax purposes, it is intended by the parties hereto that the Merger qualify as a reorganization within the meaning of Section 368(a) of the Code and that this Agreement be a "plan of reorganization". The Company hereby acknowledges and agrees that Parent and Merger Sub have not given any tax advice in connection with the Merger or otherwise,

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and have no responsibility for any tax consequences to the Company, the holders of Outstanding Company Shares or the Optionees (as defined in Section 5.10), arising from or related to the Merger or otherwise. The Company further acknowledges and agrees that it has had an opportunity to consult with its tax advisor as to the tax consequences arising from or related to the Merger and all other transactions contemplated herein.

        2.7    Dissenting Shares.    

        (a)  Notwithstanding anything to the contrary in this Agreement, any holder of Outstanding Company Shares who has exercised his dissenters' rights in accordance with applicable law and who, as of the Effective Time, has not effectively withdrawn or lost such dissenters' rights ("Dissenting Shares"), shall not have the right to have such Dissenting Shares converted into or represent a right to receive shares of Parent Common Stock and cash, as determined in accordance with Section 2.3(a) and pursuant to the Escrow Agreement and Article X but the holder of the Dissenting Shares shall be entitled only to such rights as are granted by applicable law, and the aggregate Stock Consideration and the aggregate Cash Consideration shall be reduced by the number of shares of Parent Common Stock and the amount of cash that would have been issued and paid in respect of such Dissenting Shares.

        (b)  Notwithstanding the provisions of Section 2.7(a), if any holder of Dissenting Shares shall effectively withdraw or lose (through failure to perfect or otherwise) such holder's dissenters' rights under applicable law, then, as of the later of the Effective Time or the occurrence of such event, each of such holder's Outstanding Company Shares shall automatically be converted into and represent only the right to receive the Merger Consideration therefor, as provided in Sections 2.3(a) and the right to receive the Merger Consideration pursuant to the Escrow Agreement or the Earn-out Shares pursuant to Article X, upon surrender of his Company Certificates.

        2.8    Restricted Stock; Lock-up.    

        The Merger and the other transactions contemplated hereby shall qualify as a private placement under Rule 506 of Regulation D under the Securities Act of 1933 (the "Securities Act") and the shares of Parent Common Stock issued in connection with the Merger shall constitute "restricted securities" under the Securities Act. Parent shall have no obligation to register such shares under the Securities Act. The shares of Parent Common Stock issued in connection with the Merger may not be offered, sold, assigned, pledged or otherwise transferred, except following registration of such shares under the Securities Act or in reliance on an exemption from registration under the Securities Act. Prior to the delivery of his or their Parent Certificate, each Company Shareholder shall have executed and delivered to Parent a lock-up agreement with a one-year term, in the form of Exhibit D attached hereto (the "Lock-up Agreements"). The certificates representing the Parent Common Stock shall bear the following restrictive legends:

    THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), OR ANY STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED, SOLD, ASSIGNED, PLEDGED, OR OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED PURSUANT TO THE PROVISIONS OF THE ACT AND APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO PARENT IS OBTAINED BY THE HOLDER OF THIS CERTIFICATE STATING THAT SUCH OFFER, SALE, ASSIGNMENT, PLEDGE, OR TRANSFER IS EXEMPT FROM SUCH REGISTRATION OR QUALIFICATION.

    THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A LOCK-UP AGREEMENT ENTERED INTO BY THE HOLDER OF SUCH SECURITIES PURSUANT TO WHICH SUCH SECURITIES MAY NOT BE OFFERED, SOLD, ASSIGNED, PLEDGED, OR OTHERWISE DISPOSED OF PRIOR

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    TO                         , 2003, WITHOUT THE PRIOR WRITTEN CONSENT OF THE ISSUER, EXCEPT IN ACCORDANCE WITH THE TERMS OF THE LOCK-UP AGREEMENT. STOP TRANSFER INSTRUCTIONS CONSISTENT WITH THE LOCK-UP AGREEMENT HAVE BEEN ISSUED TO THE ISSUER'S TRANSFER AGENT. A COPY OF THE LOCK-UP AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE ISSUER.

        2.9    Certain defined terms.    The following capitalized terms used in this Agreement shall have the following meanings:

        (a)  "Affiliate" of, or "Affiliated" with, a specified Person shall mean a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the specified Person.

        (b)  "Person" shall mean any individual, group, organization, corporation, partnership, joint venture, limited liability company, trust or entity of any kind.

        (c)  "Subsidiary" when used with respect to any Person, shall mean any corporation or other organization, whether incorporated or unincorporated, of which (A) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person (through ownership of securities, by contract or otherwise) or (B) such Person or any Subsidiary of such Person is a general partner of any general partnership or a manager of any limited liability company.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

        The Company makes to Parent and Merger Sub the representations and warranties contained in this Article III, in each case subject to the exceptions set forth in the disclosure statement, dated as of the date hereof by the Company to Parent prior to the execution of this Agreement (the "Company Disclosure Statement"). The Company Disclosure Statement shall be arranged in schedules corresponding to the numbered and lettered Sections of this Article III, and the disclosure in any Schedule of the Company Disclosure Statement shall qualify only the corresponding Section of this Article III. "Company's Knowledge" or similar expressions shall mean the actual, conscious knowledge of Mark Harward, Gene Mullinnix, Brenda Stoner or Merrill Wertheimer after due inquiry of employees of the Company and any Affiliate who could reasonably be expected to have knowledge of the subject matter.

        3.1    Organization, Etc.    

        (a)  Each of the Company and its Subsidiaries listed on Schedule 3.1(a) (the "Company Subsidiaries") is a corporation duly organized, validly existing and in good standing under the laws of Texas, and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each of the Company and the Company Subsidiaries is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its owned or leased properties or the nature of its activities makes such qualification necessary, except where the failure to be so qualified or in good standing would not reasonably be expected to have, individually or in the aggregate, have a Company Material Adverse Effect (as defined below). For the purposes of this Agreement, "Company Material Adverse Effect" means any change, event or effect that is: (A) materially adverse to the business, operations, assets, condition (financial or otherwise), or results of operations of the Company and the Company Subsidiaries, taken as a whole or (B) materially adverse to the rights, obligations, or prospects of the Company and/or the Company Subsidiaries as they relate to the agreements or customer relationships identified on Schedule 3.1(a)(B) to the Company Disclosure Statement.

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        (b)  Neither the Company nor any of the Company Subsidiaries is in violation of any provision of its Articles of Incorporation, bylaws or any other charter or governing documents. Schedule 3.1(b) of the Company Disclosure Statement sets forth (i) each jurisdiction in which the Company and each Company Subsidiary is qualified to do business as a foreign corporation, and (ii) the names of the current directors and officers of the Company and the Company Subsidiaries. The Company has made available to Parent accurate and complete copies of the Articles of Incorporation, bylaws and any other charter documents, as currently in effect, of the Company and the Company Subsidiaries.

        3.2    Authority Relative to this Agreement.    The Company has full corporate power and authority to (i) execute and deliver this Agreement, and (ii) assuming the approval of this Agreement by two-thirds of the outstanding shares of the Company Common Stock in accordance with the TBCA (the "Shareholder Approval"), consummate the Merger and the other transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the Merger and the other transactions contemplated hereby and thereby have been duly and validly authorized by the unanimous vote of the board of directors of the Company (the "Company Board") and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the Merger and the other transactions contemplated hereby and thereby other than the Shareholder Approval. This Agreement has been duly and validly executed and delivered by the Company. This Agreement constitutes, and each of the other documents, agreements or instruments to be delivered hereunder by the Company when executed and delivered by the Company will be duly and validly executed and delivered by the Company and will constitute, assuming due authorization, execution and delivery by Parent and Merger Sub, a valid and binding agreement of the Company, and subject to the Shareholder Approval, enforceable against the Company in accordance with its terms, except to the extent limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally or by general equitable principles.

        3.3    No Violations, Etc.    No filing with or notification to, and no permit, authorization, consent or approval of, any court, administrative agency, commission, governmental division or department, tribunal, quasi-governmental authority or other governmental or regulatory body, authority or instrumentality ("Government Entity") is necessary on the part of the Company for the consummation by the Company of the Merger and the other transactions contemplated hereby, except for the filing of the Merger Filings as required by the DGCL and the TBCA. Neither the execution and delivery of this Agreement nor consummation of the Merger and the other transactions contemplated hereby and thereby nor compliance by the Company with all of the provisions hereof and thereof, subject to obtaining Shareholder Approval (i) conflict with or result in any violation of any provision of the Articles of Incorporation, bylaws or other charter document of any Company, (ii) violate any material order, writ, injunction, decree, statute, rule or regulation applicable to any Company, or by which any of its properties or assets may be bound, or (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default under, or result in any material change in, or give rise to any right of termination, cancellation, acceleration, redemption or repurchase by any other person under, any of the terms, conditions or provisions of any material note, bond, mortgage, indenture, deed of trust, license, lease, contract, agreement or other instrument or obligation to which any Company is a party or by which any Company or any of their properties or assets may be bound. Schedule 3.3 of the Company Disclosure Statement lists all consents, waivers, notification and disclosures and approvals required to be obtained or made in connection with the consummation of the transactions contemplated hereby under any Company's notes, bonds, mortgages, indentures, deeds of trust, licenses or leases, contracts, agreements or other instruments or obligations the failure to obtain which would have a Company Material Adverse Effect.

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        3.4    Board Approval.    The Company Board has, at a meeting duly held on dated January 26, 2002: (i) approved and adopted this Agreement, (ii) recommended approval of this Agreement to the shareholders of the Company, and (iii) authorized that the Company take all action necessary to exempt the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and thereby from the provisions of all applicable state anti-takeover statutes and regulations, including, but not limited to, any such statutes or regulations provided for pursuant to TBCA.

        3.5    Capitalization.    

        (a)  The authorized capital stock of the Company consists of 15,000,000 shares of Company Common Stock and no shares of preferred stock. As of January 25, 2002, there are (i) 7,935,676 shares of Company Common Stock outstanding and (ii) 35,000 treasury shares. The authorized capital stock of Test Chip Technologies Inc., a Texas corporation consists of 15,000,000 shares of common stock and no shares of preferred stock. As of the date hereof, there are (i) 7,260,000 shares of common stock outstanding, all of which are owned by the Company and (ii) 500,000 treasury shares. The authorized capital stock of Covalar Design, Inc., a Texas corporation, consists of 15,000,000 shares of common stock and no shares of preferred stock. As of the date hereof, there are 100,000 shares of common stock of CDI outstanding, all of which are owned by the Company.

        (b)  There are no other equity securities of any class of the Company. Except for the options to purchase Company Common Stock granted by the Company under the Company Stock Plan (the "Company Options") or the options set forth in Schedule 3.5(b), there are no warrants, options, convertible securities, calls, rights, stock appreciation rights, preemptive rights, rights of first refusal, or agreements or commitments of any nature obligating the Company to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other equity interests of the Company, or obligating the Company to grant, issue, extend, accelerate the vesting of, or enter into, any such warrant, option, convertible security, call, right, stock appreciation right, preemptive right, right of first refusal, agreement or commitment. There are no voting trusts, proxies or other agreements or understandings with respect to the capital stock of the Company.

        (c)  True and complete copies of the Company 1999 Stock Option Plan (as revised and restated effective December 1, 1999) (the "Company Stock Plan") and of the forms of all agreements and instruments relating to or issued under the Company Stock Plan, have been provided to Parent. Such agreements, instruments, and forms have not been amended, modified or supplemented except as provided to Parent, and there are no agreements to amend, modify or supplement any such agreements, instruments or forms.

        (d)  Schedule 3.5(d) of the Company Disclosure Statement sets forth the following information, as of January 26, 2002, with respect to each Company Option: the aggregate number of shares issuable thereunder, the type of option, the grant date, the expiration date, the exercise price and the vesting schedule. Each Company Option was granted in accordance with the terms of the Company Stock Plan or pursuant to an agreement described on Schedule 3.5(d) of the Company Disclosure Statement The terms of the Company Stock Plan do not prohibit the assumption of the Options as provided in Section 5.10. Consummation of the Merger will not accelerate vesting of any Company Option.

        3.6    Financial Statements.    The Company has provided Parent with copies of: (i) the audited consolidated balance sheets of the Company as of December 31, 2000 and 1999, and the related audited consolidated income statements and statements of cash flows for years ended December 31, 2000 and 1999 (including, in each case, any related notes thereto and the reports of Grant Thornton & Co. with respect thereto) (collectively, the "Year-End Financial Statements"); and (ii) and the unaudited balance sheet of the Company (the "Company Balance Sheet") as of December 31, 2001 (the "Balance Sheet Date"), and the related unaudited consolidated income statement for the period ended on the Balance Sheet Date (including any related notes thereto) (collectively, the "Unaudited Financial

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Statements," and together with the Year-End Financial Statements, the "Company Financial Statements"). The Company Financial Statements (a) were prepared in accordance with United States generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto and except for the absence of notes in the Unaudited Financial Statements), and (b) fairly present in all material respects the financial position of the Company as at the respective dates thereof and the results of its operations and cash flows (except in the case of the Unaudited Financial Statements) for the periods indicated in accordance with GAAP (subject, in the case of the Unaudited Financial Statements, to normal year-end accruals and adjustments).

        3.7    Absence of Undisclosed Liabilities.    No Company has any material liabilities (absolute, accrued, contingent or otherwise) other than (i) liabilities included in the Company Balance Sheet and the related notes to the Company Financial Statements, (ii) normal or recurring liabilities incurred since the Balance Sheet Date in the ordinary course of business consistent with past practices, and (iii) liabilities under this Agreement and any related document.

        3.8    Absence of Changes or Events.    Except as contemplated by this Agreement, since the Balance Sheet Date no Company Material Adverse Effect has occurred and, in addition, the Company has not, directly or indirectly:

        (a)  purchased, otherwise acquired, or agreed to purchase or otherwise acquire, any shares of capital stock of any Subsidiary of the Company, or declared, set aside or paid any dividend or otherwise made a distribution (whether in cash, stock or property or any combination thereof) in respect of the capital stock of any Subsidiary of the Company (other than dividends or other distributions payable solely to the Company or a wholly owned Subsidiary of the Company);

        (b)  authorized for issuance, issued, sold, delivered, granted or issued any options, warrants, calls, subscriptions or other rights for, or otherwise agreed or committed to issue, sell or deliver any shares of any class of capital stock of the Company or any securities convertible into or exchangeable or exercisable for shares of any class of capital stock of the Company other than pursuant to and in accordance with the Company Stock Plan, or as otherwise set forth on Schedule 3.5(d) of the Company Disclosure Statement;

        (c)  (i) created or incurred any indebtedness for borrowed money exceeding $50,000 in the aggregate, (ii) assumed, guaranteed, endorsed or otherwise as an accommodation become responsible for the obligations of any other individual, firm or corporation, made any loans or advances to any other individual, firm or corporation exceeding $50,000 in the aggregate, (iii) entered into any oral or written material agreement or any commitment or transaction or incurred any liabilities material to the Company taken as a whole, or involving in excess of $50,000;

        (d)  instituted any change in accounting methods, principles or practices other than as required by GAAP and disclosed in the notes to the Company Financial Statements;

        (e)  revalued any assets, including without limitation, writing down the value of inventory or writing off notes or accounts receivable in excess of amounts previously reserved as reflected in the Company Balance Sheet;

        (f)    suffered any damage, destruction or loss, whether covered by insurance or not, except for such as would not, individually and in the aggregate exceed $25,000;

        (g)  (i) increased in any manner the compensation of any of its directors, officers or, other than in the ordinary course of business and consistent with past practice, non-officer employees, (ii) granted any severance or termination pay to any Person; (iii) entered into any oral or written employment, consulting, indemnification or severance agreement with any Person; (iv) adopted, become obligated

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under, or amended any employee benefit plan, program or arrangement; or (v) repriced any Company Options;

        (h)  sold, transferred, leased, licensed, pledged, mortgaged, encumbered, or otherwise disposed of, or agreed to sell, transfer, lease, license, pledge, mortgage, encumber, or otherwise dispose of, any material properties, (including intangibles, real, personal or mixed);

        (i)    amended its Articles of Incorporation, bylaws, or any other charter document, or effected or been a party to any merger, consolidation, share exchange, business combination, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction;

        (j)    made capital expenditures in any calendar month exceeding $50,000 in the aggregate;

        (k)  paid, discharged or satisfied any material claims, liabilities or obligations (absolute, accrued, contingent or otherwise), other than the payment, discharge or satisfaction of liabilities (including, without limitation, accounts payable) in the ordinary course of business and consistent with past practice, or collected, or accelerated the collection of, any amounts owed (including, without limitation, accounts receivable) other than their collection in the ordinary course of business;

        (l)    waived, released, assigned, settled or compromised any material claim or litigation, or commenced a lawsuit other than for the routine collection of bills; or

        (m)  agreed or committed to do any of the things described in the preceding clauses (a) through (l).

        3.9    No Subsidiaries.    Other than as set forth in Schedule 3.1(b) of the Company Disclosure Statement, the Company does not directly or indirectly own any equity interest in any Person, has no rights or contractual obligations to acquire any such interest and is not a party to any partnership or joint venture.

        3.10    Litigation.    

        (a)  There is no private or governmental claim, action, suit (whether in law or in equity), investigation or proceeding of any nature ("Action") pending or, to the knowledge of the Company, threatened against the Company or any of the Company Subsidiaries, or any of their respective officers and directors (in their capacities as such), or involving any of their assets, before any Government Entity, except for those Actions which, individually or in the aggregate, are not reasonably expected to have a Company Material Adverse Effect. There is no Action pending or, to the Company's Knowledge, threatened which in any manner challenges, seeks to, or is reasonably likely to prevent, enjoin, alter or delay the transactions contemplated by this Agreement.

        (b)  There is no outstanding judgment, order, writ, injunction or decree of any Government Entity in a proceeding to which the Company or any Company Subsidiary, or any of their assets is or was a party or by which the Company, any Company Subsidiary, or any of their assets is bound.

        3.11    Insurance.    Schedule 3.11 of the Company Disclosure Statement lists all insurance policies (including without limitation workers' compensation insurance policies) covering the business, properties or assets of the Company or any Company Subsidiary, the premiums and coverages of such policies, and all claims in excess of U.S. $50,000 made against any such policies since January 1, 1999. All such policies are in effect, and true and complete copies of all such policies have been made available to Parent. Neither the Company nor any Company Subsidiary has received notice of the cancellation or threat of cancellation of any of such policy.

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        3.12    Contracts and Commitments.    

        (a)  Neither the Company nor any Company Subsidiary is a party to or bound by any oral or written contract, obligation or commitment of any type in any of the following categories:

              (i)  agreements or arrangements that contain severance pay, understandings with respect to tax arrangements, understandings with respect to expatriate benefits, or post-employment liabilities or obligations of such company;

            (ii)  agreements or plans under which benefits will be increased or accelerated by the occurrence of any of the transactions contemplated by this Agreement or under which the value of the benefits will be calculated on the basis of any of the transactions contemplated by this Agreement;

            (iii)  agreements, contracts or commitments currently in force relating to the disposition or acquisition of assets other than in the ordinary course of business, or relating to an ownership interest in any corporation, partnership, joint venture or other business enterprise;

            (iv)  agreements, contracts or commitments (A) relating to the acquisition, transfer, development, sharing, license (to or by the Company), or use of any Company IP Right, as defined in Section 3.16 (except for any contract pursuant to which any Company IP Right is licensed to the Company under any third party software license generally available to the public), or (B) with respect to the manufacturing, distribution or marketing of any products of the Company;

            (v)  agreements, contracts or commitments for the purchase of materials, supplies or equipment: (A) that provide for purchase prices the Company reasonably believes are substantially greater than those presently prevailing for such materials, supplies or equipment, (B) that are with sole or single source suppliers, or (C) from any Affiliate of the Company for purchase prices substantially greater than those presently prevailing for such materials, supplies or equipment;

            (vi)  guarantees or other agreements, contracts or commitments under which any Company is absolutely or contingently liable for (A) the performance of any other person, firm or corporation, or (B) the whole or any part of the indebtedness or liabilities of any other person, firm or corporation;

          (vii)  powers of attorney authorizing the incurrence of a material obligation on the part of such company;

          (viii)  agreements, contracts or commitments which limit or restrict (A) where a Company may conduct business, (B) the type or lines of business (current or future) in which they may engage, or (C) any acquisition of assets or stock (tangible or intangible) by such company;

            (ix)  agreements, contracts or commitments containing any agreement with respect to a change of control of such company;

            (x)  agreements, contracts or commitments for the borrowing or lending of money, or the availability of credit (except credit extended by a Company to customers in the ordinary course of business and consistent with past practice);

            (xi)  any hedging, option, derivative or other similar transaction and any foreign exchange position or contract for the exchange of currency; or

          (xii)  any joint marketing or joint development agreement, or any license or distribution agreement relating to any product of the Companies.

        (b)  Neither the Company nor any Company Subsidiary, nor to the Company's Knowledge, any other party thereto has breached, violated or defaulted under, or received notice that it has breached, violated or defaulted under, nor to the Company's Knowledge does there exist any condition under

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which, with the passage of time or the giving of notice or both, is reasonably expected to cause such a breach, violation or default under, any material agreement, contract or commitment to which the Company or any Company Subsidiary is a party or, to the Company's Knowledge, by which any of them or any of their properties or assets may be bound (any such agreement, contract or commitment, a "Company Contract"), other than any breaches, violations or defaults which individually or in the aggregate would not have a Company Material Adverse Effect. All of the Company Contracts are listed on Schedule 3.12 of the Company Disclosure Schedule.

        (c)  Each Company Contract is a valid, binding and enforceable obligation of the Company or the Company Subsidiary that is a party thereto and to the Company's Knowledge, of the other party or parties thereto, in accordance with its terms, and is in full force and effect, except (i) where the failure to be valid, binding, enforceable and in full force and effect would not have a Company Material Adverse Effect and (ii) to the extent enforcement may be limited by applicable bankruptcy, insolvency, moratorium or other laws affecting the enforcement of creditors' rights governing or by general principles of equity.

        (d)  An accurate and complete copy of each Company Contract has been provided to Parent.

        3.13    Labor Matters; Employment and Labor Contracts.    

        (a)  Neither the Company nor any Company Subsidiary is a party to any union contract or other collective bargaining agreement, nor to the Company's Knowledge, are there any activities or proceedings of any labor union to organize any the Company's employees or the employees of any Company Subsidiary. The Company and the Company Subsidiaries are in compliance with all applicable (i) laws, regulations and agreements respecting employment and employment practices, (ii) terms and conditions of employment and (iii) occupational health and safety requirements, except, in each case, for those failures to comply which, individually or in the aggregate, would not have a Company Material Adverse Effect.

        (b)  There is no labor strike, slowdown or stoppage pending (or to the Company's Knowledge any labor strike or stoppage threatened) against the Company or any Company Subsidiary. No petition for certification has been filed and is pending before the National Labor Relations Board with respect to any employees of the Company or any Company Subsidiary who are not currently organized. Neither Company nor any Company Subsidiary has obligations under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), with respect to any former employees or qualifying beneficiaries thereunder, except for obligations that are not now reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect. There are no controversies pending or, to the knowledge of the Company, threatened, between the Company or any of the Company Subsidiaries and any of their respective employees, which controversies are reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect.

        (c)  Neither the Company not any Company Subsidiary is a party to or bound by any employment agreements or arrangements that are not terminable at will by such company.

        3.14    Compliance with Laws.    Neither the Company nor any Company Subsidiary has violated or failed to comply with any law (including without limitation relating to the export or import of goods or technology) of any Government Entity, except where any such violations or failures to comply are not now reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect. The Company and each Company Subsidiary has all permits, licenses and franchises from Government Entities required to conduct its businesses as now being conducted and as proposed to be conducted, except for those, the absence of which, would not, individually or in the aggregate, have a Company Material Adverse Effect.

        3.15    Government Contracts.    Neither the Company nor any Company Subsidiary currently is and has never been a party to a Government Contract and has never tendered a bid for a Government

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Contract. For purposes of this Section, "Government Contract" shall mean any prime contract, subcontract, letter contract, purchase order or delivery order executed or submitted to or on behalf of any Government Entity or any prime contractor or higher-tier subcontractor, or under which any Government Entity or any such prime contractor or subcontractor otherwise has or may acquire any right or interest.

        3.16    Intellectual Property Rights.    For purposes of this Agreement, "Intellectual Property" shall mean all patents, patent applications, copyrights, trade secrets, mask works, trademarks and service marks, and all other industrial or intellectual property rights recognized in any jurisdiction and applications or registrations in any of the foregoing.

        (a)  The Company and each Company Subsidiary owns or has the right to use all Intellectual Property necessary to conduct its business and all material Intellectual Property now used in its business (such Intellectual Property and the rights thereto are collectively referred to herein as the "Company IP Rights").

        (b)  Schedule 3.16(b) of the Company Disclosure Statement sets forth, with respect to all Company IP Rights registered with any Government Entity or for which an application for registration has been filed with any Governmental Body, (i) a brief description of such Company IP Rights, and (ii) the names of the jurisdictions covered by the applicable registration or application. Schedule 3.16(b) of the Company Disclosure Statement identifies and provides a brief description of, and identifies any ongoing royalty or payment obligations with respect to, each Company IP Right that is licensed or otherwise made available to the Company or any Company Subsidiary by any Person (except for any Company IP Right that is licensed to the Company or any Company Subsidiary under any third party software license generally available to the public), and identifies the agreement under which such Company IP Right is being licensed or otherwise made available to the Company or any Company Subsidiary. The Company and each Company Subsidiary has good, valid and marketable title to all of the Company IP Rights (except for Intellectual Property licensed to the Company or any Company Subsidiary), free and clear of all encumbrances, except (i) as set forth in Schedule 3.16(b) of the Company Disclosure Statement and (ii) for any lien for current taxes not yet due and payable. To the Company's Knowledge, (A) the Company and/or each Company Subsidiary has a valid right to use and otherwise exploit all Company IP Rights and, (B) as to Intellectual Property licensed to the Company or a Company Subsidiary, such company has a valid license. Except as set forth in Schedule 3.16(b) of the Company Disclosure Statement, neither the Company nor any Company Subsidiary has not developed jointly nor does it jointly own or have joint rights with any other Person any Company IP Rights that are material to the business of the Company or any Company Subsidiary. Except as set forth in Schedule 3.16(b) of the Company Disclosure Statement, there is no agreement (written, oral or otherwise) or understanding pursuant to which any Person has any right (whether or not currently exercisable) to use, license or otherwise exploit any Company IP Rights.

        (c)  Each of the Company and the Company Subsidiaries has taken commercially reasonable measures and precautions to protect and maintain the confidentiality and secrecy of all Company IP Rights (except Company IP Rights whose value would be unimpaired by public disclosure) and otherwise to maintain and protect the value of all Company IP Rights.

        (d)  To the knowledge of the Company, neither the Company nor any Company Subsidiary is misappropriating or making any unlawful use of, and neither the Company nor any Company Subsidiary has at any time misappropriated or made any unlawful use, of, or received any notice or other communication (in writing or otherwise) of any actual, alleged, possible or potential infringement, misappropriation or unlawful use of, any Intellectual Property rights owned or used by any other Person. The Company has no knowledge that any Person is misappropriating, or making unlawful use of any of the Company IP Rights. To the Company's Knowledge, neither the Company nor any

13


Company Subsidiary has inadvertently or recklessly lost trade secret status for any information material to the Company or a Company Subsidiary or the confidential information of third parties.

        (e)  Except as set forth in Schedule 3.16 of the Company Disclosure Statement, neither the Company nor any Company Subsidiary has licensed any of the Company IP Rights to any Person on an exclusive basis.

        (f)    The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not constitute a material breach of any instrument or agreement governing any Company IP Rights, and will not (i) cause the modification of any material terms of any licenses or agreements relating to any Company IP Rights, (ii) cause the forfeiture or termination of any Company IP Rights, (iii) give rise to a right of forfeiture or termination of any Company IP Rights or (iv) materially impair the right of the Company and the Surviving Corporation to use, sell or license any Company IP Rights or portion thereof.

        (g)  Neither the manufacture, marketing, license, sale or intended use of any product or technology currently licensed or sold or under development by the Company or any Company Subsidiary: (i) violates in any material respect any license or agreement between the Company or any Company Subsidiary and any third party or (ii) to the Company's Knowledge, infringes in any material respect any patents or other Intellectual Property of any other party; and, to the Company's Knowledge, there is no pending or threatened claim or litigation contesting the validity, ownership or right to use, sell, license or dispose of any Company IP Rights or asserting that any Company IP Rights or the proposed use, sale, license or disposition thereof, or the manufacture, use or sale of any products of the Company of any Company Subsidiary, conflicts or will conflict with the rights of any other party.

        (h)  The Company has provided to Parent a true and complete copy of its standard form of employee confidentiality agreement for the Company and each Company Subsidiary and all employees have executed such an agreement. All consultants or third parties with access to proprietary information of the Company or any Company Subsidiary have executed non-disclosure agreements which refer to or include the Company IP Rights.

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        (i)    To the Company's Knowledge none of its or any Company Subsidiary's employees or consultants is obligated under any contract, covenant or other agreement or commitment of any nature, or subject to any judgment, decree or order of any Government Entity, that would interfere with the use of such employee's or consultant's best efforts to promote the interests of the Company or any Company Subsidiary or that would conflict with the business of the Company as presently conducted or proposed to be conducted. Neither the Company nor any Company Subsidiary has entered into any agreement to indemnify any other person, including but not limited to any employee or consultant of the Company or a Company Subsidiary, against any charge of infringement, misappropriation or misuse of any Intellectual Property, other than indemnification provisions contained in purchase orders or customer agreements arising in the ordinary course of business. All current and former officers, directors, officers, employees and consultants of the Company and each Company Subsidiary have signed valid and enforceable written confidentiality, non-disclosure and invention assignment agreements which, among other matters, include an assignment of any and all rights or claims in any Intellectual Property that any such officer, director, employee or consultant has or may have by reason of any contribution, participation or other role in the development, conception, creation, reduction to practice or authorship of any invention, innovation, development or work of authorship or any other Intellectual Property that is used in the business of the Company and the Company Subsidiaries, and the Company possesses signed copies of all such written assignments by such directors, officers, employees and consultants.

        3.17    Accounts Receivable.    

        (a)  Except as set forth in the Company Balance Sheet, (i) each account receivable of the Company and each Company Subsidiary (the "Accounts Receivable") represents a sale made in the ordinary course of business and which arose pursuant to an enforceable contract for a bona fide sale of goods or for services performed, and the Company and each Company Subsidiary has performed all of their obligations to produce the goods or perform the services to which such Accounts Receivable relate, other than amounts recorded as deferred revenue, and (ii) to the knowledge of the Company, no Account Receivable is subject to any claim for reduction, counterclaim, set-off, recoupment or other claim for credit, allowances or adjustment by the obligor thereof.

        (b)  Schedule 3.17(b)(i) lists all customers representing 5% or more of the Company's consolidated revenues for the last three fiscal years and Schedule 3.17(b)(ii) lists a complete and accurate aging list of all Accounts Receivable of the Company and the Company Subsidiaries as of December 31, 2001, which list shall be updated and delivered to Parent on or before the Closing Date.

        3.18    Order Backlog.    Schedule 3.18 of the Company Disclosure Statement contains a list of the aggregate orders for the products of the Company and the Company Subsidiaries as of the Balance Sheet Date, and identifies each customer included in the backlog and the description of the products ordered and prices for each product by customer. Except as set forth on Schedule 3.18, to the Company's Knowledge no customer who has placed an order included in such backlog has refused, or intends to refuse, delivery of any ordered products in accordance with the terms of such orders.

        3.19    Product and Service Warranties.    The standard written forms of product and service warranties and guarantees utilized by the Company and the Company Subsidiaries as of the date of this Agreement have been provided to Parent. Except as set forth on Schedule 3.19 of the Company Disclosure Statement, during a period of three years prior to the date of this Agreement, neither the Company nor any Company Subsidiary has made any other written warranties (which remain in effect) with regard to products and/or services supplied by any such company.

        3.20    Taxes.    

        (a)  For the purposes of this Agreement, a "Tax" or, collectively, "Taxes," means (i) any and all Federal, state, local, foreign and other taxes, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits,

15

sales, use and occupation, and value added, ad valorem, transfer, gains, franchise, capital stock, severance, withholding, payroll, recapture, employment, excise, unemployment insurance, social security, business license, occupation, business organization, stamp, environmental and property taxes, together with all interest, penalties and additions imposed with respect to such amounts and (ii) any liability imposed by applicable law for the payment of Taxes of another person, including as a result of being a successor to or transferee of any individual or entity or pursuant to Treas. Reg. § 1.1502-6 or comparable provisions of state, local or foreign tax law.

        (b)  The Company has filed all material returns, estimates, information statements and reports relating to Taxes ("Returns") required to be filed by it prior to the date of this Agreement, and such Returns are true and correct and completed in accordance with applicable law. Schedule 3.20(b) of the Company Disclosure Statement lists all jurisdictions in which Returns are required to be filed by the Company (or have been required since the inception of the Company) and the types of Returns required to be filed in each such jurisdiction.

        (c)  The Company has (A) timely paid all Taxes due and payable by it as shown on the Returns and all Taxes payable without the necessity of a Return, (B) timely paid all Taxes for which a notice of assessment or collection has been received (other than amounts described in clause (C) below and being contested in good faith by appropriate proceedings) and (C) properly reserved, in accordance with GAAP, for any Taxes that may become due and payable in the future with respect to the periods set forth in the Company Financial Statements.

        (d)  Neither the Internal Revenue Service (the "IRS") nor any other taxing authority has asserted any claim for Taxes in writing, or, to the Company's Knowledge, is threatening to assert any claims for Taxes. No Tax deficiency notice or notice of assessment of collection has been received in writing by the Company except as described on Schedule 3.20 of the Company Disclosure Statement. No audit or other examination of any Return of the Company is presently in progress, nor has the Company been notified in writing of any request for such an audit or other examination. No power of attorney to deal with Tax matters or waiver of any statute of limitations with respect to Taxes has been granted by the Company. Except as described on Schedule 3.20(d) of the Company Disclosure Statement the relevant statute of limitations for the assessment or proposal of a deficiency for Taxes has expired for all years before 1996. The Company has not availed itself of any Tax amnesty, Tax holiday or similar relief in any jurisdiction.

        (e)  The Company has withheld or collected and paid over to the appropriate governmental authorities (or are properly holding for such payment) all Taxes required by law to be withheld or collected with respect to their operations, including withholdings on payments to the Company for sales and use taxes or payments by the Company to employees or independent contractors on account of Federal, state, and foreign income Taxes, the Federal Insurance Contribution Act, and the Federal Unemployment Tax Act.

        (f)    There are no liens for Taxes upon the assets of the Company or the Company Subsidiaries (other than liens for property Taxes that are not yet due or delinquent).

        (g)  There is no contract, agreement, plan or arrangement covering any employee or former employee of any Company that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to Sections 280G, 404 or 162 of the Code.

        (h)  The Company has not filed any consent agreement 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 (as defined in Section 341(f)(4) of the Code) owned by the Company.

        (i)    The Company is not and has not been a member of an affiliated group of corporations filing a consolidated Federal income tax return (or a group of corporations filing a consolidated, combined or unitary income tax return under comparable provisions of state, local or foreign tax law) other than a group the common parent of which is or was the Company.

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        (j)    The Company has no obligation, actual or contingent, under any agreement or arrangement with any other Person with respect to Taxes of such other Person, including any indemnity against any Tax in connection with any arrangement for the leasing of real or personal property.

        (k)  The Company has made available to Parent true copies of all Returns that the Company has filed since its inception and true copies of all correspondence and other written submissions to or communications with any Tax authorities.

        (l)    None of the assets of the Company is "tax-exempt use property" within the meaning of Section 168(h) of the Code. None of the assets of the Company constitutes tax-exempt bond financed property or tax-exempt use property, within the meaning of Section 168 of the Code. The Company is not a party to any "safe harbor lease" that is subject to the provisions of Section 168(f)(8) of the Code as in effect prior to the Tax Reform Act of 1986, or to any "long term contract" within the meaning of Section 460 of the Code.

        (m)  The Company (i) has not agreed to and is not required to make any adjustment pursuant to Section 481(a) of the Code or has no knowledge that the IRS has proposed in writing any such adjustment or change in accounting method with respect to the Company; and (ii) has no application pending with the IRS or any other Tax Agency requesting permission for any change in accounting method.

        (n)  Except as set forth in Schedule 3.20 of the Disclosure Statement, the Company is not and has not been a party to any joint venture, partnership, or other arrangement or contract that could be treated as a partnership for Federal income tax purposes.

        (o)  To the Company's Knowledge, the Company has no income reportable for a period ending after the Effective Time but attributable to a shipment, sale or other disposition (including an installment sale) of any property, or to the performance of services, occurring in a period ending on or prior to the Effective Time and resulting in a deferred reporting of income from such transaction.

        (p)  The Company is not, nor has been at any time, a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code.

        (q)  There currently are no limitations on the utilization of the net operating losses, built-in losses, capital losses, tax credits or other similar items of the Company (collectively, the "Tax Losses") under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v) Sections 1.1502-15 and 1.1502-15A of the Treasury Regulations, (vi) Sections 1.1502-21 and 1.1502-21A of the Treasury Regulations, or (vii) Sections 1.1502-91 through 1.1502-99 of the Treasury Regulations; in each case as in effect both prior to and following the Tax Reform Act of 1986, except as may be applicable as a result of entering into this Agreement or the consummation of the Merger. The amounts of net operating losses and capital losses for each taxable year ending before the Closing Date are set forth in Schedule 3.20(q) of the Company Disclosure Statement.

        3.21    Employee Benefit Plans; ERISA.    

        (a)  Set forth on Schedule 3.21(a) of the Company Disclosure Schedule are all "employee pension benefit plans" as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("Pension Plans"), "welfare benefit plans" as defined in Section 3(1) of ERISA ("Welfare Plans"), or stock bonus, stock option, restricted stock, stock appreciation right, stock purchase, bonus, incentive, deferred compensation, severance, holiday, or vacation plans, or any other employee benefit plan, program, policy or arrangement covering employees (or former employees) employed in the United States that either is maintained or contributed to by the Company or any ERISA Affiliate (as hereinafter defined) or to which the Company or any of ERISA Affiliate is obligated to make payments or otherwise may have any liability (collectively, the "Employee Benefit Plans") with respect to employees or former employees of the Company, or any ERISA Affiliate. For purposes of this Agreement, "ERISA Affiliate" shall mean any person (as defined in Section 3(9) of

17

ERISA) that is or has been a member of any group of persons described in Section 414(b), (c), (m) or (o) of the Code, including without limitation the Company.

        (b)  The Company, and each of the Pension Plans and Welfare Plans, are in compliance with the applicable provisions of ERISA, the Code and other applicable laws, except where the failure to comply would not, individually or in the aggregate, have a Company Material Adverse Effect.

        (c)  All contributions to, and payments from, the Pension Plans which are required to have been made in accordance with the Pension Plans have been timely made, except where the failure to make such contributions or payments on a timely basis would not reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect.

        (d)  All of the Company's Pension Plans intended to qualify under Section 401 of the Code have been determined by the IRS to be so qualified, and no event has occurred and, to the Company's Knowledge, no condition exists with respect to the form or operation of such Pension Plans which would cause the loss of such qualification or exemption or the imposition of any material liability, penalty or tax under ERISA or the Code.

        (e)  To the Company's Knowledge, there are no (i) investigations pending by any Government Entity involving the Pension Plans or Welfare Plans, nor (ii) pending or threatened claims (other than routine claims for benefits), suits or proceedings against any Pension or Welfare Plan, against the assets of any of the trusts under any Pension or Welfare Plan or against any fiduciary of any Pension or Welfare Plan with respect to the operation of such plan or asserting any rights or claims to benefits under any Pension Plan or against the assets of any trust under such plan, except for those which would not, individually or in the aggregate, give rise to any liability which would reasonably be expected to have a Company Material Adverse Effect. To the Company's Knowledge, there are no facts which would give rise to any liability under this Section 3.21(e) except for those which would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect in the event of any such investigation, claim, suit or proceeding.

        (f)    None of the Company or any employee of the foregoing, nor any trustee, administrator, other fiduciary or any other "party in interest" or "disqualified person" with respect to the Pension Plans or Welfare Plans, has engaged in a "prohibited transaction" (as such term is defined in Section 4975 of the Code or Section 406 of ERISA), other than such transactions that would not, individually or in the aggregate, have a Company Material Adverse Effect.

        (g)  None of the Company, or any ERISA Affiliate maintain or contribute to, nor have they ever maintained or contributed to, any pension plan subject to Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA.

        (h)  Neither the Company nor any ERISA Affiliate has incurred any material liability under Title IV of ERISA that has not been satisfied in full.

        (i)    Neither the Company nor any ERISA Affiliate has any material liability (including any contingent liability under Section 4204 of ERISA) with respect to any multi-employer plan, within the meaning of Section 3(37) of ERISA, covering employees (or former employees) employed in the United States.

        (j)    With respect to each of the Employee Benefit Plans, true, correct and complete copies of the following documents have been made available to Parent: (i) the plan document and any related trust agreement, including amendments thereto, (ii) any current summary plan descriptions and other material communications to participants relating to the Employee Benefit Plans, (iii) the three most recent Forms 5500, if applicable, and (iv) the most recent IRS determination letter, if applicable.

        (k)  None of the Welfare Plans maintained by the Company provides for continuing benefits or coverage for any participant or any beneficiary of a participant following termination of employment,

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except as may be required under COBRA, or except at the expense of the participant or the participant's beneficiary. The Company, to the extent it maintains a "group health plan" within the meaning of Section 5000(b)(1) of the Code, has complied with the notice and continuation requirements of Section 4980B of the Code, COBRA, Part 6 of Subtitle B of Title I of ERISA and the regulations thereunder, except where the failure to comply would not, individually or in the aggregate, have a Company Material Adverse Effect.

        (l)    No liability under any Pension Plan or Welfare Plan has been funded nor has any such obligation been satisfied with the purchase of a contract from an insurance company as to which the Company has received notice that such insurance company is in rehabilitation or a comparable proceeding.

        (m)  The consummation of the transactions contemplated by this Agreement will not result in an increase in the amount of compensation or benefits or accelerate the vesting or timing of payment of any benefits or compensation payable to or in respect of any employee of the Company under any Employee Benefit Plan.

        (n)  Schedule 3.21(n) of the Company Disclosure Statement lists each Foreign Plan (as hereinafter defined). The Company and each of the Foreign Plans are in compliance with applicable laws, and all required contributions have been made to the Foreign Plans, except where the failure to comply or make contributions would not, individually or in the aggregate, have a Company Material Adverse Effect. Each of the Foreign Plans that is a funded defined benefit plan has a fair market value of plan assets that is greater than the plan's liabilities, as determined in accordance with applicable laws. For purposes hereof, the term "Foreign Plan" shall mean any plan, program, policy, arrangement or agreement maintained or contributed to by, or entered into with, the Company or any Subsidiary with respect to employees (or former employees) employed outside the United States to the extent the benefits provided thereunder are not mandated by the laws of the applicable foreign jurisdiction.

        (o)  To the Company's Knowledge, there are no claims, suits or facts concerning the operation or benefits of any Employee Benefit Plan other than a Pension or Welfare Plan except for those which would not, individually or in the aggregate, give rise to any liability which would reasonably be expected to have a Company Material Adverse Effect.

        (p)  Each of the Employee Benefit Plans and the Foreign Plans can be terminated by the Company within a period of 30 days following the Effective Time in accordance with the terms of such Plan (and the provisions of ERISA and the Code), without any additional contribution to such Employee Benefit Plan or Foreign Plan or the payment of any additional compensation or amount or the additional vesting or acceleration of any vesting provided under the Employee Benefit Plan or Foreign Plan.

        3.22    Environmental Matters.    Schedule 3.22 to the Company Disclosure Statement identifies all real property now or previously owned, leased or occupied by the Company or any Company Subsidiary (the "Real Property"). The Company and any Company Subsidiary are in compliance with and, within the period of all applicable statutes of limitation, have complied in all material respects with all applicable Environmental Laws (as defined below) and have not received notice of any liability under any Environmental Law; and neither the Company nor any Company Subsidiary nor any portion of the Real Property is in violation of any Environmental Law.

        (a)  To the Company's Knowledge, there has not been any underground or aboveground storage tank or other underground storage receptacle or related piping, or any impoundment or other disposal area containing hazardous materials located on any Real Property owned, leased or operated by the Company or any Company Subsidiary, and no asbestos or polychlorinated biphenyls have been used or disposed of, or have been located at, on, or under any such facility or property during the period of such ownership lease or operation.

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        (b)  For purposes of this Agreement, "Environmental Law" means any law or regulation, now in effect and as amended, and any judicial or administrative interpretation thereof, in each case relating to the environment or harm to or the protection of human health or animals or plants, including, without limitation, laws relating to public and workers health and safety, emissions, discharges or releases of chemicals or any other pollutants or contaminants or industrial, radioactive, dangerous, toxic or hazardous substances or wastes (whether in solid or liquid form or in the form of a gas or vapor) into the environment or otherwise relating to the manufacture, processing, use, treatment, storage, distribution, disposal transport or handling of substances or wastes. Environmental Laws include, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, 42 USC 9601 et seq. ("CERCLA"), the Resource Conservation and Recovery Act, 42 USC, 6901 et seq., the Hazardous Materials Transportation Act, 49 USC, 6901 et seq., the Clean Water Act 33 USC, 1251 et seq., the Toxic Substances Control Act, 15 USC, 2601 et seq., the Clean Air Act, 42 USC, 7401 et seq., the Safe Drinking Water Act, 42 USC, 300f et seq., the Atomic Energy Act, 42 USC, 2201 et seq., and the Federal Food Drug and Cosmetic, Act 21 USC, 301 et seq., and comparable state and local ordinances and statutes.

        3.23    Customers.    With respect to the customers of the Company and the Company Subsidiaries, since the Balance Sheet Date, there has not been any substantial change in the nature of the business conducted or course of dealing between the Company or any Company Subsidiary and any of their customers which has had a Company Material Adverse Effect.

        3.24    Finders or Brokers.    The Company has not employed any investment banker, broker, finder or intermediary in connection with the transactions contemplated hereby who is or will be entitled to a fee or any commission upon consummation of the Merger.

        3.25    Title to Property.    The Company and the Company Subsidiaries have good and valid title to all of their respective properties, interests in properties and assets, real and personal, reflected in the Company Balance Sheet or acquired after the Balance Sheet Date, except for those sold or otherwise disposed in the ordinary course of business since the Balance Sheet Date, and have valid leasehold interests in all leased properties and assets, in each case free and clear of all mortgages, liens, pledges, charges or encumbrances of any kind or character, except (i) liens for current taxes not yet due and payable, (ii) such imperfections of title, liens and easements as do not and will not materially detract from or interfere with the use of the properties subject thereto or affected thereby or otherwise materially impair the Company's or any of the Company Subsidiaries' business operations involving such properties, (iii) liens securing debt reflected on the Company Balance Sheet, (iv) liens recorded pursuant to any Environmental Law or (v) liens which are not reasonably expected to have, individually or in the aggregate, have a Company Material Adverse Effect.

        3.26    Disclosure.    No representation or warranty contained in this Article III, and no statement in the Company Disclosure Statement, misstates a material fact or omits to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

        Parent makes to the Company the representations and warranties contained in this Article IV, in each case subject to the exceptions set forth in the disclosure statement, dated as of the date hereof, delivered by Parent and Merger Sub to the Company in connection with the execution of this Agreement (the "Parent Disclosure Statement"). The Parent Disclosure Statement shall be arranged in schedules corresponding to the numbered and lettered Sections of this Article IV, and the disclosure in any schedule of the Parent Disclosure Statement shall qualify only the corresponding Section of this Article IV.

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        4.1    Organization, Etc.    

        (a)  Each of Parent and Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Parent is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its owned or leased properties or the nature of its activities makes such qualification necessary, except where the failure to be so qualified or in good standing would not, individually and in the aggregate, have a Parent Material Adverse Effect (as defined below). For the purposes of this Agreement, "Parent Material Adverse Effect" means any change, event or effect that is materially adverse to the business, operations, assets, condition (financial or otherwise) or results of operations of Parent and any Parent Material Subsidiary (as defined below), taken as a whole; provided, however, that the following shall not be taken into account in determining whether there has been or would be a Parent Material Adverse Effect: any change which occurs as a result of the announcement of this Agreement or the pendency of the transactions contemplated hereby, including, without limitation, any reduction in the trading price of shares of Parent Common Stock on any publicly traded market. For purposes of this Agreement, "Parent Material Subsidiary" shall mean California Sub.

        (b)  Neither Parent nor Merger Sub is in violation of any provision of its Certificate of Incorporation, bylaws or other charter or governing documents.

        4.2    Authority Relative to this Agreement.    Each of Parent and Merger Sub has full corporate power and authority to execute and deliver this Agreement and to consummate the Merger and the other transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the Merger and the other transactions contemplated hereby and have been duly and validly authorized by the board of directors of each of Parent and Merger Sub and no other corporate proceedings on the part of either Parent or Merger Sub are necessary to authorize this Agreement or to consummate the Merger and the other transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Parent and Merger Sub and constitutes, and each of the other documents, agreements or instruments to be delivered hereunder by Parent or Merger Sub when executed and delivered by Parent or Merger Sub will be duly and validly executed and delivered by Parent or Merger Sub, as the case may be, and will constitute, assuming due authorization, execution and delivery by the Company, a valid and binding agreement of each of Parent and Merger Sub, enforceable against each of them in accordance with its terms, except to the extent that its enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally or by general equitable principles.

        4.3    No Violations, Etc.    No filing with or notification to, and no permit, authorization, consent or approval of, any Government Entity is necessary on the part of either Parent or Merger Sub for the consummation by Parent or Merger Sub of the Merger or the other transactions contemplated hereby except for the filing of the Merger Filings as required by the DGCL and the TBCA. Neither the execution and delivery of this Agreement nor the consummation of the Merger or the other transactions contemplated hereby, nor compliance by Parent and Merger Sub with all of the provisions hereof and thereof will (i) conflict with or result in any breach of any provision of the Certificate of Incorporation, bylaws or other charter documents of Parent or any of Parent's Subsidiaries, (ii) violate any material order, writ, injunction, decree, statute, rule or regulation applicable to Parent, or any of Parent's Subsidiaries or by which any of their properties or assets may be bound, or (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default, or give rise to any right of termination, cancellation, acceleration, redemption or repurchase by any other Person under, any of the terms, conditions or provisions of any material note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Parent or any of Parent's Subsidiaries is a party or by which any of them or any of their properties or assets may be bound. No consent, waiver, approval, notification or disclosure is required to be obtained or made

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in connection with the consummation of the transactions contemplated hereby under Parent's or any of Parent's Subsidiaries notes, bonds, mortgages, indentures, deeds of trust, licenses or leases, contracts, agreements or other instruments or obligations the failure to obtain which would reasonably be expected to have a Parent Material Adverse Effect.

        4.4    Capitalization.    

        (a)  The authorized capital stock of Parent consists of 75,000,000 shares of Parent Common Stock, of which there were 27,519,990 shares issued and outstanding as of December 31, 2001 and 10,000,000 shares of preferred stock, no shares of which were issued or outstanding as of December 31, 2001. The authorized capital stock of Merger Sub consists of 1,000,000 shares of Common Stock, $0.001 par value, 1,000 of which are issued and outstanding as of the date hereof and owned by Parent. Merger Sub was formed for the purpose of consummating the Merger and has no material assets or liabilities except as necessary for such purpose. At the Effective Time and when issued in accordance with the terms of this Agreement, the shares of Parent Common Stock to be issued pursuant to Article II and Article X will be duly authorized, validly issued, fully paid and nonassessable and will be free and clear of all encumbrances and liens, except for any liens and encumbrances created by the holders of the Outstanding Company Shares, and are not subject to preemptive rights created by statute, the Certificate of Incorporation or bylaws of Parent or any agreement to which Parent is a party or by which it is bound.

        (b)  Except as set forth on the Parent Disclosure Statement, there are no warrants, options, convertible securities, calls, rights, stock appreciation rights, preemptive rights, rights of first refusal, or agreements or commitments of any nature obligating Parent to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other equity interests of Parent, or obligating Parent to grant, issue, or enter into, any such warrant, option, convertible security, call, right, stock appreciation right, preemptive right, right of first refusal, agreement or commitment.

        4.5    Compliance with Laws.    Neither Parent nor the Parent Material Subsidiary has violated or failed to comply with any law (including, without limitation, relating to the export or import of goods or technology) of any Government Entity, except where any such violations or failures to comply are not reasonably expected to have, individually or in the aggregate, a Parent Material Adverse Effect. Parent and Merger Sub have all permits, licenses and franchises from Governmental Entities required to conduct their businesses as now being conducted and as proposed to be conducted, except for those the absence of which are not reasonably expected to have, individually or in the aggregate, a Parent Material Adverse Effect.

        4.6    SEC Documents.    Parent has filed in a timely manner all documents that it was required to file with the Securities and Exchange Commission ("SEC") under Sections 13, 14(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and all rules and regulations thereunder, since July 30, 2001, the date on which Parent became subject to such reporting requirements. As of their respective filing dates, all documents filed by Parent with the SEC (the "SEC Documents") complied in all material respects with the requirements of the Exchange Act or the Securities Act, as applicable, and all rules and regulations thereunder. None of the SEC Documents contained, as of their respective dates, any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. The financial statements of Parent included in the SEC Documents (the "Parent Financial Statements") comply in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto. The Parent Financial Statements have been prepared in accordance with GAAP consistently applied and fairly present in all material respects the consolidated financial position of Parent and its Subsidiaries at the dates thereof and the results of operations and cash flows of Parent and its Subsidiaries for the periods then ended in accordance with GAAP (subject, in the case of unaudited statements, to normal accruals and adjustments).

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        4.7    Absence of Undisclosed Liabilities.    Neither Parent nor any of its Subsidiaries has any material liabilities (absolute, accrued, contingent or otherwise) other than (i) liabilities disclosed in the Parent Financial Statements and the related notes to the financial statements, (ii) normal or recurring liabilities incurred since September 30, 2001 (the "Parent Balance Sheet Date") in the ordinary course of business consistent with past practice, and (iii) liabilities under this Agreement and any related document.

        4.8    Absence of Changes or Events.    Except as contemplated by this Agreement, since the Parent Balance Sheet Date no Parent Material Adverse Effect has occurred.

        4.9    Litigation.    Except as disclosed in the SEC Documents, there is no Action pending or, to the knowledge of Parent, threatened against Parent or Parent Material Subsidiary, or any of their respective officers and directors (in their capacities as such), or involving any of their assets, before any Government Entity, except for those Actions which, individually and in the aggregate, are not reasonably expected to have a Parent Material Adverse Effect. There is no Action pending or, to the knowledge of Parent, threatened which in any manner challenges, seeks to, or is reasonably likely to prevent, enjoin, alter or delay the transactions contemplated by this Agreement.

        4.10    Taxes.    Parent has filed all material Returns required to be filed prior to the date of this Agreement, and such Returns are true and correct and completed in accordance with applicable law. Parent has (A) timely paid all Taxes due and payable by it as shown on the Returns and all Taxes payable without the necessity of a Return, (B) timely paid all Taxes for which a notice of assessment or collection has been received (other than amounts described in clause (C) below and being contested in good faith by appropriate proceedings) and (C) properly reserved, in accordance with GAAP, for all Taxes that may become due and payable in the future with respect to the periods covered in the Parent's Financial Statements.

        4.11    Finders or Brokers.    Parent has not employed any investment banker, broker, finder or intermediary in connection with the transactions contemplated hereby who is or will be entitled to a fee or any commission upon consummation of the Merger.

        4.12    Disclosure.    No representation or warranty contained in this Article IV, and no statement in the Parent Disclosure Statement, misstates a material fact or omits to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading.

ARTICLE V

COVENANTS

        5.1    Conduct of Business During Interim Period.    Except as contemplated or required by this Agreement or as expressly consented to in writing by Parent, during the period from the date of this Agreement to the earlier of the termination of this Agreement or the Effective Time, each of the Company and the Company Subsidiaries will (i) conduct its operations according to its ordinary and usual course of business consistent with past practice, (ii) use all commercially reasonable efforts to preserve intact its business organization, to keep available the services of its officers and employees in each business function and to maintain satisfactory relationships with suppliers, distributors, customers and others having business relationships with it, and (iii) not take any action that would adversely affect the Company's ability to consummate the Merger or the other transactions contemplated by this Agreement. Without limiting the generality of the foregoing, and except as otherwise contemplated or required in this Agreement, prior to the earlier of the termination of this Agreement or the Effective

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Time neither the Company nor any Company Subsidiary will, without the prior written consent of Parent, directly or indirectly, do any of the following:

        (a)  enter into, violate, amend or otherwise modify or waive any of the terms of (i) any license or partnership, joint venture, or other agreement relating to the joint development or transfer of technology or Company IP Rights; or (ii) any other agreements, commitments or contracts;

        (b)  authorize, solicit, propose or announce an intention to authorize, recommend or propose, or enter into any agreement in principle or an agreement with any other person with respect to, any plan of liquidation or dissolution, any acquisition of a material amount of assets or securities, any disposition of a material amount of assets (in excess of $50,000) or securities outside the ordinary course of business (whether by sale, lease, hypothecation or otherwise) outside the ordinary course of business, any material change in capitalization, or any partnership, association, joint venture, joint development, technology transfer, or other material business alliance;

        (c)  fail to renew any insurance policy naming it as a beneficiary or a loss payee, or take any steps or fail to take any steps that would permit any insurance policy naming it as a beneficiary or a loss payee to be canceled, terminated or materially altered, except in the ordinary course of business and consistent with past practice and following written notice to Parent;

        (d)  maintain its books and records in a manner other than in the ordinary course of business and consistent with GAAP and past practices;

        (e)  enter into any hedging, option, derivative or other similar transaction or any foreign exchange position or contract for the exchange of currency other than in the ordinary course of business and consistent with past practice;

        (f)    institute any change in its accounting methods, principles or practices other than as required by GAAP, or revalue any of its respective assets, including without limitation, writing off notes or accounts receivables;

        (g)  pay, discharge or satisfy any material claims, liabilities or obligations (absolute, accrued, contingent or otherwise), other than the payment, discharge or satisfaction of liabilities (including accounts payable) in the ordinary course of business and consistent with past practice, or collect, or accelerate the collection of, any amounts owed (including accounts receivable) other than the collection in the ordinary course of business;

        (h)  split, combine or reclassify any shares of its capital stock;

        (i)    declare or pay any dividend or make any distribution to shareholders of the Company;

        (j)    issue any capital stock or other options, warrants or rights to purchase or acquire capital stock or change the terms of any such outstanding securities, other than upon the exercise of Company Options;

        (k)  waive, release, assign, settle or compromise any material claim or litigation, or commence a lawsuit other than for the routine collection of Accounts Receivable or for a breach of this Agreement;

        (l)    make any loans (except for business travel advances in the ordinary course of business consistent with past practices) to any officer, director, consultant or employee, or to any related entity or Person;

        (m)  enter into any new transaction with or create or assume any new obligation or liability to any Affiliate, including but not limited to Covalar Design, Inc., a Texas corporation ("CDI"); provided, however, the Company may, prior to the Closing, sell all of the outstanding capital stock of CDI to Mark Harward or his designee for the net book value of CDI currently recorded on the books of the Company at the Balance Sheet Date.

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        (n)  in respect of any Taxes, make or change any material election changing any accounting method, enter into any closing agreement, settle any material claim or assessment, or consent to any extension or waiver of the limitation period applicable to any material claim or assessment except as required by applicable law; or

        (o)  take or agree to take any of the actions described in this Section 5.1, or any action which would make any of its representations or warranties contained in this Agreement untrue or incorrect in any material respect or prevent it from performing, or cause it not to perform, its covenants hereunder.

        5.2    No Solicitation.    The Company shall not, nor shall it authorize or permit any of its Subsidiaries, any of its or their respective directors, officers or employees or any investment banker, financial advisor, attorney, accountant or other advisor, agent or representative (collectively, "Representatives") retained by it or any of its Subsidiaries to, directly or indirectly through another person, (i) solicit, engage in discussions or negotiate with any person (whether or not such discussions or negotiations are initiated by the Company), or take any other action intended or designed to facilitate the efforts of any Person, other than Parent, relating to the possible acquisition of the Company (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or any significant portion of its capital stock (other than by exercise of Company Options) or assets by any person other than Parent (an "Alternate Acquisition"), (ii) provide information with respect to the Company to any Person relating to a possible Alternate Acquisition by any Person, (iii) enter into an agreement with any Person providing for a possible Alternate Acquisition, or (iv) make or authorize any statement, recommendation or solicitation in support of any possible Alternate Acquisition by any person. Without limiting the foregoing, it is agreed that any violation of the restrictions set forth in the preceding sentence by any Representative of the Company or any of its Subsidiaries shall be a breach of this Section 5.2 by the Company; provided, however, that that any inadvertent violation of the restrictions set forth in this Section 5.2 by a Company Representative which is cured within five days shall not be deemed to be a violation of this Section 5.2. The Company shall, and shall cause its Subsidiaries to, immediately cease and cause to be terminated all existing discussions or negotiations with any Person with respect to any Alternate Acquisition and request the prompt return or destruction of all confidential information previously furnished. Notwithstanding anything to the contrary contained in this Agreement but provided that Shareholder Approval has not been obtained, the Company and any of the Company's Representatives (y) may participate in discussions or negotiations with, review information from, and, subject to compliance with the last sentence of this Section 5.2, furnish non-public information to any third party that has made an unsolicited proposal for an Alternative Acquisition (a "Potential Acquiror") and/or (z) may approve or accept an unsolicited Alternative Acquisition and may make or authorize any statement, recommendation or solicitation in support of an unsolicited Alternative Acquisition, in each case only if the Company Board determines in good faith (A) that, in the case of subclause (y), such Alternative Acquisition proposal is or is reasonably likely to be or become, or, in the case of subclause (z), after receiving written advice from its financial advisor, such Alternative Acquisition proposal is, more favorable to the Company and its shareholders than the Merger (a "Superior Proposal"), it being acknowledged and agreed that the Company Board intends to, and will, retain a financial advisor for purpose of providing such written advice unless the Alternative Acquisition proposal is for all cash consideration to the Company's shareholders for a total value to them greater than the value to them of the Merger, and (B) following consultation with outside legal counsel, that the failure to participate in such discussions or negotiations, review such information or furnish such information regarding, or approve or accept, an Alternative Acquisition would violate the Company Board's fiduciary duties under applicable law. In such event, the Company shall promptly advise Parent in writing of any bona fide discussions regarding a possible Alternative Acquisition, the material terms and conditions of any such Alternative Acquisition and the identity of the Potential Acquiror. The Company shall (i) keep Parent informed of the status and terms of any such inquiry and Alternative Acquisition proposal and (ii) provide to P