Exhibit 10.1

 

PLACEMENT AGENT AGREEMENT

 

August 27, 2009

 

B. Riley & Co., LLC

11100 Santa Monica Blvd.

Suite 800

Los Angeles, CA 90025

 

Ladies and Gentlemen:

 

1.             Introduction.  Kratos Defense & Security Solutions, Inc., a
Delaware corporation (the “Company”), proposes, pursuant to the terms of this
Placement Agent Agreement (this “Agreement”) to sell to certain institutional
investors (the “Purchasers”) up to an aggregate of 26,000,000 shares (the
“Shares”) of common stock, $0.001 par value per share (the “Common Stock”), of
the Company. The Company hereby confirms that B. Riley & Co., LLC is acting as
the exclusive placement agent (the “Placement Agent”) in accordance with the
terms and conditions hereof.

 

2.             Agreement to Act as Placement Agent; Placement of Shares.  On the
basis of the representations, warranties and agreements of the Company herein
contained, and subject to all the terms and conditions of this Agreement:

 

(a)           The Company hereby authorizes the Placement Agent to act as its
exclusive agent to solicit offers for the purchase of all or part of the Shares
from the Company in connection with the proposed offering of the Shares (the
“Offering”).  Until the Closing Date (as defined in Section 4 hereof), the
Company shall not, without the prior written consent of the Placement Agent,
solicit or accept offers to purchase Shares otherwise than through the Placement
Agent.

 

(b)           The Company hereby acknowledges that the Placement Agent, as an
agent of the Company, shall use its reasonable best efforts to solicit offers
from potential purchasers to purchase the Shares from the Company on the terms
and subject to the conditions set forth in the Prospectus (as defined below). 
The Placement Agent has no authority to bind the Company with respective to any
prospective offer to purchase the Shares.  The Placement Agent shall use
commercially reasonable efforts to assist the Company in obtaining performance
by each Purchaser whose offer to purchase Shares was solicited by the Placement
Agent and accepted by the Company, but the Placement Agent shall not, except as
otherwise provided in this Agreement, be obligated to disclose the identity of
any potential purchaser or have any liability to the Company in the event any
such purchase is not consummated for any reason.  Under no circumstances will
the Placement Agent be obligated to underwrite or purchase any Shares for its
own accounts and, in soliciting offers to purchase the Shares, the Placement
Agent shall act solely as the Company’s agent and not as a principal. 
Notwithstanding the foregoing, it is understood and agreed that the Placement
Agent (or its affiliates) may, solely at their discretion and without any
obligation to do so, purchase Shares as a principal.

 

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(c)           Subject to the provisions of this Section 2, offers for the
purchase of Shares shall be solicited by the Placement Agent as agent for the
Company at such times and in such amounts as the Placement Agent deems
advisable.  The Placement Agent shall communicate to the Company, orally or in
writing, each reasonable offer to purchase Shares received by it as agent of the
Company.  The Company shall have the sole right to accept offers to purchase the
Shares and may reject any such offer, in whole or in part.  The Placement Agent
shall have the right, in its discretion reasonably exercised, without notice to
the Company, to reject any offer to purchase Shares received by it, in whole or
in part, and any such rejection shall not be deemed a breach of this Agreement.

 

(d)           The Shares are being sold to the Purchasers at a price of $0.72
per share.

 

(e)           As compensation for services rendered, on the Closing Date, the
Company shall pay to the Placement Agent by wire transfer of immediately
available funds to an account or accounts designated by the Placement Agent, an
aggregate amount equal to 5% of the aggregate gross proceeds received by the
Company from the sale of the Shares on such Closing Date.

 

(f)            No Shares which the Company has agreed to sell pursuant to this
Agreement shall be deemed to have been purchased and paid for, or sold by the
Company, until such Shares shall have been delivered to the Purchaser thereof
against payment by such Purchaser.  If the Company shall default in its
obligations to deliver Shares to a Purchaser whose offer it has accepted, the
Company shall indemnify and hold the Placement Agent harmless against any loss,
claim, damage or expense arising from or as a result of such default by the
Company in accordance with Section 8 herein.

 

3.             Representations and Warranties of the Company.  The Company
represents and warrants to, and agrees with, the Placement Agent that:

 

(a)           The Company has prepared and filed in conformity with the
requirements of the Securities Act of 1933, as amended (the “Securities Act”),
and published rules and regulations thereunder (the “Rules and Regulations”)
adopted by the Securities and Exchange Commission (the “Commission”) a “shelf”
Registration Statement (as hereinafter defined) on Form S-3 (File
No. 333-161340), which was declared effective by the Commission as of August 21,
2009 (the “Effective Date”), including a base prospectus relating to the
securities registered pursuant to such Registration Statement (the “Base
Prospectus”), and such amendments and supplements thereto as may have been
required to the date of this Agreement.  The term “Registration Statement” as
used in this Agreement means the registration statement (including all exhibits,
financial schedules and all documents and information deemed to be a part of the
Registration Statement pursuant to Rule 430A of the Rules and Regulations), as
amended and/or supplemented to the date of this Agreement, including the Base
Prospectus.  The Registration Statement is effective under the Securities Act
and no stop order preventing or suspending the effectiveness of the Registration
Statement or suspending or preventing the use of the Prospectus (as defined
below) has been issued by the Commission and no proceedings for that purpose
have been instituted or are threatened by the Commission. 

 

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The Company, if required by the Rules and Regulations of the Commission, will
file the Prospectus, with the Commission pursuant to Rule 424(b) of the
Rules and Regulations.  The term “Prospectus” as used in this Agreement means
the prospectus, in the form in which it is to be filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations, or, if the prospectus is
not to be filed with the Commission pursuant to Rule 424(b), the prospectus in
the form included as part of the Registration Statement as of the Effective
Date, except that if any revised prospectus or prospectus supplement shall be
provided to the Placement Agent by the Company for use in connection with the
Offering and sale of the Shares which differs from the Prospectus (whether or
not such revised prospectus or prospectus supplement is required to be filed by
the Company pursuant to Rule 424(b) of the Rules and Regulations), the term
“Prospectus” shall refer to such revised prospectus or prospectus supplement, as
the case may be, from and after the time it is first provided to the Placement
Agent for such use.  Any reference herein to the Registration Statement or the
Prospectus shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-3 which were filed under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), on or before
the last to occur of the Effective Date, or the date of the Prospectus, and any
reference herein to the terms “amend,” “amendment,” or “supplement” with respect
to the Registration Statement or the Prospectus shall be deemed to refer to and
include (i) the filing of any document under the Exchange Act after the
Effective Date or the date of the Prospectus, as the case may be, which is
incorporated by reference and (ii) any such document so filed.  If the Company
has filed an abbreviated registration statement to register additional
securities pursuant to Rule 462(b) under the Rules and Regulations (the
“462(b) Registration Statement”), then any reference herein to the Registration
Statement shall also be deemed to include such 462(b) Registration Statement.

 

(b)           As of the Applicable Time (as defined below) and as of the Closing
Date, neither (i) any General Use Free Writing Prospectus (as defined below)
issued at or prior to the Applicable Time, and the Pricing Prospectus (as
defined below), all considered together (collectively, the “General Disclosure
Package”), (ii) any individual Limited Use Free Writing Prospectus (as defined
below) issued at or prior to the Applicable Time, nor (iii) the bona fide
electronic road show, if any, (as defined in Rule 433(h)(5) of the Rules and
Regulations), that has been made available without restriction to any person,
when considered together with the General Disclosure Package, included or will
include, any untrue statement of a material fact or omitted or as of the Closing
Date will omit, to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted from any
Issuer Free Writing Prospectus, in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of the Placement
Agent specifically for inclusion therein, which information the parties hereto
agree is limited to the “Placement Agent’s Information” which is defined as the
information set forth in Section 16.  As used in this paragraph (b) and
elsewhere in this Agreement:

 

“Applicable Time” means 8:30 P.M., New York time, on the date of this Agreement.

 

“General Use Free Writing Prospectus” means any Issuer Free Writing Prospectus.

 

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“Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as
defined in Rule 433 of the Rules and Regulations relating to the Shares in the
form filed or required to be filed with the Commission or, if not required to be
filed, in the form retained in the Company’s records pursuant to Rule 433(g) of
the Rules and Regulations.

 

“Limited Use Free Writing Prospectuses” means any Issuer Free Writing Prospectus
that is not a General Use Free Writing Prospectus.

 

“Pricing Prospectus” means the Base Prospectus as amended and supplemented
immediately prior to the Applicable Time, including any document incorporated by
reference therein and any prospectus supplement deemed to be a part thereof.

 

(c)           No order preventing or suspending the use of any Issuer Free
Writing Prospectus or the Prospectus relating to the Offering has been issued by
the Commission, and no proceeding for that purpose or pursuant to Section 8A of
the Securities Act has been instituted or threatened by the Commission.

 

(d)           At the time the Registration Statement became effective, at the
date of this Agreement and at the Closing Date, the Registration Statement
conformed and will conform in all material respects to the requirements of the
Securities Act and the Rules and Regulations and did not and will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; the Prospectus, at the time the Prospectus became effective and at
the Closing Date, conformed and will conform in all material respects to the
requirements of the Securities Act and the Rules and Regulations and did not and
will not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that the foregoing representations and warranties in this paragraph (d) shall
not apply to information contained in or omitted from the Registration Statement
or the Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of the Placement Agent specifically for
inclusion therein, which information the parties hereto agree is limited to the
Placement Agent’s Information.

 

(e)           Each Issuer Free Writing Prospectus, if any, as of its issue date
and at all subsequent times through the completion of the public offer and sale
of the Shares or until any earlier date that the Company notified or notifies
the Placement Agent as described in Section 5(c), did not, does not and will not
include any information that conflicted, conflicts or will conflict with the
information contained in the Registration Statement, Pricing Prospectus or the
Prospectus, including any document incorporated by reference therein and any
prospectus supplement deemed to be a part thereof that has not been superseded
or modified, or includes an untrue statement of a material fact or omitted or
would omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.  The foregoing sentence does not apply to
statements in or omissions from any Issuer Free Writing Prospectus in reliance
upon, and in conformity with, written information furnished to the Company by or
on behalf of the Placement

 

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Agent specifically for inclusion therein, which information the parties hereto
agree is limited to the Placement Agent’s Information.

 

(f)            The documents incorporated by reference in the Prospectus, when
they became effective or were filed with the Commission, as the case may be,
conformed in all material respects to the requirements of the Securities Act or
the Exchange Act, as applicable, the Rules and Regulations and the rules and
regulations of the Commission under the Exchange Act and none of such documents
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and any further documents so filed and incorporated by reference in
the Prospectus, when such documents become effective or are filed with the
Commission, as the case may be, will conform in all material respects to the
requirements of the Securities Act or the Exchange Act, as applicable, the
Rules and Regulations and the rules and regulations of the Commission under the
Exchange Act and will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.

 

(g)           The Company is not an “ineligible issuer” in connection with the
Offering pursuant to Rules 164, 405 and 433 under the Securities Act.  The
Company has not, directly or indirectly, distributed and will not distribute any
offering material in connection with the Offering other than the Prospectus and
other materials, if any, permitted under the Securities Act and consistent with
Section 5(b).  The Company will file with the Commission all Issuer Free Writing
Prospectuses (other than a “road show,” as defined in Rule 433(d)(8) of the
Rules and Regulations), if any, in the time and manner required under
Rules 163(b)(2) and 433(d) of the Rules and Regulations.

 

(h)           Each of the Company and its Subsidiaries has been duly organized
and is validly existing as a corporation or other legal entity in good standing
(or the foreign equivalent thereof) under the laws of its jurisdiction of
incorporation or organization.  Each of the Company and its Subsidiaries is duly
qualified to do business and is in good standing as a foreign corporation or
other legal entity in each jurisdiction in which its ownership or lease of its
properties or the conduct of its business requires such qualification and has
all power and authority (corporate or other) necessary to own or hold its
properties and to conduct the businesses in which each is engaged, except where
the failure to so qualify or have such power or authority would not (i) have,
singularly or in the aggregate, a material adverse effect on the condition
(financial or otherwise), results of operations, assets or business of the
Company and its Subsidiaries, taken as a whole, or (ii) impair in any material
respect the ability of the Company to perform its obligations under this
Agreement or to consummate any transactions contemplated by this Agreement, the
General Disclosure Package or the Prospectus (any such effect as described in
clauses (i) or (ii), a “Material Adverse Effect”). The Company owns or controls,
directly or indirectly, only the corporations, partnerships, or other entities
listed on Schedule A attached hereto (each a “Subsidiary” and, collectively, the
“Subsidiaries”)

 

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(i)            The Company has the full right, power and authority to enter into
this Agreement and to perform and to discharge its obligations hereunder; and
this Agreement has been duly authorized, executed and delivered by the Company,
and constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms.

 

(j)            The shares of Common Stock to be issued and sold by the Company
to the Purchasers have been duly and validly authorized and the shares of Common
Stock, when issued and delivered against payment therefor as provided herein
will be duly and validly issued, fully paid and non-assessable and free of any
preemptive or similar rights and will conform to the description thereof
contained in the General Disclosure Package and the Prospectus.

 

(k)           The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in each of the General Disclosure
Package and the Prospectus.  The shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly issued, fully
paid and non-assessable.  Since the date provided in the General Disclosure
Package, the Company has not issued any equity securities, other than Common
Stock issued pursuant to the exercise of stock options or settlement of
restricted stock units previously outstanding under the Company’s equity
compensation plans or the issuance of Common Stock pursuant to employee stock
purchase plans.  All of the Company’s options, warrants and other rights to
purchase or exchange any securities for shares of the Company’s capital stock
have been duly authorized and validly issued and were issued in compliance in
all material respects with United States federal and applicable state securities
laws.  None of the outstanding shares of Common Stock was issued in violation of
any preemptive rights, rights of first refusal or other similar rights to
subscribe for or purchase securities of the Company.

 

(l)            The membership interests, capital stock, partnership interests or
other similar equity interests, as applicable, of each Subsidiary have been duly
authorized and validly issued, are fully paid and nonassessable and, except to
the extent set forth in the General Disclosure Package, are owned by the Company
directly, free and clear of any claim, lien, encumbrance, security interest,
restriction upon voting or transfer or any other claim of any third party.

 

(m)          The execution, delivery and performance of this Agreement by the
Company, the issue and sale of the Shares by the Company and the consummation of
the transactions contemplated hereby and thereby will not (with or without
notice or lapse of time or both) conflict with or result in a breach or
violation of any of the terms or provisions of, constitute a default under, give
rise to any right of termination or other right or the cancellation or
acceleration of any right or obligation or loss of a benefit under or pursuant
to, any indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound or to which any of the
property or assets of the Company or any of its Subsidiaries is subject, nor
will such actions result in any violation of the provisions of the charter or
by-laws (or analogous governing instruments, as applicable) of the Company or
any of its Subsidiaries or any law, statute,

 

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rule, regulation, judgment, order or decree of any court or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
Subsidiaries or any of their properties or assets.

 

(n)           The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene any
provision of (i) applicable law; (ii) the certificate of incorporation or
by-laws (or analogous organizational documents) of the Company or any of its
Subsidiaries; (iii) any agreement or other instrument binding upon the Company
or any of its Subsidiaries that is material to the Company and its Subsidiaries,
taken as a whole; or (iv) any judgment, order or decree of any governmental
body, agency or court having jurisdiction over the Company or any of its
Subsidiaries except, in the cases of clauses (i) and (iii) above for any such
contravention that would not have a Material Adverse Effect, and no consent,
approval, authorization or order of, or qualification with, any governmental
body or agency is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the securities or Blue
Sky laws of the various states or the by-laws, rules and regulations of the
Financial Industry Regulatory Authority (“FINRA”) and the NASDAQ Global Market
in connection with the offer and sale of the Shares.

 

(o)           Grant Thornton LLP, who have audited certain financial statements
and related schedules included or incorporated by reference in the Registration
Statement, the General Disclosure Package and the Prospectus, is an independent
registered public accounting firm as required by the Securities Act and the
Rules and Regulations and the Public Company Accounting Oversight Board (United
States) (the “PCAOB”).  Except as pre-approved in accordance with the
requirements set forth in Section 10A of the Exchange Act, Grant Thornton LLP
has not been engaged by the Company to perform any “prohibited activities” (as
defined in Section 10A of the Exchange Act).

 

(p)           The financial statements, together with the related notes and
schedules, included or incorporated by reference in the General Disclosure
Package, the Prospectus and in the Registration Statement fairly present the
financial position and the results of operations and changes in financial
position of the Company and its consolidated Subsidiaries and other consolidated
entities at the respective dates or for the respective periods therein
specified.  Such statements and related notes and schedules have been prepared
in accordance with the generally accepted accounting principles in the United
States (“GAAP”) applied on a consistent basis throughout the periods involved
except as may be set forth in the related notes included or incorporated by
reference in the General Disclosure Package.  The financial statements, together
with the related notes and schedules, included or incorporated by reference in
the General Disclosure Package and the Prospectus comply in all material
respects with the Securities Act, the Exchange Act, and the Rules and
Regulations and the rules and regulations under the Exchange Act.  No other
financial statements or supporting schedules or exhibits are required by the
Securities Act or the Rules and Regulations to be described, or included or
incorporated by reference in the Registration Statement, the General Disclosure
Package or the Prospectus.  There is no pro forma or as adjusted financial
information which is required to be included in the Registration Statement, the
General Disclosure Package, or the

 

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Prospectus or a document incorporated by reference therein in accordance with
the Securities Act and the Rules and Regulations which has not been included or
incorporated as so required.

 

(q)           There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company and its Subsidiaries, taken as a whole, otherwise than as set forth or
contemplated in the General Disclosure Package.

 

(r)            There is no legal or governmental proceeding, action, suit or
claim pending or, to the Company’s knowledge, threatened to which the Company or
any of its Subsidiaries is a party or to which any of the properties or assets
of the Company or any of its Subsidiaries is subject (i) other than proceedings
accurately described in all material respects in the General Disclosure Package
or proceedings that would not have a Material Adverse Effect on the Company and
its Subsidiaries, taken as a whole, or (ii) that are required to be described in
the Registration Statement, the General Disclosure Package or the Prospectus and
are not so described; and there are no statutes, regulations, contracts or other
documents to which the Company or any of its Subsidiaries is subject or by which
the Company or any of its Subsidiaries is bound that are required to be
described in the Registration Statement, the General Disclosure Package or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
described or filed as required.

 

(s)           Neither the Company nor any of its Subsidiaries is or, after
giving effect to the Offering of the Shares and the application of the proceeds
thereof as described in the General Disclosure Package and the Prospectus, will
become an “investment company” within the meaning of the Investment Company Act
of 1940, as amended, and the rules and regulations of the Commission thereunder.

 

(t)            Neither the Company, its Subsidiaries nor any of the Company’s or
its Subsidiaries’ officers, directors or affiliates has bid for or purchased,
for any account in which it or any of its affiliated purchasers has a beneficial
interest, any Shares, or attempted to induce any person to purchase any Shares;
and has not, and has not caused its affiliated purchasers to, make bids or
purchased for the purpose of creating actual, or apparent, active trading in or
of raising the price of the Shares.

 

(u)           Neither the Company nor its Subsidiaries own any real property. 
The Company and its Subsidiaries have good and marketable title to all personal
property owned by them which is material to the business of the Company and its
Subsidiaries, taken as a whole, in each case free and clear of all liens,
encumbrances and defects of title except such as are described in the General
Disclosure Package would not individually or in the aggregate have a Material
Adverse Effect; and any real property and buildings held under lease by the
Company and its Subsidiaries are held by them under valid, subsisting and
enforceable leases except such as are described in the General Disclosure
Package or would not have a Material Adverse Effect.

 

(v)           Except as disclosed in the General Disclosure Package, neither the
Company nor any of its Subsidiaries is in violation of any statute, rule,
regulation,

 

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decision or order of any governmental agency or body or any court, relating to
the use, disposal or release of hazardous or toxic substances or relating to the
protection or restoration of the environment or human exposure to hazardous or
toxic substances (collectively, “Environmental Laws”), operates any real
property contaminated with any substance that is subject to any Environmental
Laws, is liable for any off-site disposal or contamination pursuant to any
Environmental Laws, or is subject to any claim relating to any Environmental
Laws, which violation, contamination, liability or claim would individually or
in the aggregate have a Material Adverse Effect; and the Company is not aware of
any pending investigation which might lead to such a claim.

 

(w)          The Company and its Subsidiaries own or possess, or have the right
to use, adequate trademarks, trade names and other rights to inventions,
know-how, patents, copyrights, confidential information and other intellectual
property (collectively, “Intellectual Property Rights”) necessary to conduct the
business now operated by them, or presently employed by them, and have not
received any notice of infringement of or conflict with asserted rights of
others with respect to any Intellectual Property Rights, except such as will not
individually or in the aggregate have a Material Adverse Effect.

 

(x)            Neither the Company nor any of its Subsidiaries, nor to its
knowledge, any director, officer, employee or other person associated with or
acting on behalf of the Company or any of its Subsidiaries has:  (i) used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expense relating to political activity; (ii) made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; (iii) caused the Company or any of its
Subsidiaries to be in violation of any provision of the United States Foreign
Corrupt Practices Act of 1977; or (iv) made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment other than with respect to the
activities set forth in that certain press release issued by the Company on
July 7, 2009, as to which the Company makes no representation.

 

(y)           The Company and its Subsidiaries maintain a system of internal
accounting and other controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management’s general or
specific authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management’s general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.  Except as described in the General Disclosure Package, since the
end of the Company’s most recent audited fiscal year, there has been (A) no
material weakness in the Company’s internal control over financial reporting
(whether or not remediated) and (B) no change in the Company’s internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, the Company’s internal control over financial reporting.

 

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(z)            No relationship, direct or indirect, exists between or among the
Company and any of its Subsidiaries, on the one hand, and the directors,
officers, stockholders (or analogous interest holders), customers or suppliers
of the Company or any of its Subsidiaries or any of their affiliates, on the
other hand, which is required to be described in the General Disclosure Package
or the Prospectus or a document incorporated by reference therein and which is
not so described.

 

(aa)         No person or entity has the right to require registration of shares
of Common Stock or other securities of the Company or any of its Subsidiaries
under the Securities Act because of the filing or effectiveness of the
Registration Statement or otherwise.

 

(bb)         Neither the Company nor any of its Subsidiaries is a party to any
contract, agreement or understanding with any person (other than this Agreement
and any letter of understanding between the Company and the Placement Agent)
that would give rise to a valid claim against the Company or the Placement Agent
for a brokerage commission, finder’s fee or like payment in connection with the
offering and sale of the Shares or any transaction contemplated by this
Agreement, the Registration Statement, the General Disclosure Package or the
Prospectus.

 

(cc)         No forward-looking statement (within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act) contained in either the
General Disclosure Package or the Prospectus has been made or reaffirmed without
a reasonable basis or has been disclosed other than in good faith.

 

(dd)         The Company is subject to and in compliance in all material
respects with the reporting requirements of Section 13 or Section 15(d) of the
Exchange Act. As of the filing date of the Registration Statement, the Company
was eligible to file a “shelf” Registration Statement on Form S-3 with the
Commission.  The Common Stock is registered pursuant to Section 12(b) of the
Exchange Act and is listed on the NASDAQ Global Select Market, and the Company
has taken no action designed to, or reasonably likely to have the effect of,
terminating the registration of the Common Stock under the Exchange Act or
delisting the Common Stock from the NASDAQ Global Select Market, nor has the
Company received any notification that the Commission or FINRA is contemplating
terminating such registration or listing.  No consent, approval, authorization
or order of, or filing, notification or registration with, the NASDAQ Global
Select Market is required for the listing and trading of the shares of Common
Stock on the NASDAQ Global Select Market, except such as will have been obtained
on or prior to the Closing Date.

 

(ee)         The Company is in compliance in all material respects with all
applicable provisions of the Sarbanes-Oxley Act of 2002 and all applicable
rules and regulations promulgated thereunder or implementing the provisions
thereof that are then in effect.

 

(ff)           The statistical and market related data included in the General
Disclosure Package are based on or derived from sources that the Company
believes to be reliable and accurate, and such data agree with the sources from
which they are derived.

 

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(gg)         Neither the Company nor any Subsidiary directly or indirectly
controls, is controlled by, or is under common control with, or is an associated
person (within the meaning of Article I, Section 1(ee) of the By-laws of FINRA)
of, any member firm of FINRA.

 

(hh)         No approval of the stockholders of the Company under the rules and
regulations of NASDAQ (including Rule 5635 of the NASDAQ Global Marketplace
Rules) is required for the Company to issue and deliver the Shares to the
Purchasers.

 

(ii)           Except as described in the General Disclosure Package, the
Company has not sold, issued or distributed any shares of Common Stock during
the six-month period preceding the date hereof, including any sales pursuant to
Rule 144A under, or Regulation D or S of, the Securities Act, other than shares
issued pursuant to employee benefit plans, qualified equity compensation plans
or other employee compensation plans or pursuant to outstanding options, rights
or warrants.

 

Any certificate signed by or on behalf of the Company and delivered to the
Placement Agent or to counsel for the Placement Agent shall be deemed to be a
representation and warranty by the Company to the Placement Agent and the
Purchasers as to the matters covered thereby.

 

4.             The Closing.  The time and date of closing and delivery of the
documents required to be delivered to the Placement Agent pursuant to Sections 5
and 7 hereof shall be at 7:00 A.M., Pacific time, on September 2, 2009 (the
“Closing Date”) at the offices of Paul, Hastings, Janofsky & Walker LLP, 4747
Executive Drive, 12th Floor, San Diego, CA 92121.

 

5.             Further Covenants and Agreements of the Company.  The Company
covenants and agrees with the Placement Agent and, as applicable, with the
Purchasers as follows:

 

(a)           To prepare the Rule 462(b) Registration Statement, if necessary,
in a form approved by the Placement Agent and file such Rule 462(b) Registration
Statement with the Commission on the date hereof; to prepare the Prospectus in a
form approved by the Placement Agent containing information previously omitted
at the time of effectiveness of the Registration Statement in reliance on
rules 430A, 430B and 430C and to file such Prospectus pursuant to Rule 424(b) of
the Rules and Regulations not later than the second business day following the
execution and delivery of this Agreement or, if applicable, such earlier time as
may be required by Rule 430A of the Rules and Regulations; to notify the
Placement Agent promptly of the Company’s intention to file or prepare any
supplement or amendment to any Registration Statement or to the Prospectus in
connection with this Offering and to provide a draft of any such amendment or
supplement to the Registration Statement, the General Disclosure Package or to
the Prospectus to the Placement Agent for review within an amount of time that
is reasonably practical under the circumstances and prior to filing; to advise
the Placement Agent, promptly after it receives notice thereof, of the time when
any amendment to any Registration Statement has been filed in connection with
the Offering or becomes effective or any supplement to the General Disclosure
Package or the Prospectus or any amended Prospectus has been filed and to
furnish the Placement Agent with copies

 

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thereof; to file within the time periods prescribed by the Exchange Act,
including any extension thereof, all material required to be filed by the
Company with the Commission pursuant to Rule 433(d) or 163(b)(2), as the case
may be; to advise the Placement Agent, promptly after it receives notice
thereof, of the issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Issuer Free Writing Prospectus or the
Prospectus, of the suspension of the qualification of the Shares for offering or
sale in any jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement, the General Disclosure Package or
the Prospectus or for additional information; and, in the event of the issuance
of any stop order or of any order preventing or suspending the use of any Issuer
Free Writing Prospectus or the Prospectus or suspending any such qualification,
and promptly to use its best efforts to obtain the withdrawal of such order.

 

(b)           That, unless it obtains the prior consent of the Placement Agent,
it has not made and will not make any offer relating to the Shares that would
constitute a “free writing prospectus” as defined in Rule 405 of the Rules and
Regulations unless the prior written consent of the Placement Agent has been
received (each, a “Permitted Free Writing Prospectus”).  The Company represents
that it has treated and agrees that it will treat each Permitted Free Writing
Prospectus as an Issuer Free Writing Prospectus, and that it has and will comply
with the requirements of Rules 164 and 433 of the Rules and Regulations
applicable to any Issuer Free Writing Prospectus, including the requirements
relating to timely filing with the Commission, legending and record keeping.

 

(c)           If at any time prior to the expiration of nine (9) months after
the date when a Prospectus relating to the Shares is required to be delivered
under the Securities Act, any event occurs or condition exists as a result of
which the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading, or the Registration Statement, as then amended or
supplemented, would include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein not misleading,
or if for any other reason it is necessary at  any time to amend or supplement
any Registration Statement or the Prospectus to comply with the Securities Act
or the Exchange Act, the Company will promptly notify the Placement Agent, and
upon the Placement Agent’s request, the Company will promptly prepare and file
with the Commission, at the Company’s expense, an amendment to the Registration
Statement or an amendment or supplement to the Prospectus that corrects such
statement or omission or effects such compliance.  The Company consents to the
use of the Prospectus or any amendment or supplement thereto by the Placement
Agent.

 

(d)           To the extent not available on the Commission’s EDGAR system, to
make generally available to its stockholders as soon as practicable, but in any
event not later than eighteen (18) months after the effective date of each
Registration Statement (as defined in Rule 158(c) of the Rules and Regulations),
an earnings statement of the Company and its consolidated Subsidiaries (which
need not be audited) complying with

 

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Section 11(a) of the Securities Act and the Rules and Regulations (including, at
the option of the Company, Rule 158).

 

(e)           To take promptly from time to time such actions as the Placement
Agent may reasonably request to qualify the Shares for offering and sale under
the securities or Blue Sky laws of such jurisdictions (domestic or foreign) as
the Placement Agent may designate and to continue such qualifications in effect,
and to comply with such laws, for so long as required to permit the offer and
sale of Shares in such jurisdictions; provided that the Company and its
Subsidiaries shall not be obligated to qualify as foreign corporations in any
jurisdiction in which they are not so qualified or to file a general consent to
service of process in any jurisdiction.

 

(f)            That the Company will not, for a period of one hundred eighty
(180) days from the date of the Prospectus, (the “Lock-Up Period”) without the
prior written consent of the Placement Agent, directly or indirectly offer,
sell, assign, transfer, pledge, contract to sell, or otherwise dispose of, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, other than (i) the Company’s sale of the Shares
hereunder, (ii) the issuance of Common Stock or any equity awards (including the
issuance of Common Stock upon exercise or settlement of such equity awards)
pursuant to the Company’s employee benefit plans, stock option and employee
stock purchase plans or other employee compensation plans as such plans are in
existence on the date hereof and described in the Prospectus, (iii) the issuance
of Common Stock pursuant to the vesting or exercises of options, restricted
stock units, warrants or rights outstanding on the date hereof, and (iv) the
issuance of Common Stock or securities convertible into or exercisable or
exchangeable for Common Stock (and the issuance of Common Stock pursuant to the
terms of such securities convertible into or exercisable or exchangeable for
Common Stock) in connection with strategic transactions involving the Company
and other entities, including without limitation, merger, acquisition, joint
venture, licensing, collaboration, manufacturing, development, marketing,
co-promotion or distribution arrangements.  The Company will cause each
executive officer listed in Schedule B to furnish to the Placement Agent, prior
to the Closing Date, a letter, substantially in the form of Exhibit A hereto,
pursuant to which each such person shall agree, among other things, not to
directly or indirectly offer, sell, assign, transfer, pledge, contract to sell,
or otherwise dispose of, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, not to engage
in any swap or other agreement or arrangement that transfers, in whole or in
part, directly or indirectly, the economic risk of ownership of Common Stock or
any such securities, during the period  of ninety (90) days from the date of the
Prospectus, without the prior written consent of the Placement Agent.  The
Company also agrees that during such period, the Company will not file any
registration statement, preliminary prospectus or prospectus, or any amendment
or supplement thereto, under the Securities Act for any such transaction or
which registers, or offers for sale, Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock, except for registration
statements on Form S-8 relating to employee benefit plans and registration
statements registering securities issued by the Company pursuant to (iv) above. 
The Company hereby agrees that (A) if it issues an earnings release or material
news, or if a material event relating to the Company occurs, during the last
seventeen

 

13

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days of the Lock-Up Period, or (B) if prior to the expiration of the Lock-Up
Period, the Company announces that it will release earnings results during the
sixteen-day period beginning on the last day of the Lock-Up Period, the
restrictions imposed by this paragraph (f) shall continue to apply until the
expiration of the eighteen-day period beginning on the issuance of the earnings
release or the occurrence of the material news or material event.

 

(g)           To supply the Placement Agent with copies of all correspondence to
and from, and all documents issued to and by, the Commission in connection with
the registration of the Shares under the Securities Act or the Registration
Statement or the Prospectus, or any amendment or supplement thereto or document
incorporated by reference therein.

 

(h)           Prior to the Closing Date, not to issue any press release or other
communication directly or indirectly or hold any press conference without the
prior consent of the Placement Agent.

 

(i)            Until the Placement Agent shall have notified the Company of the
completion of the Offering of the Shares, that the Company will not, and will
cause its affiliated purchasers (as defined in Regulation M under the Exchange
Act) not to, either alone or with one or more other persons, bid for or
purchase, for any account in which it or any of its affiliated purchasers has a
beneficial interest, any Shares, or attempt to induce any person to purchase any
Shares; and not to, and to cause its affiliated purchasers not to, make bids or
purchase for the purpose of creating actual, or apparent, active trading in or
of raising the price of the Shares.

 

(j)            Not to take any action prior to the Closing Date which would
require the Prospectus to be amended or supplemented pursuant to Section 5.

 

(k)           To apply the net proceeds from the sale of the Shares as set forth
in the Registration Statement, the General Disclosure Package and the Prospectus
under the heading “Use of Proceeds.”

 

(l)            To use its best efforts to list, effect and maintain, subject to
notice of issuance, the Common Stock on the NASDAQ Global Select Market.

 

(m)          To use its best efforts to assist the Placement Agent with any
filings with FINRA and obtaining any required clearance from FINRA as to the
amount of compensation allowable or payable to the Placement Agent.

 

(n)           To use its best efforts to do and perform all things required to
be done or performed under this Agreement by the Company prior to the Closing
Date and to satisfy all conditions precedent to the delivery of the Shares.

 

6.             Payment of Expenses.  The Company agrees to pay, or reimburse if
paid by the Placement Agent, whether or not the transactions contemplated hereby
are consummated or this Agreement is terminated: (a) the costs incident to the
authorization, issuance, sale and delivery of the Shares to the Purchasers and
any taxes payable in that connection; (b) the costs incident to

 

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the registration of the Shares under the Securities Act; (c) the costs incident
to the preparation, printing and distribution of the Registration Statement, the
Base Prospectus, any Issuer Free Writing Prospectus, the General Disclosure
Package, the Prospectus, any amendments, supplements and exhibits thereto or any
document incorporated by reference therein; (d) the reasonable and documented
fees and expenses incurred in connection with securing any required review by
FINRA and any filings made with FINRA; (e) any applicable listing, quotation or
other fees; (f) the fees and expenses (including related fees and expenses of
counsel for the Placement Agent) of qualifying the Shares under the securities
laws of the several jurisdictions as provided in Section 5(e) and of preparing,
printing and distributing wrappers and blue sky memoranda; (g) all fees and
expenses of the registrar and transfer agent of the Shares; and (h) all other
costs and expenses of the Company and the Placement Agent incident to the
Offering of the Shares by, or the performance of the obligations of, the Company
and the Placement Agent under this Agreement (including, without limitation, the
fees and expenses of the Company’s counsel, Placement Agent’s counsel and the
Company’s independent accountants and the travel and other reasonable expenses
incurred by Company and the Placement Agent’s personnel in connection with any
“road show” including, without limitation, any expenses advanced by the
Placement Agent on the Company’s behalf (which will be promptly reimbursed)).
For the avoidance of doubt, the Company agrees to reimburse the Placement
Agent’s reasonable out-of-pocket expenses, including the reasonable legal fees
of Paul, Hastings, Janofsky & Walker, LLP, counsel to the Placement Agent,
whether or not the Offering is consummated; provided that, with the exception of
reasonable legal fees, the Company shall not be liable to the Placement Agent
for amounts in excess of $50,000 without prior written consent of the Company.

 

7.             Conditions to the Obligations of the Placement Agent and the
Purchasers, and the Sale of the Shares.  The respective obligations of the
Placement Agent hereunder, and the closing of the sale of the Shares, are
subject to the accuracy, when made and as of the Applicable Time and on the
Closing Date, of the representations and warranties of the Company contained
herein, to the accuracy of the statements of the Company made in any
certificates pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder, and to each of the following additional
terms and conditions:

 

(a)           No stop order suspending the effectiveness of the Registration
Statement or any part thereof, preventing or suspending the use of any Base
Prospectus, the Prospectus or any Permitted Free Writing Prospectus or any part
thereof shall have been issued and no proceedings for that purpose or pursuant
to Section 8A under the Securities Act shall have been initiated or threatened
by the Commission, and all requests for additional information on the part of
the Commission (to be included or incorporated by reference in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
reasonable satisfaction of the Placement Agent; the Rule 462(b) Registration
Statement, if any, each Issuer Free Writing Prospectus, if any, and the
Prospectus shall have been filed with the Commission within the applicable time
period prescribed for such filing by, and in compliance with, the Rules and
Regulations and in accordance with Section 5(a), and the
Rule 462(b) Registration Statement, if any, shall have become effective
immediately upon its filing with the Commission; and FINRA shall have raised no
objection to the fairness and reasonableness of the terms of this Agreement or
the transactions contemplated hereby.

 

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(b)           The Placement Agent shall not have discovered and disclosed to the
Company on or prior to the Closing Date that the Registration Statement or any
amendment or supplement thereto contains an untrue statement of a fact which, in
the opinion of counsel for the Placement Agent, is material or omits to state
any fact which, in the opinion of such counsel, is material and is required to
be stated therein or is necessary to make the statements therein not misleading,
or that the General Disclosure Package, any Issuer Free Writing Prospectus or
the Prospectus or any amendment or supplement thereto contains an untrue
statement of fact which, in the opinion of such counsel, is material or omits to
state any fact which, in the opinion of such counsel, is material and is
necessary in order to make the statements, in the light of the circumstances in
which they were made, not misleading.

 

(c)           All corporate proceedings and other legal matters incident to the
authorization, form and validity of each of this Agreement, the Shares, the
Registration Statement, the General Disclosure Package, each Issuer Free Writing
Prospectus, if any, and the Prospectus and all other legal matters relating to
this Agreement and the transactions contemplated hereby shall be reasonably
satisfactory in all material respects to counsel for the Placement Agent, and
the Company shall have furnished to such counsel all documents and information
that they may reasonably request.

 

(d)           Morrison & Foerster LLP shall have furnished to the Placement
Agent, such counsel’s written opinion, as counsel to the Company, addressed to
the Placement Agent and dated the Closing Date, in the form agreed as of the
date hereof.

 

(e)           The Company shall have furnished to the Placement Agent and the
Purchasers a certificate, dated the Closing Date, of its Chief Executive Officer
and its Chief Financial Officer stating that (i) since the effective date of the
Registration Statement, no event has occurred which should have been set forth
in a supplement or amendment to the Registration Statement, the General
Disclosure Package or the Prospectus, (ii) to the best of their knowledge after
reasonable investigation, as of the Closing Date, the representations and
warranties of the Company in this Agreement are true and correct in all material
respects, except that any such representation or warranty shall be true and
correct in all respects where such representation or warranty is qualified with
respect to materiality, and the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied hereunder at
or prior to the Closing Date, and (iii) there has not been, subsequent to the
date of the most recent unaudited financial statements included or incorporated
by reference in the General Disclosure Package, any material adverse change in
the financial position or results of operations of the Company and its
Subsidiaries, taken as a whole, or any change or development that, singly or in
the aggregate, would involve a material adverse change or a prospective material
adverse change, in or affecting the condition (financial or otherwise), results
of operations, business, assets or prospects of the Company and its Subsidiaries
taken as a whole, except as set forth in the Prospectus.

 

(f)            Since the date of the latest audited financial statements
included in the General Disclosure Package or incorporated by reference in the
General Disclosure Package as of the date hereof, (i) neither the Company nor
any of its Subsidiaries shall

 

16

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have sustained any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth in the General Disclosure Package, and (ii) there shall not have been any
change in the capital stock or long-term debt of the Company nor any of its
Subsidiaries, or any change, or any development involving a prospective change,
in or affecting the business, general affairs, management, financial position,
stockholders’ equity, results of operations or prospects of the Company and its
Subsidiaries, taken as a whole, otherwise than as set forth in the General
Disclosure Package, the effect of which, in any such case described in clause
(i) or (ii) of this paragraph (f), is, in the judgment of the Placement Agent,
so material and adverse as to make it impracticable or inadvisable to proceed
with the sale or delivery of the Shares on the terms and in the manner
contemplated in the General Disclosure Package.

 

(g)           No action shall have been taken and no law, statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency or body which would prevent the issuance or sale of the
Shares or materially and adversely affect the business or operations of the
Company and its Subsidiaries, taken as a whole; and no injunction, restraining
order or order of any other nature by any United States federal or state court
of competent jurisdiction shall have been issued which would prevent the
issuance or sale of the Shares or materially and adversely affect the business
or operations of the Company or its Subsidiaries, taken as a whole.

 

(h)           Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the NASDAQ Stock Market or in the
over-the-counter market, or trading in any securities of the Company on any
exchange or in the over-the-counter market, shall have been suspended or
materially limited, or minimum or maximum prices or maximum range for prices
shall have been established on any such exchange or such market by the
Commission, by such exchange or market or by any other regulatory body or
governmental authority having jurisdiction; (ii) a banking moratorium shall have
been declared by United States federal or state authorities or a material
disruption has occurred in commercial banking or securities settlement or
clearance services in the United States; (iii) the United States shall have
become engaged in hostilities, or the subject of an act of terrorism, or there
shall have been an outbreak of or escalation in hostilities involving the United
States, or there shall have been a declaration of a national emergency or war by
the United States; or (iv) there shall have occurred such a material adverse
change in general economic, political or financial conditions (or the effect of
international conditions on the financial markets in the United States shall be
such) as to make it, in the judgment of the Placement Agent, impracticable or
inadvisable to proceed with the sale or delivery of the Shares on the terms and
in the manner contemplated in the General Disclosure Package and the Prospectus.

 

(i)            The Company shall have filed a listing of additional shares
notification with the NASDAQ Global Select Market in connection with the
Offering, and shall have received no objections thereto from the NASDAQ Global
Select Market.

 

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(j)            The Placement Agent shall have received the written agreements,
substantially in the form of Exhibit A hereto, of the executive officers of the
Company listed in Schedule B to this Agreement.

 

(k)           Prior to the Closing Date, the Company shall have furnished to the
Placement Agent such further information, opinions, certificates, letters or
documents as the Placement Agent shall have reasonably requested, including a
Secretary’s Certificate.

 

All opinions, letters, evidence and certificates mentioned above or elsewhere in
this Agreement shall be deemed to be in compliance with the provisions hereof
only if they are in form and substance reasonably satisfactory to counsel for
the Placement Agent.

 

8.             Indemnification and Contribution.

 

(a)           The Company shall indemnify and hold harmless the Placement Agent,
each of its affiliates and each of its and their respective directors, officers,
members, employees, representatives and agents and their respective affiliates,
and each person, if any, who controls such Placement Agent within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively
the “Placement Agent Indemnified Parties,” and each a “Placement Agent
Indemnified Party”) against any loss, claim, damage, expense or liability
whatsoever (or any action, investigation or proceeding in respect thereof),
joint or several, to which such Placement Agent Indemnified Party may become
subject, under the Securities Act or otherwise, insofar as such loss, claim,
damage, expense, liability, action, investigation or proceeding arises out of or
is based upon (A) any untrue statement or alleged untrue statement of a material
fact contained in any Issuer Free Writing Prospectus, any “issuer information”
filed or required to be filed pursuant to Rule 433(d) of the Rules and
Regulations, any Registration Statement or the Prospectus, or in any amendment
or supplement thereto or document incorporated by reference therein, (B) the
omission or alleged omission to state in any Issuer Free Writing Prospectus, any
“issuer information” filed or required to be filed pursuant to Rule 433(d) of
the Rules and Regulations, any Registration Statement or the Prospectus, or in
any amendment or supplement thereto or document incorporated by reference
therein, a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (C) any breach of the representations and
warranties of the Company contained herein or failure of the Company to perform
its obligations hereunder or pursuant to any law, and shall reimburse the
Placement Agent Indemnified Party promptly upon demand for any legal fees or
other expenses reasonably incurred by such Placement Agent Indemnified Party in
connection with investigating, or preparing to defend, or defending against, or
appearing as a third party witness in respect of, or otherwise incurred in
connection with, any such loss, claim, damage, expense, liability, action,
investigation or proceeding, as such fees and expenses are incurred; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, expense or liability arises out of or is
based upon an untrue statement or alleged untrue statement in, or omission or
alleged omission from, any Registration Statement or the Prospectus, or any such
amendment or supplement thereto, or any Issuer Free Writing Prospectus made in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of the Placement Agent

 

18

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specifically for use therein, which information the parties hereto agree is
limited to the Placement Agent’s Information.  This indemnity agreement is not
exclusive and will be in addition to any liability, which the Company may
otherwise have and shall not limit any rights or remedies which may otherwise be
available at law or in equity to each Placement Agent Indemnified Party.

 

(b)           The Placement Agent shall indemnify and hold harmless the Company
and its directors, its officers who signed the Registration Statement and each
person, if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act (collectively the “Company
Indemnified Parties” and each a “Company Indemnified Party”) against any loss,
claim, damage, expense or liability whatsoever (or any action, investigation or
proceeding in respect thereof), joint or several, to which such Company
Indemnified Party may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, expense, liability, action, investigation
or proceeding arises out of or is based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in any Issuer Free Writing
Prospectus, any “issuer information” filed or required to be filed pursuant to
Rule 433(d) of the Rules and Regulations, any Registration Statement or the
Prospectus, or in any amendment or supplement thereto, or (ii) the omission or
alleged omission to state in any Issuer Free Writing Prospectus, any “issuer
information” filed or required to be filed pursuant to Rule 433(d) of the
Rules and Regulations, any Registration Statement or the Prospectus, or in any
amendment or supplement thereto, a material fact required to be stated therein
or necessary to make the statements therein not misleading, but in each case
only to the extent that the untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the Placement
Agent specifically for use therein, which information the parties hereto agree
is limited to the Placement Agent’s Information, and shall reimburse the Company
Indemnified Parties for any legal or other expenses reasonably incurred by such
party in connection with investigating or preparing to defend or defending
against or appearing as third party witness in connection with any such loss,
claim, damage, liability, action, investigation or proceeding, as such fees and
expenses are incurred.  This indemnity agreement is not exclusive and will be in
addition to any liability which the Placement Agent might otherwise have and
shall not limit any rights or remedies which may otherwise be available under
this Agreement, at law or in equity to the Company Indemnified Parties. 
Notwithstanding the provisions of this Section 8(b), in no event shall any
indemnity by the Placement Agent under this Section 8(b) exceed the total
compensation received by such Placement Agent in accordance with Section 2(e).

 

(c)           Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, the indemnified party
shall, if a claim in respect thereof is to be made against an indemnifying party
under this Section 8, notify such indemnifying party in writing of the
commencement of that action; provided, however, that the failure to notify the
indemnifying party shall not relieve it from any liability which it may have
under this Section 8 except to the extent it has been materially prejudiced by
such failure; and, provided, further, that the failure to notify an indemnifying
party shall not relieve it from any liability which it may have to an

 

19

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indemnified party otherwise than under this Section 8.  If any such action shall
be brought against an indemnified party, and it shall notify the indemnifying
party thereof, the indemnifying party shall be entitled to participate therein
and, to the extent that it wishes, jointly with any other similarly notified
indemnifying party, to assume the defense of such action with counsel reasonably
satisfactory to the indemnified party (which counsel shall not, except with the
written consent of the indemnified party, be counsel to the indemnifying
party).  After notice from the indemnifying party to the indemnified party of
its election to assume the defense of such action, except as provided herein,
the indemnifying party shall not be liable to the indemnified party under
Section 8 for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense of such action other than
reasonable costs of investigation; provided, however, that any indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense of such action but the fees and expenses of such
counsel (other than reasonable costs of investigation which shall remain the
expense of the Company) shall be at the expense of such indemnified party unless
(i) in the case of a Placement Agent Indemnified Party, the employment thereof
has been specifically authorized in writing by the Company in the case of a
claim for indemnification under Section 8(a) or Section 2(f), or (ii) such
indemnified party shall have been advised by its counsel that there may be one
or more legal defenses available to it which are different from or additional to
those available to the indemnifying party, or (iii) the indemnifying party has
failed to assume the defense of such action and employ counsel reasonably
satisfactory to the indemnified party within a reasonable period of time after
notice of the commencement of the action or the indemnifying party does not
diligently defend the action after assumption of the defense, in which case, if
such indemnified party notifies the indemnifying party in writing that it elects
to employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of (or, in the
case of a failure to diligently defend the action after assumption of the
defense, to continue to defend) such action on behalf of such indemnified party
and the indemnifying party shall be responsible for legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
of such action; provided, however, that the indemnifying party shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys at any time for all such indemnified
parties (in addition to any local counsel), which firm shall be designated in
writing by the Placement Agent if the indemnified parties under this Section 8
consist of any Placement Agent Indemnified Party or by the Company if the
indemnified parties under this Section 8 consist of any Company Indemnified
Parties.  Subject to this Section 8(c), the amount payable by an indemnifying
party under Section 8 shall include, but not be limited to, (x) reasonable legal
fees and expenses of counsel to the indemnified party and any other expenses in
investigating, or preparing to defend or defending against, or appearing as a
third party witness in respect of, or otherwise incurred in connection with, any
action, investigation, proceeding or claim, and (y) all amounts paid in
settlement of any of the foregoing.  No indemnifying party shall, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of judgment with respect to any pending or threatened
action or any claim

 

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whatsoever, in respect of which indemnification or contribution could be sought
under this Section 8 (whether or not the indemnified parties are actual or
potential parties thereto), unless such settlement, compromise or consent
(i) includes an unconditional release of each indemnified party in form and
substance reasonably satisfactory to such indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.  Subject to the provisions of the following sentence, no
indemnifying party shall be liable for settlement of any pending or threatened
action or any claim whatsoever that is effected without its written consent
(which consent shall not be unreasonably withheld or delayed), but if settled
with its written consent, or if its consent has been unreasonably withheld or
delayed, or if there be a judgment for the plaintiff in any such matter, the
indemnifying party agrees to indemnify and hold harmless any indemnified party
from and against any loss or liability by reason of such settlement or
judgment.  In addition, if at any time an indemnified party shall have requested
that an indemnifying party reimburse the indemnified party for reasonable fees
and expenses of counsel, such indemnifying party agrees that it shall be liable
for any settlement of the nature contemplated herein effected without its
written consent if (i) such settlement is entered into more than forty-five (45)
days after receipt by such indemnifying party of the request for reimbursement,
(ii) such indemnifying party shall have received notice of the terms of such
settlement at least thirty (30) days prior to such settlement being entered into
and (iii) such indemnifying party shall not have reimbursed such indemnified
party in accordance with such request prior to the date of such settlement.

 

(d)           If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
Section 8(a) or Section 8(b), then each indemnifying party shall, in lieu of
indemnifying such indemnified party, contribute to the amount paid, payable or
otherwise incurred by such indemnified party as a result of such loss, claim,
damage, expense or liability (or any action, investigation or proceeding in
respect thereof), as incurred, (i) in such proportion as shall be appropriate to
reflect the relative benefits received by the Company on the one hand and the
Placement Agent on the other hand from the ) Offering of the Shares, or (ii) if
the allocation provided by clause (i) of this Section 8(d) is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) of this Section 8(d) but also the
relative fault of the Company on the one hand and the Placement Agent on the
other with respect to the statements, omissions, acts or failures to act which
resulted in such loss, claim, damage, expense or liability (or any action,
investigation or proceeding in respect thereof) as well as any other relevant
equitable considerations.  The relative benefits received by the Company on the
one hand and the Placement Agent on the other with respect to such Offering
shall be deemed to be in the same proportion as the total net proceeds from the
Offering of the Shares purchased under this Agreement (before deducting
expenses) received by the Company bear to the total compensation received by the
Placement Agent in connection with the Offering, in each case as set forth in
the table on the cover page of the Prospectus.  The relative fault of the
Company on the one hand and the Placement Agent on the other shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact

 

21

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relates to information supplied by the Company on the one hand or the Placement
Agent on the other, the intent of the parties and their relative knowledge,
access to information and opportunity to correct or prevent such untrue
statement, omission, act or failure to act; provided that the parties hereto
agree that the written information furnished to the Company by or on behalf of
the Placement Agent for use in any Registration Statement or the Prospectus, or
in any amendment or supplement thereto, consists solely of the Placement Agent’s
Information.  The Company and the Placement Agent agree that it would not be
just and equitable if contributions pursuant to this Section 8(d) were to be
determined by pro rata allocation or by any other method of allocation that does
not take into account the equitable considerations referred to herein.  The
amount paid or payable by an indemnified party as a result of the loss, claim,
damage, expense, liability, action, investigation or proceeding referred to
above in this Section 8(d) shall be deemed to include, for purposes of this
Section 8(d), any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating, preparing to defend or
defending against or appearing as a third party witness in respect of, or
otherwise incurred in connection with, any such loss, claim, damage, expense,
liability, action, investigation or proceeding.  Notwithstanding the provisions
of this Section 8(d), the Placement Agent shall not be required to contribute
any amount in excess of the total compensation received by the Placement Agent
in accordance with Section 2(e) less the amount of any damages which the
Placement Agent has otherwise paid or become liable to pay by reason of any
untrue or alleged untrue statement, omission or alleged omission, act or alleged
act or failure to act or alleged failure to act.  No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.

 

9.             Termination.  The obligations of the Placement Agent and the
Purchasers hereunder may be terminated by the Placement Agent, in its absolute
discretion by notice given to the Company prior to delivery of and payment for
the Shares if, prior to that time, any of the events described in Section 7(f),
Section 7(g) or Section 7(h) have occurred or if the Purchasers shall decline to
purchase the Shares for any reason permitted under this Agreement.

 

10.          Absence of Fiduciary Relationship.  The Company acknowledges and
agrees that:

 

(a)           the Placement Agent’s responsibility to the Company is solely
contractual in nature, the Placement Agent has been retained solely to act as
placement agent in connection with the Offering and no fiduciary, advisory or
agency relationship between the Company and the Placement Agent has been created
in respect of any of the transactions contemplated by this Agreement,
irrespective of whether the Placement Agent has advised or is advising the
Company on other matters;

 

(b)           the price of the Shares set forth in this Agreement was
established by the Company following discussions and arms-length negotiations
with the Placement Agent, and the Company is capable of evaluating and
understanding, and understands and accepts, the terms, risks and conditions of
the transactions contemplated by this Agreement;

 

22

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(c)           it has been advised that the Placement Agent and its affiliates
are engaged in a broad range of transactions which may involve interests that
differ from those of the Company and that the Placement Agent has no obligation
to disclose such interests and transactions to the Company by virtue of any
fiduciary, advisory or agency relationship; and

 

(d)           it waives, to the fullest extent permitted by law, any claims it
may have against the Placement Agent for breach of fiduciary duty or alleged
breach of fiduciary duty and agrees that the Placement Agent shall have no
liability (whether direct or indirect) to the Company in respect of such a
fiduciary duty claim or to any person asserting a fiduciary duty claim on behalf
of or in right of the Company, including stockholders, employees or creditors of
the Company.

 

11.          Successors; Persons Entitled to Benefit of Agreement.  This
Agreement shall inure to the benefit of and be binding upon the Placement Agent,
the Company, and their respective successors and assigns.  Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any
person, other than the persons mentioned in the preceding sentence, any legal or
equitable right, remedy or claim under or in respect of this Agreement, or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of such
persons and for the benefit of no other person; except that the representations,
warranties, covenants, agreements and indemnities of the Company contained in
this Agreement shall also be for the benefit of the Placement Agent Indemnified
Parties and the indemnities of the Placement Agent shall be for the benefit of
the Company Indemnified Parties.

 

12.          Survival of Indemnities, Representations, Warranties, Etc.  The
respective indemnities, covenants, agreements, representations, warranties and
other statements of the Company and the Placement Agent, as set forth in this
Agreement or made by them respectively, pursuant to this Agreement, shall remain
in full force and effect, regardless of any investigation made by or on behalf
of the Placement Agent, the Company, the Purchasers or any person controlling
any of them and shall survive delivery of and payment for the Shares. 
Notwithstanding any termination of this Agreement, including without limitation
any termination pursuant to Section 9, the indemnity and contribution agreements
contained in Section 8 and the covenants, representations, warranties set forth
in this Agreement shall not terminate and shall remain in full force and effect
at all times.

 

13.          Notices.  All statements, requests, notices and agreements
hereunder shall be in writing, and:

 

(a)           if to the Placement Agent, shall be delivered or sent by mail,
facsimile transmission, overnight courier or email to B. Riley & Co., LLC,
Attention: Tom Kelleher, 11100 Santa Monica Blvd., Suite 800, Los Angeles, CA,
90025; and

 

(b)           if to the Company, shall be delivered or sent by mail, facsimile
transmission, overnight courier or email to Kratos Defense & Security
Solutions, Inc., Attention: Chief Financial Officer, 4810 Eastgate Mall, San
Diego, CA 92121.

 

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14.          Definition of Certain Terms.  For purposes of this Agreement
“business day” means any day on which the NASDAQ Stock Market is open for
trading.

 

15.          Governing Law, Agent for Service and Jurisdiction.  This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York, including without limitation Section 5-1401 of the New York General
Obligations Law.  No legal proceeding may be commenced, prosecuted or continued
in any court other than the courts of the State of New York located in the City
and County of New York or in the United States District Court for the Southern
District of New York, which courts shall have jurisdiction over the adjudication
of such matters, and the Company and the Placement Agent each hereby consent to
the jurisdiction of such courts and personal service with respect thereto.  The
Company and the Placement Agent each hereby consent to personal jurisdiction,
service and venue in any court in which any legal proceeding arising out of or
in any way relating to this Agreement is brought by any third party against the
Company or the Placement Agent.  The Company and the Placement Agent each hereby
waive all right to trial by jury in any legal proceeding (whether based upon
contract, tort or otherwise) in any way arising out of or relating to this
Agreement.  The Company agrees that a final judgment in any such legal
proceeding brought in any such court shall be conclusive and binding upon the
Company and the Placement Agent and may be enforced in any other courts in the
jurisdiction of which the Company is or may be subject, by suit upon such
judgment.

 

16.          Placement Agent’s Information.  The parties hereto acknowledge and
agree that, for all purposes of this Agreement, the Placement Agent’s
Information consists solely of the following information in the Prospectus: the
second sentence of the third paragraph on the front cover of the Prospectus
Supplement and the second and fourth sentences in the section entitled “Plan of
Distribution.”

 

17.          Partial Unenforceability.  The invalidity or unenforceability of
any section, paragraph, clause or provision of this Agreement shall not affect
the validity or enforceability of any other section, paragraph, clause or
provision hereof.  If any section, paragraph, clause or provision of this
Agreement is for any reason determined to be invalid or unenforceable, there
shall be deemed to be made such minor changes (and only such minor changes) as
are necessary to make it valid and enforceable.

 

18.          General.  This Agreement constitutes the entire agreement of the
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.  In this Agreement, the masculine, feminine and
neuter genders and the singular and the plural include one another.  The section
headings in this Agreement are for the convenience of the parties only and will
not affect the construction or interpretation of this Agreement.  This Agreement
may be amended or modified, and the observance of any term of this Agreement may
be waived, only by a writing signed by the Company and the Placement Agent.

 

19.          Counterparts.  This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument and such signatures
may be delivered by facsimile.

 

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If the foregoing is in accordance with your understanding of the agreement
between the Company and the Placement Agent, kindly indicate your acceptance in
the space provided for that purpose below.

 

 

Very truly yours,

 

 

 

 

 

KRATOS DEFENSE & SECURITY SOLUTIONS, INC.

 

 

 

 

By:

/s/ Laura L. Siegal

 

Name:

Laura L. Siegal

 

Its:

Vice President, Corporate Controller and Secretary

 

 

 

 

 

 

Accepted as of the date first above written:

 

 

 

 

 

B. RILEY & CO., LLC

 

 

 

 

 

 

By:

/s/ Tom Kelleher

 

 

Name:

Tom Kelleher

 

 

Its:

Chief Executive Officer

 

 

 

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SCHEDULE A

 

List of Subsidiaries

 

Subsidiary Name

 

Jurisdiction of
Organization

 

Type of Entity

 

 

 

 

 

Digital Fusion, Inc.

 

Delaware

 

Corporation

 

 

 

 

 

Kratos Commercial Solutions, Inc.

 

Delaware

 

Corporation

 

 

 

 

 

Kratos Government Solutions, Inc.

 

Delaware

 

Corporation

 

 

 

 

 

SYS

 

California

 

Corporation

 

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SCHEDULE B

 

List of Officers Subject to Section 5(f)

 

Eric DeMarco

 

Deanna Lund

 

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EXHIBIT A

 

Form of Lock-Up Agreement

 

September 2, 2009

 

B. Riley & Co., LLC
11100 Santa Monica Blvd.

Suite 800

Los Angeles, CA 90025

 

 

Re:

Kratos Defense & Security Solutions, Inc. - Public Offering of Shares

 

Ladies and Gentlemen:

 

In order to induce B. Riley & Co., LLC (“B. Riley”) to enter into a placement
agent agreement with Kratos Defense & Security Solutions, Inc., a Delaware
corporation (the “Company”), with respect to the public offering (the
“Offering”) of shares of the Company’s common stock, par value $0.001 per share
(“Common Stock”), the undersigned hereby agrees that for a period (the “lock-up
period”) of ninety (90) days following the date of the final prospectus
supplement filed by the Company with the Securities and Exchange Commission in
connection with such Offering (the “Prospectus Supplement”), the undersigned
will not, without the prior written consent of B. Riley, directly or indirectly,
(i) offer, sell, assign, transfer, pledge, contract to sell, or otherwise
dispose of, any shares of Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock (including, without limitation,
shares of Common Stock or any such securities which may be deemed to be
beneficially owned by the undersigned in accordance with the rules and
regulations promulgated under the Securities Exchange Act of 1934, as the same
may be amended or supplemented from time to time (such shares or securities, the
“Beneficially Owned Shares”)), (ii) enter into any swap, hedge or other
agreement or arrangement that transfers in whole or in part, the economic risk
of ownership of any Beneficially Owned Shares, Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock, or
(iii) engage in any short selling of any Beneficially Owned Shares, Common Stock
or securities convertible into or exercisable or exchangeable for Common Stock. 
The foregoing sentence shall not apply to (a) transactions relating to any
Beneficially Owned Shares, Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock acquired from the Company in the
Offering or in open market transactions after the completion of the Offering,
(b) transfers of any Beneficially Owned Shares, Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock as a bona fide
gift, (c) in the case of a natural person, transfers of any Beneficially Owned
Shares, Common Stock or securities convertible into or exercisable or
exchangeable for Common Stock by will or intestate succession or to any trust or
partnership for the direct or indirect benefit of the undersigned or any member
of the immediate family of the undersigned, (d) in the case of a non-natural
person, distributions of any Beneficially Owned Shares, Common Stock or
securities convertible into or exercisable or exchangeable for Common Stock to
general or limited partners or stockholders or members of the undersigned,
(e) in the case of a non-natural person, transfers of any Beneficially Owned
Shares, Common Stock or securities convertible into or exercisable or
exchangeable for Common Stock (A) in

 

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connection with the sale or other bona fide transfer in a single transaction of
all or substantially all of the undersigned’s capital stock, partnership
interests, membership interests or other similar equity interests, as the case
may be, or all or substantially all of the undersigned’s assets, in any such
case not undertaken for the purpose of avoiding the restrictions imposed by this
Agreement or (B) to another corporation, partnership, limited liability company
or other business entity so long as the transferee is an affiliate of the
undersigned and such transfer is not for value, (f) the “net” exercise of
outstanding options or warrants to purchase Common Stock in accordance with
their terms, or (g) transfers pursuant to a sale or an offer to purchase 100% of
the outstanding Common Stock, whether pursuant to a merger, tender offer or
otherwise, to a third party or group of third parties; provided that in the case
of any transfer or distribution pursuant to clause (b), (c), (d) or (e), each
donee, pledgee, distributee or transferee shall sign and deliver a lock-up
agreement substantially in the form of this Agreement; and provided, further,
that any Common Stock acquired upon the net exercise of options or warrants
described in clause (f) above shall be subject to the restrictions imposed by
this Agreement.  For the purposes of this paragraph, “immediate family” shall
mean spouse, domestic partner, lineal descendant (including adopted children),
father, mother, brother or sister of the transferor.

 

If (i) the Company issues an earnings release or material news or a material
event relating to the Company occurs during the last seventeen days of the
lock-up period, or (ii) prior to the expiration of the lock-up period, the
Company announces that it will release earnings results during the sixteen-day
period beginning on the last day of the lock-up period, the restrictions imposed
by this Agreement shall continue to apply until the expiration of the
eighteen-day period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.

 

In addition, the undersigned hereby waives, from the date hereof until the
expiration of the ninety (90) day period following the date of the Prospectus
Supplement, any and all rights, if any, to request or demand registration
pursuant to the Securities Act of 1933, as amended, of any shares of Common
Stock or securities convertible into or exercisable or exchangeable for Common
Stock that are registered in the name of the undersigned or that are
Beneficially Owned Shares.  In order to enable the aforesaid covenants to be
enforced, the undersigned hereby consents to the placing of legends and/or stop
transfer orders with the transfer agent of the Common Stock with respect to any
shares of Common Stock, securities convertible into or exercisable or
exchangeable for Common Stock or Beneficially Owned Shares.

 

If (i) the Company notifies B. Riley in writing that it does not intend to
proceed with the Offering, (ii) for any reason the Offering is terminated prior
to the payment for and delivery of the Common Stock or (iii) the Offering shall
not have been completed by October 31, 2009, then upon the occurrence of any
such event, this Agreement shall immediately be terminated and the undersigned
shall be released from its obligations hereunder.

 

 

[Signatory]

 

 

 

 

By:

 

 

Name:

 

 

Its:

 

 

2

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