Exhibit 10.56


 


	
  

  	
  430 Ferguson Drive

  
	
  Mountain View, CA
  94043-5272

  
	
  650.960.3000

  
	
  650.960.0127 Fax

  
	
  www.CatalyticaEnergy.com

  
	
   

  



 


March 16, 2005 


 


William J. McMahon, III



7 Lyford Rd.


Hopkinton, MA 01748


 


Dear Bill:


 


I am pleased to present you with this revised offer for the position of
President of CESI-SCR, Inc., a wholly-owned subsidiary of Catalytica Energy
Systems, Inc. (CESI), and Member of SCR-Tech LLC. As we have discussed,
SCR-Tech is entering an exciting period of growth, and we look forward to your
leadership in its future success. This position will be located at the SCR-Tech
facility in Charlotte, North Carolina. Specifics of this offer are listed
below. The full-time position will be effective March 21, 2005 and  you will report directly to me.


 


Compensation


 


Your salary will be $16,667 per month, which annualizes to $200,000.


 


In 2005, you will be eligible for an annual bonus opportunity at a
target of the higher of 35% of your 2005 base-earnings or 1.75% of 2005
revenues, both pro-rata for 2005 as of your starting date. From 2006 through
2009, you will be eligible for an annual bonus opportunity of the higher of 20%
of base salary or 1.75% of annual revenue for each of the years of this period.
Your bonus allocation will be weighted as follows: 20% on SCR-Tech annual
revenue, 50% on SCR-Tech annual EBITDA, and 20% on CESI corporate objectives as
determined by the CESI CEO or his designee. The revenue and EBITDA goals will
be determined annually. In no case will the revenue and EDBITDA goals be
greater than 25% of the previous year’s revenue and EBITDA goals. Revenue and
EBITDA will be determined by the CESI CFO as audited by Ernst and Young. CESI
corporate objectives attainment will be determined by the CESI CEO or his designee.
In order to be eligible for the annual bonus, you must be an employee on
December 31st and the year in question. The annual bonus is earned as of
December 31st and the payout of any bonus will occur at the end of
February of the following year.


 


In addition, you will be eligible for a CESI stock option bonus with an
annual target to be determined by the CESI CEO and the CESI Board of Directors.
Please recognize that stock option values and any bonus awards are not
guaranteed. They are based on company and Individual performance and require
approval from our Board of Directors.


 


As part of your hiring agreement you will be granted options in the
amount of 50,000 shares of Catalytica Energy Systems, Inc. These options will
be granted once they have been approved by the CESI Board of Directors and will
be priced at the date of grant. They will be subject to a 4- year vesting
schedule.


 


Benefits


 


Effective upon your date of hire, you and your eligible dependents may
enroll in SCR-Tech’s medical and dental benefit program. You are also
immediately eligible for short and long-term disability, and life insurance
plans.


 


You will be eligible to participate in the CESI 401(k) retirement plan
on the first of the month following three months of employment. The 401(k) plan
includes a 60% match (up to 6% of your eligible deferral Compensation) and
immediate vesting of all company contributions. On July 1, 2005 you will be
able to participate. In the CESI Employee Stock Purchase Plan at a discounted
price.


 


Makers of





 

















 


You will be eligible for four weeks paid vacation (20 days), and holidays,
earned on an accrual basis from your date of hire as per SCR-Tech policy.


 


Relocation


 


To facilitate your relocation to the Charlotte,
North Carolina area, you will be eligible for a maximum payout of $75,000. CESI offers a relocation service that you may
elect to utilize.


 


Severance


 


The Company may terminate your employment at any time and for any reason
without cause. As long as any termination by
CESI is not for cause and providing that you do not terminate voluntarily,
(i) you will continue to receive your then current salary and your medical
benefits (or compensatory equivalent) as
severance for a period of 6 months. In the event of such termination, you will be entitled only to the
severance payment set forth above and no further compensation or benefits.


 


Should there be a change of control event at SCR-Tech,
you will be eligible, at the buyer’s option, for 6 months severance and medical benefits, and earned bonus pro-rata
as of the date of the change of
control.


 


This offer is contingent upon acceptable results
of a background check and a pre-employment drug-screening test. SCR-Tech must receive results of the drug test
before any start date. Please contact Regina Machado at 650 940-6323 to make
the appropriate arrangements.


 


We look forward to you becoming the leader of the SCR-Tech team. Your
employment with CESI-SCR, a subsidiary of
Catalytica Energy Systems, Inc. is “at will” which means that either you
or the Company can terminate the employment relationship at any time with or
without cause. Please indicate your
acceptance of this offer by signing below and returning the original to me. This
offer is valid through March 18, 2005.


 


Sincerely


 


	
  /s/ Dominic
  Geraghty

  	
   

  
	
  Dominic Geraghty, Ph.D

  
	
  Senior Vice President

  
	
  Corporate Development

  
	
  Catalytica Energy Systems, Inc.

  



 


I accept the offer of employment with CESI-SCR,
Inc., a subsidiary of Catalytica Energy Systems, Inc., described in this letter. I also understand that this letter is
not a contract of employment.


 


 


	
  /s/ William J. McMahon

  	
   

  	
  3-17-05

  
	
  William J. McMahon, III

  	
   

  	
  Date

  



 


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SCR-TECH, LLC


 


CHANGE OF CONTROL SEVERANCE
AGREEMENT


 


This Change of Control Severance Agreement (the “Agreement”)
is made and entered into by and between William J. McMahon III (the “Employee”)
and SCR-Tech, LLC (the “Company”), a wholly-owned subsidiary of Catalytica
Energy Systems, Inc. (“Catalytica”), effective as of the latest date set forth
by the signatures of the parties hereto below.


 


R E C I T A L S


 


A)          It is expected that the
Company from time to time will consider the possibility of an acquisition by
another company or other change of control as a means of enhancing stockholder
value.  The President of Catalytica (the “President”)
recognizes that such consideration can be a distraction to the Employee and can
cause the Employee to consider alternative employment opportunities.  The President has determined that it is in
the best interests of the Company, Catalytica and its stockholders to assure
that the Company will have the continued dedication and objectivity of the
Employee, notwithstanding the possibility, threat or occurrence of a Change of
Control (as defined below) of the Company.


 


B)            The President believes
that it is in the best interests of the Company, Catalytica and its
stockholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its stockholders.


 


C)            The President believes
that it is imperative to provide the Employee with certain severance benefits
upon Employee’s termination of employment following a Change of Control which
provides the Employee with enhanced financial security and provides incentive
and encouragement to the Employee to remain with the Company notwithstanding
the possibility of a Change of Control.


 


D)           Certain capitalized
terms used in the Agreement are defined in Section 6 below.


 


The parties hereto agree as follows:


 


1)              Term of Agreement.  This Agreement shall terminate upon the date
that all obligations of the parties hereto with respect to this Agreement have
been satisfied.


 


2)              At-Will
Employment.  The Company and the
Employee acknowledge that the Employee’s employment is and shall continue to be
at-will, as defined under applicable law. 
If the Employee’s employment terminates for any reason, including
(without limitation) any termination after an announcement of Change of Control
and prior to twenty-four (24) months following a Change of Control or the
announcement of a Change of Control,


 


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whichever comes later, the Employee shall not be
entitled to any payments, benefits, damages, awards or compensation other than
as provided by this Agreement, or as may otherwise be available in accordance
with the Company’s established employee plans and practices or pursuant to
other agreements with the Company.


 


3)              Severance
Benefits.


 


a)              Termination In
Connection With a Change of Control. 
If the Employee’s employment terminates as a result of Involuntary
Termina­tion (as defined below) other than for Cause at any time after an
announcement of a Change of Control and prior to twenty-four (24) months
following a Change of Control or the announcement of a Change of Control,
whichever comes later (a “Severance Termination”), then, subject to Section 5,
the Employee shall be entitled to receive the following severance benefits:


 


(1)          Severance Payment.  A cash payment in an amount equal to fifty
percent (50%) of the Employee’s Annual Compensation plus a pro rata payment of
the current year bonus award based on the target bonus for the Employee;


 


(2)          Continued Employee
Benefits.  One hundred percent (100%)
Company-paid health, dental and life insurance coverage at the same level of
coverage as was provided to such employee immediately prior to the Severance
Termination (the “Company-Paid Coverage”). 
If such coverage included the Employee’s dependents immediately prior to
the Severance Termination, such dependents shall also be covered at Company
expense.  Company-Paid Coverage shall
continue until the earlier of (i) six months from the date of the Involuntary
Termination or (ii) the date that the Employee and his dependents become
covered under another employer’s group health, dental or life insurance plans
that provide Employee and his dependents with comparable benefits and levels of
coverage.  For purposes of Title X of the
Consolidated Budget Reconciliation Act of 1985 (“COBRA”), the date of the “qualifying
event” for Employee and his dependents shall be the date upon which the
Company-Paid Coverage terminates.


 


(3)          Timing of Severance
Payments.  Any severance payment to
which Employee is entitled under Section 3(a)(1) shall be paid by the Company
to the Employee (or to the Employee’s successor in interest, pursuant to
Section 7(b)) in cash and in full, not later than thirty (30) calendar days
following the Termination Date, subject to Section 9(f).


 


b)             Voluntary
Resignation; Termination for Cause. 
If the Employee’s employment terminates by reason of the Employee’s
voluntary resignation (and is not an Involuntary Termination), or if the
Employee is terminated for Cause, then the Employee shall not be entitled to
receive severance or other benefits except for those (if any) as may then be
established under the Company’s then existing option, severance and benefits
plans and practices or pursuant to other agreements with the Company.


 


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c)              Disability; Death.  If the Company terminates the Employee’s
employment as a result of the Employee’s Disability, or such Employee’s
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits except for those
(if any) as may then be established under the Company’s then existing severance
and benefits plans and practices or pursuant to other agreements with the
Company.


 


d)             Termination Apart
from Change of Control.  In the event
the Employee’s employment is terminated for any reason, either prior to the
three-month notice period before a Change of Control or after the twenty-four
(24) -month period following a Change of Control, then the Employee shall
be entitled to receive severance and any other benefits only as may then be
established under the Company’s existing severance and benefits plans and
practices or pursuant to other agreements with the Company.


 


4)              Attorney Fees,
Costs and Expenses.  The Company
shall reimburse Employee for the reasonable attorney fees, costs and expenses
incurred by the Employee in connection with any action brought by Employee to
enforce his rights hereunder, provided such action is not decided in favor of
the Company.


 


5)              Limitation on
Payments.


 


a)              In the event that
the severance and other benefits provided for in this Agreement or otherwise
payable to the Employee (i) constitute “parachute payments” within the meaning
of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”)
and (ii) but for this Section 5, would be subject to the excise tax imposed by
Section 4999 of the Code, then the Employee’s severance benefits under Section 3(a)(1)
shall be either


 


(1)          delivered in full, or


 


(2)          delivered as to such
lesser extent which would result in no portion of such severance benefits being
subject to excise tax under Section 4999 of the Code,


 


whichever of the foregoing amounts, taking into
account the applicable federal, state and local income taxes and the excise tax
imposed by Section 4999, results in the receipt by the Employee on an after-tax
basis, of the greatest amount of severance benefits, notwithstanding that all
or some portion of such severance benefits may be taxable under Section 4999 of
the Code.  Any taxes due under Section
4999 shall be the responsibility of the employee.


 


b)             If a reduction in the
payments and benefits that would otherwise be paid or provided to the Employee
under the terms of this Agreement is necessary to comply with the provisions of
Section 5(a), the Employee shall be entitled to select which payments or
benefits will be reduced and the manner and method of any such reduction of
such payments or benefits (including but not limited to the number of options
that would vest


 


5

















 


under Section 3(a)) subject to reasonable limitations
(including, for example, express provisions under the Company’s benefit plans)
(so long as the requirements of Section 5(a) are met).  Within thirty (30) days after the amount of
any required reduction in payments and benefits is finally determined in
accordance with the provisions of Section 5(c), the Employee shall notify the
Company in writing regarding which payments or benefits are to be reduced.  If no notification is given by the Employee,
the Company will determine which amounts to reduce.  If, as a result of any reduction required by
Section 5(a), amounts previously paid to the Employee exceed the amount to
which the Employee is entitled, the Employee will promptly return the excess
amount to the Company.


 


c)              Unless the Company
and the Employee otherwise agree in writing, any determination required under
this Section 5 shall be made in writing by the Company’s Accountants
immediately prior to Change of Control, whose determination shall be conclusive
and binding upon the Employee and the Company for all purposes.  For purposes of making the calculations
required by this Section 5, the Accountants may, after taking into account the
information provided by the Employee, make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Sections 280G and 4999 of
the Code.  The Company and the Employee
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under this
Section.  The Company shall bear all
costs the Accountants may reasonably incur in connection with any calculations
contemplated by this Section 5.


 


6)              Definition of
Terms.  The following terms referred
to in this Agreement shall have the following meanings:


 


a)              Accountant.  Unless the Company and the Employee otherwise
agree in writing, any determination required under the Section shall be made in
writing by the Company’s independent public accountants.


 


b)             Annual
Compensation.  “Annual Compensation”
means an amount equal to the greater of (i) Employee’s Company base salary for
the twelve (12) months preceding the Change of Control excluding bonus or (ii)
Employee’s Company base salary on an annualized basis excluding bonus as of the
Termination Date.


 


c)              Cause.  “Cause” shall mean (i) any act of personal
dishonesty taken by the Employee in connection with his responsibilities as an
employee and intended to result in substantial personal enrichment of the
Employee, (ii) the conviction of a felony, (iii) a willful act by the Employee
that constitutes gross misconduct and that is injurious to the Company, or (iv)
Employee’s failure to satisfactorily perform his or her job duties for a period
of not less than thirty (30) days following delivery to the Employee of a
written demand for performance from the Company that describes the basis for
the Company’s belief that the Employee has not substantially performed his
duties; or (v) Employee’s  continued
violations of the Employee’s obligations to the Company that are demonstrably
willful


 


6

















 


and deliberate on the Employee’s part.  Any dismissal for causes in accordance with
Subsection (iv) or (v) of this Section 6(b) must be approved by the Company’s
Board of Directors prior to the dismissal date.


 


d)             Change of Control.  “Change of Control” means the occurrence of
any of the following events:


 


(i)             Any “person” (as such
term is used in Sec­tions 13(d) and 14(d) of the Securities Exchange Act
of 1934, as amended) becomes the “beneficial owner” (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the total voting power represented
by the Company’s then outstanding voting securities in any twelve (12) month
period;


 


(ii)   The
consummation of a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation that would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity or such surviving entity’s parent) at least fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity or such surviving entity’s parent
outstanding immediately after such merger or consolidation;


 


(iii)  The
consummation of the sale or disposition by the Company of all or seventy-five
percent (75%) or more of the Company’s assets.


 


e)              Disability.  “Disability” shall mean that the Employee has
been unable to perform the essential functions of his Company duties with or
without reasonable accommodation as the result of his incapacity due to
physical or mental illness, and such inability, at least twenty-six (26) weeks
after its commencement, is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Employee or the
Employee’s legal representative (such Agreement as to acceptability not to be
unreasonably withheld).  Termination
resulting from Disability may only be effected after at least thirty (30) days’
written notice by the Company of its intention to terminate the Employee’s
employment.  In the event that the
Employee resumes the performance of substantially all of his duties hereunder
before the termination of his employment becomes effective, the notice of
intent to terminate shall automatically be deemed to have been revoked.


 


f)                Involuntary
Termination.  “Involuntary
Termination” shall mean (i) without the Employee’s express written consent, the
significant reduction, without good business reasons, of the Employee’s duties,
authority or responsibilities, relative to the Employee’s duties, authority or
responsibilities as in effect immediately prior to such reduction, or the
assignment to Employee of such reduced duties, authority or responsibilities;
(ii) without the Employee’s express written consent, a substantial


 


7

















 


reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Employee immediately prior to such reduction; (iii) a reduction by the
Company in the base salary or target bonus of the Employee as in effect
immediately prior to such reduction; (iv) a material reduction by the Company
in the kind or level of employee benefits to which the Employee was entitled
immediately prior to such reduction with the result that the Employee’s overall
benefits package is significantly reduced; (v) the relocation of the Employee
to a facility or a location more than fifty (50) miles from the Employee’s then
present location, without the Employee’s express written consent; (vi) any
purported termination of the Employee by the Company that is not effected for
Disability or for Cause, or any purported termination for which the grounds
relied upon are not valid; (vii) the failure of the Company to obtain the
assumption of this Agreement by any successors contemplated in Section 7(a)
below; or (viii) any act or set of facts or circumstances that would, under
California case law or statute constitute a constructive termination of the
Employee.


 


g)             Termination Date.  “Termination Date” shall mean (i) if this
Agreement is terminated by the Company for Disability, thirty (30) days after
notice of termination is given to the Employee (provided that the Employee
shall not have returned to the performance of the Employee’s duties on a
full-time basis during such thirty (30)-day period), (ii) if the Employee’s
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, provided that if within thirty (30) days
after the Company gives the Employee notice of termination, the Employee
notifies the Company that a dispute exists concerning the termination or the
benefits due pursuant to this Agreement, then the Termination Date shall be the
date on which such dispute is finally determined, either by mutual written
agreement of the parties, or a by final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected), or (iii) if the Agreement is terminated by the
Employee, the date on which the Employee delivers the notice of termination to
the Company.


 


7)              Successors.


 


a)              Company’s
Successors.  Any successor to the
Company (whether direct or indirect and whether by purchase, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company’s business and/or assets shall assume the obligations under this
Agreement and agree expressly to perform the obligations under this Agreement
in the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession.  For all purposes under this Agreement, the
term “Company” shall include any successor to the Company’s business and/or
assets which executes and delivers the assumption agreement described in this
Section 7(a) or which becomes bound by the terms of this Agreement by operation
of law.


 


b)             Employee’s
Successors.  The terms of this
Agreement and all rights of the Employee hereunder shall inure to the benefit
of, and be enforceable by, the Employee’s personal or


 


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legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.


 


8)              Notice.


 


a)              General.  Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid.  In the case of the Employee, mailed notices
shall be addressed to him at the home address which he most recently
communicated to the Company in writing. 
In the case of the Company, mailed notices shall be addressed to its
corporate headquarters, and all notices shall be directed to the attention of
its Secretary.


 


b)             Notice of
Termination.  Any termination by the
Company for Cause or by the Employee as a result of a voluntary resignation or
an Involuntary Termination shall be communicated by a notice of termination to
the other party hereto given in accordance with Section 8(a) of this
Agreement.  Such notice shall indicate
the specific termina­tion provision in this Agreement relied upon, shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination under the provision so indicated, and shall specify the
termination date (which shall be not more than thirty (30) days after the
giving of such notice).  The failure by
the Employee to include in the notice any fact or circumstance which
contributes to a showing of Involuntary Termination shall not waive any right
of the Employee hereunder or preclude the Employee from asserting such fact or
circumstance in enforcing his rights hereunder.


 


9)              Miscellaneous
Provisions.


 


a)              No Duty to
Mitigate.  The Employee shall not be
required to mitigate the amount of any payment contemplated by this Agreement,
nor shall any such payment be reduced by any earnings that the Employee may
receive from any other source.


 


b)             Waiver.  No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the Employee). 
No waiver by either party of any breach of, or of compliance with, any
condition or provision of this Agreement by the other party shall be considered
a waiver of any other condition or provision or of the same condition or
provision at another time.


 


c)              Whole Agreement.
This Agreement and any outstanding stock option agreements represent the entire
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior arrangements and understandings regarding same. Other
than the agreements described in the preceding sentence, no agreements,
representations or understandings (whether oral or written and whether express
or implied) which are not expressly set forth in this Agreement have been made
or entered into by either party with respect to the subject matter hereof.


 


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d)             Choice of Law;
Jurisdiction and Venue.  The
validity, interpretation, construction and performance of this Agreement shall
be construed and enforced in accordance with, and the rights of the parties
shall be governed by, the laws of the State of Arizona without regard to
principles of conflicts of laws.  The
parties irrevocably consent to the jurisdiction and venue of the federal and
state courts of the County of Maricopa, Arizona in connection with any dispute
or litigation under this Agreement, and the parties hereby waive any right to
contest the validity of such jurisdiction and venue.


 


e)              Severability.  The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.


 


f)                Withholding.  All payments made pursuant to this Agreement
will be subject to withholding of applicable income and employment taxes.


 


g)             Counterparts.  This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.


 


IN WITNESS WHEREOF, each of the parties has executed
this Agreement, in the case of the Company by its duly authorized officer, as
of the day and year set forth below.


 


	
  SCR-Tech, LLC

  	
   

  
	
  By:

  	
   

  	
  CESI-SCR, Inc., its sole Member and Manager

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
  /s/ Dom Geraghty

  	
   

  	
  Date:

  	
  3/17/05

  	
   

  
	
   

  	
   

  	
  Dom Geraghty

  	
   

  
	
   

  	
   

  	
  President, CESI-SCR,
  Inc.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Catalytica Energy
  Systems, Inc.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
  /s/ Mike Murry

  	
   

  	
  Date:

  	
  3/17/05

  	
   

  
	
   

  	
   

  	
  Mike Murry

  	
   

  
	
   

  	
   

  	
  President and CEO,
  Catalytica Energy Systems, Inc.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  EMPLOYEE

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
  /s/ William J. McMahon,
  III

  	
   

  	
  Date:

  	
  3/17/05

  	
   

  
	
   

  	
   

  	
  William J. McMahon, III