**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 ofPresident of CESI-SCR, Inc., a wholly-owned subsidiary of Catalytica EnergySystems, 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 yourleadership in its future success. This position will be located at the SCR-Techfacility in Charlotte, North Carolina. Specifics of this offer are listedbelow. 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 atarget of the higher of 35% of your 2005 base-earnings or 1.75% of 2005revenues, both pro-rata for 2005 as of your starting date. From 2006 through2009, 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 annualrevenue, 50% on SCR-Tech annual EBITDA, and 20% on CESI corporate objectives asdetermined by the CESI CEO or his designee. The revenue and EBITDA goals willbe determined annually. In no case will the revenue and EDBITDA goals begreater than 25% of the previous year’s revenue and EBITDA goals. Revenue andEBITDA will be determined by the CESI CFO as audited by Ernst and Young. CESIcorporate 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 onDecember 31st and the year in question. The annual bonus is earned as ofDecember 31st and the payout of any bonus will occur at the end ofFebruary of the following year.

 

In addition, you will be eligible for a CESI stock option bonus with anannual 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 notguaranteed. They are based on company and Individual performance and requireapproval from our Board of Directors.

 

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

 

**Benefits**

 

Effective upon your date of hire, you and your eligible dependents mayenroll in SCR-Tech’s medical and dental benefit program. You are alsoimmediately eligible for short and long-term disability, and life insuranceplans.

 

You will be eligible to participate in the CESI 401(k) retirement planon the first of the month following three months of employment. The 401(k) planincludes a 60% match (up to 6% of your eligible deferral Compensation) andimmediate vesting of all company contributions. On July 1, 2005 you will beable to participate. In the CESI Employee Stock Purchase Plan at a discountedprice.

 

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 mayelect to utilize.

 

**Severance**

 

The Company may terminate your employment at any time and for any reasonwithout cause. As long as any termination byCESI is not for cause and providing that you do not terminate voluntarily,(i) you will continue to receive your then current salary and your medicalbenefits (or compensatory equivalent) asseverance for a period of 6 months. In the event of such termination, you will be entitled only to theseverance 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-rataas of the date of the change ofcontrol.

 

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

 

We look forward to you becoming the leader of the SCR-Tech team. Youremployment with CESI-SCR, a subsidiary ofCatalytica Energy Systems, Inc. is “at will” which means that either youor the Company can terminate the employment relationship at any time with orwithout cause. Please indicate youracceptance of this offer by signing below and returning the original to me. Thisoffer 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 isnot a contract of employment.

 

 
| /s/ William J. McMahon  |   | 3-17-05 |
|-------------------------|--------|---------|
| William J. McMahon, III |   | Date    |

 

2

----

 

# **SCR-TECH, LLC**

# ** **

# **CHANGE OF CONTROL SEVERANCEAGREEMENT**

#  

# 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 CatalyticaEnergy Systems, Inc. (“Catalytica”), effective as of the latest date set forthby the signatures of the parties hereto below.

#  

# R E C I T A L S

#  

# A)          It is expected that theCompany from time to time will consider the possibility of an acquisition byanother company or other change of control as a means of enhancing stockholdervalue.  The President of Catalytica (the “President”)recognizes that such consideration can be a distraction to the Employee and cancause the Employee to consider alternative employment opportunities.  The President has determined that it is inthe best interests of the Company, Catalytica and its stockholders to assurethat the Company will have the continued dedication and objectivity of theEmployee, notwithstanding the possibility, threat or occurrence of a Change ofControl (as defined below) of the Company.

#  

# B)            The President believesthat it is in the best interests of the Company, Catalytica and itsstockholders to provide the Employee with an incentive to continue hisemployment and to motivate the Employee to maximize the value of the Companyupon a Change of Control for the benefit of its stockholders.

#  

# C)            The President believesthat it is imperative to provide the Employee with certain severance benefitsupon Employee’s termination of employment following a Change of Control whichprovides the Employee with enhanced financial security and provides incentiveand encouragement to the Employee to remain with the Company notwithstandingthe possibility of a Change of Control.

#  

# D)           Certain capitalizedterms 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 datethat all obligations of the parties hereto with respect to this Agreement havebeen satisfied.

#  

# 2)              At-WillEmployment.  The Company and theEmployee acknowledge that the Employee’s employment is and shall continue to beat-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 Controland prior to twenty-four (24) months following a Change of Control or theannouncement of a Change of Control,

 

3

----

 

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

#  

# 3)              SeveranceBenefits.

#  

## a)              Termination InConnection With a Change of Control. If the Employee’s employment terminates as a result of InvoluntaryTermina­tion (as defined below) other than for Cause at any time after anannouncement of a Change of Control and prior to twenty-four (24) monthsfollowing 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 fiftypercent (50%) of the Employee’s Annual Compensation plus a pro rata payment ofthe current year bonus award based on the target bonus for the Employee;

###  

### (2)          Continued EmployeeBenefits.  One hundred percent (100%)Company-paid health, dental and life insurance coverage at the same level ofcoverage as was provided to such employee immediately prior to the SeveranceTermination (the “Company-Paid Coverage”). If such coverage included the Employee’s dependents immediately prior tothe Severance Termination, such dependents shall also be covered at Companyexpense.  Company-Paid Coverage shallcontinue until the earlier of (i) six months from the date of the InvoluntaryTermination or (ii) the date that the Employee and his dependents becomecovered under another employer’s group health, dental or life insurance plansthat provide Employee and his dependents with comparable benefits and levels ofcoverage.  For purposes of Title X of theConsolidated Budget Reconciliation Act of 1985 (“COBRA”), the date of the “qualifyingevent” for Employee and his dependents shall be the date upon which theCompany-Paid Coverage terminates.

###  

### (3)          Timing of SeverancePayments.  Any severance payment towhich Employee is entitled under Section 3(a)(1) shall be paid by the Companyto the Employee (or to the Employee’s successor in interest, pursuant toSection 7(b)) in cash and in full, not later than thirty (30) calendar daysfollowing the Termination Date, subject to Section 9(f).

###  

## b)             VoluntaryResignation; Termination for Cause. If the Employee’s employment terminates by reason of the Employee’svoluntary resignation (and is not an Involuntary Termination), or if theEmployee is terminated for Cause, then the Employee shall not be entitled toreceive severance or other benefits except for those (if any) as may then beestablished under the Company’s then existing option, severance and benefitsplans and practices or pursuant to other agreements with the Company.

 

4

----

 

## c)              Disability; Death.  If the Company terminates the Employee’semployment as a result of the Employee’s Disability, or such Employee’semployment is terminated due to the death of the Employee, then the Employeeshall 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 severanceand benefits plans and practices or pursuant to other agreements with theCompany.

 

## d)             Termination Apartfrom Change of Control.  In the eventthe Employee’s employment is terminated for any reason, either prior to thethree-month notice period before a Change of Control or after the twenty-four(24) -month period following a Change of Control, then the Employee shallbe entitled to receive severance and any other benefits only as may then beestablished under the Company’s existing severance and benefits plans andpractices or pursuant to other agreements with the Company.

##  

# 4)              Attorney Fees,Costs and Expenses.  The Companyshall reimburse Employee for the reasonable attorney fees, costs and expensesincurred by the Employee in connection with any action brought by Employee toenforce his rights hereunder, provided such action is not decided in favor ofthe Company.

#  

# 5)              Limitation onPayments.

#  

## a)              In the event thatthe severance and other benefits provided for in this Agreement or otherwisepayable to the Employee (i) constitute “parachute payments” within the meaningof 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 bySection 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 suchlesser extent which would result in no portion of such severance benefits beingsubject to excise tax under Section 4999 of the Code,

#  

### whichever of the foregoing amounts, taking intoaccount the applicable federal, state and local income taxes and the excise taximposed by Section 4999, results in the receipt by the Employee on an after-taxbasis, of the greatest amount of severance benefits, notwithstanding that allor some portion of such severance benefits may be taxable under Section 4999 ofthe Code.  Any taxes due under Section4999 shall be the responsibility of the employee.

###  

## b)             If a reduction in thepayments and benefits that would otherwise be paid or provided to the Employeeunder the terms of this Agreement is necessary to comply with the provisions ofSection 5(a), the Employee shall be entitled to select which payments orbenefits will be reduced and the manner and method of any such reduction ofsuch payments or benefits (including but not limited to the number of optionsthat 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 ofany required reduction in payments and benefits is finally determined inaccordance with the provisions of Section 5(c), the Employee shall notify theCompany 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 bySection 5(a), amounts previously paid to the Employee exceed the amount towhich the Employee is entitled, the Employee will promptly return the excessamount to the Company.

##  

## c)              Unless the Companyand the Employee otherwise agree in writing, any determination required underthis Section 5 shall be made in writing by the Company’s Accountantsimmediately prior to Change of Control, whose determination shall be conclusiveand binding upon the Employee and the Company for all purposes.  For purposes of making the calculationsrequired by this Section 5, the Accountants may, after taking into account theinformation provided by the Employee, make reasonable assumptions andapproximations concerning applicable taxes and may rely on reasonable, goodfaith interpretations concerning the application of Sections 280G and 4999 ofthe Code.  The Company and the Employeeshall furnish to the Accountants such information and documents as theAccountants may reasonably request in order to make a determination under thisSection.  The Company shall bear allcosts the Accountants may reasonably incur in connection with any calculationscontemplated by this Section 5.

##  

# 6)              Definition ofTerms.  The following terms referredto in this Agreement shall have the following meanings:

#  

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

##  

## b)             AnnualCompensation.  “Annual Compensation”means an amount equal to the greater of (i) Employee’s Company base salary forthe 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 theTermination Date.

##  

## c)              Cause.  “Cause” shall mean (i) any act of personaldishonesty taken by the Employee in connection with his responsibilities as anemployee and intended to result in substantial personal enrichment of theEmployee, (ii) the conviction of a felony, (iii) a willful act by the Employeethat 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 periodof not less than thirty (30) days following delivery to the Employee of awritten demand for performance from the Company that describes the basis forthe Company’s belief that the Employee has not substantially performed hisduties; or (v) Employee’s  continuedviolations of the Employee’s obligations to the Company that are demonstrablywillful

 

6

----

 

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

##  

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

##  

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

####  

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

####  

#### (iii)  Theconsummation of the sale or disposition by the Company of all or seventy-fivepercent (75%) or more of the Company’s assets.

####  

## e)              Disability.  “Disability” shall mean that the Employee hasbeen unable to perform the essential functions of his Company duties with orwithout reasonable accommodation as the result of his incapacity due tophysical or mental illness, and such inability, at least twenty-six (26) weeksafter its commencement, is determined to be total and permanent by a physicianselected by the Company or its insurers and acceptable to the Employee or theEmployee’s legal representative (such Agreement as to acceptability not to beunreasonably withheld).  Terminationresulting from Disability may only be effected after at least thirty (30) days’written notice by the Company of its intention to terminate the Employee’semployment.  In the event that theEmployee resumes the performance of substantially all of his duties hereunderbefore the termination of his employment becomes effective, the notice ofintent to terminate shall automatically be deemed to have been revoked.

##  

## f)                InvoluntaryTermination.  “InvoluntaryTermination” shall mean (i) without the Employee’s express written consent, thesignificant reduction, without good business reasons, of the Employee’s duties,authority or responsibilities, relative to the Employee’s duties, authority orresponsibilities as in effect immediately prior to such reduction, or theassignment 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 thefacilities and perquisites (including office space and location) available tothe Employee immediately prior to such reduction; (iii) a reduction by theCompany in the base salary or target bonus of the Employee as in effectimmediately prior to such reduction; (iv) a material reduction by the Companyin the kind or level of employee benefits to which the Employee was entitledimmediately prior to such reduction with the result that the Employee’s overallbenefits package is significantly reduced; (v) the relocation of the Employeeto a facility or a location more than fifty (50) miles from the Employee’s thenpresent location, without the Employee’s express written consent; (vi) anypurported termination of the Employee by the Company that is not effected forDisability or for Cause, or any purported termination for which the groundsrelied upon are not valid; (vii) the failure of the Company to obtain theassumption of this Agreement by any successors contemplated in Section 7(a)below; or (viii) any act or set of facts or circumstances that would, underCalifornia case law or statute constitute a constructive termination of theEmployee.

##  

## g)             Termination Date.  “Termination Date” shall mean (i) if thisAgreement is terminated by the Company for Disability, thirty (30) days afternotice of termination is given to the Employee (provided that the Employeeshall not have returned to the performance of the Employee’s duties on afull-time basis during such thirty (30)-day period), (ii) if the Employee’semployment is terminated by the Company for any other reason, the date on whicha notice of termination is given, provided that if within thirty (30) daysafter the Company gives the Employee notice of termination, the Employeenotifies the Company that a dispute exists concerning the termination or thebenefits due pursuant to this Agreement, then the Termination Date shall be thedate on which such dispute is finally determined, either by mutual writtenagreement of the parties, or a by final judgment, order or decree of a court ofcompetent jurisdiction (the time for appeal therefrom having expired and noappeal having been perfected), or (iii) if the Agreement is terminated by theEmployee, the date on which the Employee delivers the notice of termination tothe Company.

##  

# 7)              Successors.

#  

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

#  

# b)             Employee’sSuccessors.  The terms of thisAgreement and all rights of the Employee hereunder shall inure to the benefitof, and be enforceable by, the Employee’s personal or

 

8

----

 

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

#  

# 8)              Notice.

#  

# a)              General.  Notices and all other communicationscontemplated by this Agreement shall be in writing and shall be deemed to havebeen duly given when personally delivered or when mailed by U.S. registered orcertified mail, return receipt requested and postage prepaid.  In the case of the Employee, mailed noticesshall be addressed to him at the home address which he most recentlycommunicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to itscorporate headquarters, and all notices shall be directed to the attention ofits Secretary.

#  

# b)             Notice ofTermination.  Any termination by theCompany for Cause or by the Employee as a result of a voluntary resignation oran Involuntary Termination shall be communicated by a notice of termination tothe other party hereto given in accordance with Section 8(a) of thisAgreement.  Such notice shall indicatethe specific termina­tion provision in this Agreement relied upon, shall setforth in reasonable detail the facts and circumstances claimed to provide abasis for termination under the provision so indicated, and shall specify thetermination date (which shall be not more than thirty (30) days after thegiving of such notice).  The failure bythe Employee to include in the notice any fact or circumstance whichcontributes to a showing of Involuntary Termination shall not waive any rightof the Employee hereunder or preclude the Employee from asserting such fact orcircumstance in enforcing his rights hereunder.

#  

# 9)              MiscellaneousProvisions.

#  

# a)              No Duty toMitigate.  The Employee shall not berequired to mitigate the amount of any payment contemplated by this Agreement,nor shall any such payment be reduced by any earnings that the Employee mayreceive from any other source.

#  

# b)             Waiver.  No provision of this Agreement shall bemodified, waived or discharged unless the modification, waiver or discharge isagreed to in writing and signed by the Employee and by an authorized officer ofthe Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, anycondition or provision of this Agreement by the other party shall be considereda waiver of any other condition or provision or of the same condition orprovision at another time.

#  

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

 

9

----

 

# d)             Choice of Law;Jurisdiction and Venue.  Thevalidity, interpretation, construction and performance of this Agreement shallbe construed and enforced in accordance with, and the rights of the partiesshall be governed by, the laws of the State of Arizona without regard toprinciples of conflicts of laws.  Theparties irrevocably consent to the jurisdiction and venue of the federal andstate courts of the County of Maricopa, Arizona in connection with any disputeor litigation under this Agreement, and the parties hereby waive any right tocontest the validity of such jurisdiction and venue.

#  

# e)              Severability.  The invalidity or unenforceability of anyprovision or provisions of this Agreement shall not affect the validity orenforceability of any other provision hereof, which shall remain in full forceand effect.

#  

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

#  

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

#  

# IN WITNESS WHEREOF, each of the parties has executedthis Agreement, in the case of the Company by its duly authorized officer, asof 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 |   |

 

----