Document:

exv10w12

 

Exhibit 10.12

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

          This
Amended and Restated Employment Agreement (this “Agreement”) is made and entered
into as of the 5th day of October, 2005 by and between SAVE THE WORLD AIR, INC., a Nevada
corporation (“STWA”) and Bruce McKinnon (the “Executive”).

RECITALS

     A. STWA and the Executive are parties to that certain Employment Agreement dated as of the
1st day of December, 2003 (the “Original Agreement”), which sets forth the terms and
conditions upon which STWA employs the Executive.

     B. STWA and the Executive have previously entered into an Amendment to Employment Agreement
dated as of March 2, 2004 (the “First Amendment”), pursuant to which STWA appointed the Executive
to the position of Chief Operating Officer of STWA and increased the annual base compensation of
the Executive from $153,600 to $192,000 for the period commencing March 2, 2004.

     C. STWA and the Executive desire to further amend the Original Agreement, as previously
amended by the First Amendment, in certain respects, including to promote the Executive to the
position of President of STWA effective on and as of October 5, 2005 and to increase the annual
base compensation payable to the Executive from $192,000 to $240,000 effective on and as of October
5, 2005.

     D. In order to memorialize the amendments to the Original Agreement described above, STWA and
the Executive have agreed to amend and restate the Original Agreement in its entirety.

AGREEMENT

          NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements
of the parties contained herein, and intending to be legally bound hereby, the parties hereto agree
as follows:

     1. DEFINITIONS AND SPECIAL PROVISIONS. Each capitalized word and
term used herein shall have the meaning ascribed to it in the glossary appended hereto. Such
glossary is incorporated herein by reference and made a part hereof.

     2. EMPLOYMENT. STWA hereby agrees to employ the Executive, and the Executive hereby
agrees to accept employment with STWA, on the terms and conditions set forth herein.

 

 

     3. TERM OF AGREEMENT. The Executive’s employment under this Agreement shall commence on
the date hereof and, except as otherwise provided herein, shall continue until December 31, 2007;
provided, however, that commencing on December 31, 2007 and each anniversary thereafter, the term
of this Agreement shall automatically be extended for one additional year beyond the term otherwise
established unless, prior to such date, STWA or the Executive shall have given a Notice of
Non-Extension.

     4. POSITION AND DUTIES. The Executive shall serve as President of STWA and he shall have
such responsibilities, duties and authority as may, from time to time, be generally associated with
such positions and as may be specifically directed by the Board of Directors of STWA from time to
time during the term of this Agreement, including any extensions thereof. In addition, the
Executive shall serve in such capacity, with respect to each Subsidiary or affiliated company, as
the Board of Directors of each such Subsidiary or affiliated company shall designate from time to
time. During the term of this Agreement, he shall devote substantially all of his working time and
efforts to the business and affairs of STWA, the Subsidiaries and affiliated companies; provided,
however, that nothing herein shall be construed as precluding him from devoting a reasonable amount
of time to civic, charitable, trade association and similar activities that do not represent
conflicts and are not otherwise in any way detrimental to STWA.

     5. COMPENSATION AND RELATED MATTERS.

(a) BASE
COMPENSATION. During the period of the Executive’s employment hereunder, STWA
shall pay to him annual base compensation for the period from December 1, 2003 to December 31, 2004
of $153,600. STWA shall pay to the Executive the annual base compensation of $192,000 for the
period commencing March 2, 2004 to October 5, 2005. For the period commencing October 5, 2005 and
continuing thereafter during the term of this Agreement, STWA shall pay to the Executive annual
base compensation of $240,000. The Board(s) of Directors of STWA shall periodically review the
Executive’s employment performance, in accordance with policies generally in effect from time to
time, for possible merit or cost-of-living increases in such base compensation. Except for a
reduction, should such reduction occur, which is proportionate to a company-wide reduction in
executive pay, the annual base compensation paid to the Executive in any period shall not be less
than the annual base compensation paid to him in any prior period. The frequency and manner of
payment of such base compensation shall be in accordance with STWA’s executive payroll practices
from time to time in effect. Nothing herein shall be construed as precluding the Executive from
entering into any salary reduction or deferral plan or arrangement during the term of this
Agreement; provided, however, that his base compensation shall be determined without regard to any
such salary reduction or deferral for purposes of calculating the amount of any compensation and
benefits to which he or his surviving spouse may be entitled under Paragraph 6, 7, 10, or 11 hereof
following his termination of employment. The amounts set forth in the first sentence of this
subparagraph 5(a) shall be pro rated to the extent such period is less than a year.

(b) INCENTIVE COMPENSATION. During the period of the Executive’s employment hereunder, he
shall be entitled to participate in all incentive plans, stock option plans, and similar
arrangements as may be in effect and maintained by STWA for executive officers on a basis and at
award levels consistent and commensurate with his position and duties hereunder.

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(c) EMPLOYEE BENEFIT PLANS AND OTHER PLANS OR ARRANGEMENTS. The Executive shall be
entitled to participate in all Employee Benefit Plans of STWA that either, are in effect at present
or that may be adopted in the future. In addition, he shall be entitled to participate in and enjoy
any other plans and arrangements which provide for sick leave, vacation, sabbatical, or personal
days, club memberships and dues, education payment or reimbursement, business-related seminars, and
similar fringe benefits provided to or for the executive officers of STWA from time to time.
Notwithstanding the foregoing, Executive shall be entitled to at least four (4) weeks vacation per
calendar year during each year of employment. Such vacation shall be prorated during the year 2003
based on the date of this Agreement.

(d) EXPENSES. During the period of the Executive’s employment hereunder, he shall be entitled
to receive prompt reimbursement for all reasonable and customary expenses, including transportation
expenses, incurred by him in performing services hereunder in accordance with the general policies
and procedures established by STWA.

(e) AUTOMOBILE. STWA shall provide for a monthly automobile allowance of $900.00. The company
may, at its discretion, provide an automobile, mutually acceptable, to the Executive for his
exclusive use.

(f) MEDICAL INSURANCE. Notwithstanding the provisions of Paragraph 5(c) hereof, the Executive
shall not be entitled to participate in any group health insurance plan which may be offered to
employees of STWA for any period during the term of this Agreement; provided
however, that commencing December 1, 2003, STWA will reimburse KZ Golf for the insurance
premiums, including the share of such premiums otherwise required to be paid by the Executive, if
any, incurred in connection with maintaining health insurance for the Executive and his spouse
through participation in the health insurance plan offered to employees of KZ Golf, which insurance
premium was, at June 1, 2006, $607.12 per month.

     6. TERMINATION BY REASON OF DISABILITY.

(a) IN GENERAL. In the event the Executive becomes unable to perform his duties on a full-time
basis by reason of the occurrence of his Disability and, within 30 days after a Notice of
Termination is given, he shall not have returned to the full-time performance of such duties, his
employment may be terminated by STWA.

(b) COMPENSATION AND BENEFITS. In the event of the termination of the Executive’s employment
pursuant to Subparagraph 6(a), the term of this Agreement shall continue for one year after the
Date of Termination, and STWA shall pay or provide the compensation and benefits set forth below:

          (1) The Executive shall be paid an amount per annum equal to the greater of (i) his
highest annual base compensation (including the car allowance provided for in subparagraph 5(e))
received during one of the two calendar years immediately preceding the calendar year in which the
Date of Termination occurs, or (ii) his base compensation (including the car allowance provided for
in subparagraph 5(e)) in effect immediately prior to the Date of

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Termination (or prior to any reduction which entitled him to terminate his employment for Good
Reason), over a period of one year beginning with such Date of Termination. The frequency and
manner of payment of such amounts shall be in accordance with STWA’s executive payroll
practices from time to time in effect.

          (2) The Executive shall be paid an amount equal to the higher of the aggregate bonuses
paid to him with respect to one of the two years immediately preceding the year in which the Date
of Termination occurs. Such amount shall be paid to him in cash on the first anniversary date of
the Date of Termination.

          (3) The Executive shall be paid an amount equal to the highest annual contribution made
on his behalf (other than his own salary reduction contributions) to each tax-qualified and
non-qualified Defined Contribution Plan of STWA with respect to the year in
which the Date of Termination occurs or one of the two years immediately preceding such year. The
amount separately determined for each such plan shall be aggregated and shall be paid to him in
cash on the first anniversary date of the Date of Termination.

          (4) The Executive shall accrue benefits equal to the excess of (i) the aggregate
retirement benefits he would have received under the terms of each tax-qualified and non-qualified
Defined Benefit Plan of STWA as in effect immediately prior to the Date of Termination had he (A)
continued to be employed for one more year, and (B) received (on a pro rated basis, as appropriate)
the greater of (I) the highest compensation taken into account under each such plan with respect to
one of the two years immediately preceding the year in which the Date of Termination occurs, or
(II) his annualized base compensation in effect immediately prior to the Date of Termination (or
prior to any reduction which entitled him to terminate his employment for Good Reason), over (ii)
the retirement benefits he actually receives under such plans. The frequency, manner and extent of
payment of such benefits shall be consistent with the terms of the plans to which they relate and
any elections made thereunder.

          (5) The Executive and his eligible dependents shall be entitled to continue to
participate at the same aggregate benefit levels, for one year and at no out-of-pocket or tax cost
to him, in the Welfare Benefit Plans in which he was a participant immediately prior to the Date of
Termination, to the extent permitted under the terms of such plans and applicable law. To the
extent STWA is unable to provide for continued participation in a Welfare Benefit Plan, it shall
provide an equivalent benefit directly at no out-of-pocket or tax cost to him. For purposes of the
preceding two sentences, STWA shall be deemed to have provided a benefit at no tax cost to him if
it pays an additional amount to him or on his behalf, with respect to those benefits which would
otherwise be nontaxable to him, calculated in a manner consistent with the provisions of Paragraph
12.

(c) ADJUSTMENT TO CERTAIN SUBPARAGRAPH 6(b) COMPENSATION AND BENEFITS. Notwithstanding the
provisions of Subparagraph 6(b)(5), STWA’s obligation to pay or fund any disability insurance
premiums on behalf of the Executive shall be suspended while his Disability continues, provided the
cessation of payment or funding does not result in the termination of disability benefits. Any
amounts otherwise due under Subparagraph (b) shall be

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reduced (but not below zero) by the dollar amount of disability benefits received by him pursuant
to plans or policies funded, directly at its cost, by STWA.

(d) EARLIER CESSATION OF CERTAIN WELFARE BENEFITS. Notwithstanding the provisions of
Subparagraph (b)(5), STWA shall not be required to provide, at its cost, the welfare benefits
covered therein after the later of (i) the attainment by the Executive and his spouse (if any) of
age 65, or (ii) the date specified in the relevant plan document for benefit termination (assuming
that he was employed until age 65 or the normal retirement date, if any, specified in such
document).

(e) DEATH DURING REMAINING TERM OF AGREEMENT.

          (1) In the event the Executive dies during the remaining term of this Agreement following
his termination for Disability and he is survived by a spouse, the compensation and benefits
remaining to be paid and provided under Subparagraph 6(b) shall be unaffected by his death and
shall be paid and provided to her or on her behalf; provided, however, that the extent of her
rights to the accrued benefits described in Subparagraph 6(b)(4) shall be determined by reference
to the relevant plan provisions and any elections made under such plans; and provided further, that
STWA shall not be required to provide continued benefits with respect to her deceased husband; and
provided further, that in no event shall STWA be required to provide, at its cost, the other
welfare benefits described in Subparagraph 6(b)(5) to such spouse and her eligible dependents after
the earlier of (i) her death, or (ii) the later of (A) her attainment of
age 65, or (B) the date specified in the relevant plan document for benefit termination (assuming
that the Executive was employed until age 65 or the normal retirement date, if any, specified in
such document).

          (2) In the event the Executive dies during the remaining term of this Agreement following
his termination for Disability and he is not survived by a spouse, (i) STWA shall thereafter make
the remaining payments described in Subparagraphs 6(b)(1) through 6(b)(3) directly to his estate,
(ii) the extent of the rights of any person to the accrued benefits described in Subparagraph
6(b)(4) shall be determined by reference to the relevant plan provisions and any
elections made under such plans, and (iii) STWA’s obligation to provide continued benefits under
Subparagraph 6(b)(5) shall terminate.

(f) COMPENSATION AND BENEFITS UPON EXPIRATION OF REMAINING TERM OF AGREEMENT. Upon the
expiration of the remaining term of this Agreement following the Executive’s termination for
Disability, and provided his Disability then continues, he shall be entitled to receive the
compensation and benefits provided under the terms of any long-term disability plan of STWA in
effect on the Date of Termination or, if greater, at the expiration of such remaining term. If such
plan exists, such compensation and benefits shall continue until the earlier of (i) his death, or
(ii) the later of (A) his attainment of age 65, or (B) the date specified in the plan document for
benefit termination. To the extent STWA is unable to provide such compensation and benefits under
its long-term disability plan, if any, it shall provide equivalent compensation and benefits
directly at no out-of-pocket or tax cost to him. For purposes of the preceding sentence, STWA shall
be deemed to have provided compensation and benefits at no tax cost to him if it pays an additional
amount to him or on his behalf, with respect to the

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compensation and benefits which would otherwise be nontaxable to him, calculated in a manner
consistent with the provisions of Paragraph 12.

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     7. TERMINATION BY REASON OF DEATH.

(a) COMPENSATION AND BENEFITS TO SURVIVING SPOUSE. In the event the Executive dies while he is
employed under this Agreement and is survived by a spouse, STWA shall pay or provide the
compensation and benefits set forth below:

          (1) The surviving spouse shall be paid an amount equal to the greater of (i) the
Executive’s highest base compensation received during one of the two calendar years immediately
preceding the calendar year in which the Date of Termination occurs, or (ii) his base compensation
in effect immediately prior to the Date of Termination (or prior to any reduction
which entitled him to terminate his employment for Good Reason) for a period of one year,
beginning with such Date of Termination. The frequency and manner of payment of such amounts shall
be in accordance with STWA’s executive payroll practices from time to time
in effect.

          (2) The surviving spouse shall be paid an amount equal to the highest payment made to
Executive under each incentive bonus plan of STWA with respect to one of the two years immediately
preceding the year in which the Date of Termination occurs. Such amount shall be paid in cash to
her within 30 days after the Date of Termination.

          (3) The surviving spouse shall be paid an amount equal to the sum of the highest annual
contribution made on the Executive’s behalf (other than his own salary reduction contributions) to
each tax-qualified and non-qualified Defined Contribution Plan of STWA with respect to the year in
which the Date of Termination occurs or one of the two years immediately preceding such year. Such
amount shall be paid in cash to her within 30 days after the Date of
Termination or within 30 days after such amount can first be determined, whichever is later.

          (4) Subject to the following sentence, the surviving spouse shall be paid benefits
determined by reference to the excess of (i) the aggregate retirement benefits the Executive would
have accrued under the terms of each tax-qualified and non-qualified Defined Benefit Plan as in
effect immediately prior to the Date of Termination, had he (A) continued to be employed for a
period of one year following the Date of Termination, and (B) received
(on a pro rated basis, as appropriate) the greater of (I) the highest compensation taken into
account under each such plan with respect to one of the two years immediately preceding the year in
which the Date of Termination occurs, or (II) his annualized base compensation in effect
immediately prior to the Date of Termination (or prior to any reduction which entitled him to
terminate his employment for Good Reason), over (ii) the retirement benefits actually determined
under such plans. The frequency, manner, and extent of payment of such benefits shall be consistent
with the terms of the plans to which they relate and any elections
made thereunder.

          (5) The surviving spouse and her eligible dependents shall be entitled to continue to
participate at the same aggregate benefit levels, for a period of one year following the Date of
Termination and at no out-of-pocket or tax cost to her, in the Welfare Benefit Plans in which the
Executive was a participant immediately prior to the Date of Termination, to the extent permitted
under the terms of such plans and applicable law; provided however, that STWA shall

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not be required to provide continued benefits with respect to her deceased husband; and provided
further, that STWA shall not thereafter be required to provide, at its cost, the other welfare
benefits covered by such plans to such spouse and her eligible dependents after the earlier of (i)
her death, or (ii) the later of (A) her attainment of age 65, or (B) the date specified in the
relevant plan document for benefit termination (assuming the Executive was employed until age 65 or
the normal retirement date, if any, specified in such document). To the extent STWA is unable to
provide for continued participation in a Welfare Benefit Plan as required, it shall provide an
equivalent benefit directly at no out-of-pocket or tax cost to her. For purposes of the preceding
two sentences, STWA shall be deemed to have provided a benefit at no tax cost to her if it pays an
additional amount to her or on her behalf, with respect to those benefits which would otherwise be
nontaxable to her, calculated in a manner consistent with the provisions of Paragraph 12.

(b) COMPENSATION AND BENEFITS TO ESTATE, ETC. In the event the Executive dies while he is
employed under this Agreement and is not survived by a spouse, (i) STWA shall make the payments
described in Subparagraphs (a)(1) through (a)(3) directly to his estate, (ii) the extent of the
rights of any person to the accrued benefits described in Subparagraph (a)(4) shall be determined
by reference to the relevant plan provisions and any elections made under such plans, and (iii)
STWA’s obligation to provide benefits under Subparagraph (a)(5) shall terminate.

     8. TERMINATION BY STWA FOR CAUSE.

(a) IN GENERAL. In the event STWA intends to terminate the Executive’s employment for Cause,
it shall deliver a Notice of Termination to him which specifies a Date of Termination not less than
30 days following the dat of such notice, unless a shorter period of notice is required by the
principal regulator of STWA or any affiliate of STWA.

(b) COMPENSATION. Promptly after the Executive’s termination under Subparagraph 8(a), STWA
shall pay him, in one lump sum, his accrued but unpaid base compensation and vacation compensation
earned through the Date of Termination.

     9. TERMINATION BY THE EXECUTIVE WITHOUT GOOD REASON.

(a) IN GENERAL. In the event the Executive intends to terminate his employment without Good
Reason, he shall deliver a Notice of Termination to STWA which specifies a Date of Termination not
less than (i) 90 days following the date of such notice, if a Change in Control shall not have
occurred, or (ii) 30 days following the date of such notice, if a Change in Control shall have
occurred.

(b) COMPENSATION. Promptly after the Executive’s termination under Subparagraph 9(a), STWA
shall pay him, in one lump sum, his accrued but unpaid base compensation and vacation compensation
earned through the Date of Termination.

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     10. TERMINATION BY STWA WITHOUT DISABILITY OR CAUSE.

(a) IN GENERAL. In the event STWA intends to terminate the Executive’s employment for any
reason other than Disability or Cause, it shall deliver a Notice of Termination to him which
specifies a Date of Termination not less than 90 days following the date of such notice.

(b) COMPENSATION AND BENEFITS DURING REMAINING TERM OF AGREEMENT. In the event of the
termination of the Executive’s employment under Subparagraph (a), STWA shall pay or provide the
compensation and benefits described in Paragraph 6(b), except that all such compensation and
benefits shall be for the remaining term of this Agreement determined in accordance with Section 3
hereof, unless a change in control has occurred prior to such termination of employment, in which
case all such compensation and benefits shall be for a term of three (3) years from the Date of
Termination and the term of this Agreement shall continue until all such compensation and benefits
are paid to Executive in full.

(c) ADJUSTMENT TO CERTAIN SUBPARAGRAPH (b) COMPENSATION AND BENEFITS. In the event the
Executive suffers a Disability during the remaining term of this Agreement following the Date of
Termination, STWA’s obligation to pay or fund any disability insurance premiums on his behalf shall
be suspended while his Disability continues, provided the cessation of payment or funding does not
result in the termination of disability benefits. Any amounts described in Paragraph 6(b) and
otherwise payable under Subparagraph (b) shall be reduced (but not below zero) by the dollar amount
of disability benefits received by him pursuant to plans or policies funded, directly at its cost,
by STWA.

(d) EARLIER CESSATION OF CERTAIN WELFARE BENEFITS. Notwithstanding the provisions of
Subparagraph (b), STWA shall not be required to provide, at its cost, the welfare benefits covered
by Paragraph 6(b)(5) after the later of (i) the attainment by the Executive and his spouse (if any)
of age 65, or (ii) the date specified in the relevant plan document for benefit termination
(assuming that he was employed until age 65 or the normal retirement date, if any, specified in
such document).

(e) DEATH DURING REMAINING TERM OF AGREEMENT.

          (1) In the event the Executive dies during the remaining term of this Agreement following
his termination without Disability or Cause by STWA and he is survived by a spouse, the
compensation and benefits required to be paid and provided under Subparagraph 10(b) shall be
unaffected by his death and shall be paid and provided to her or on her behalf; provided, however,
that the extent of her rights to the accrued benefits described in Paragraph 6(b)(4) shall be
determined by reference to the relevant plan provisions and any elections made under such plans;
and provided further, that STWA shall not be required to provide continued benefits with respect to
her deceased husband; and provided further, that in no event shall STWA be required to provide, at
its cost, the other welfare benefits described in Paragraph 6(b)(5) to such spouse and her eligible
dependents after the earlier of (i) her death, or (ii) the later of (A) her attainment of age 65,
or (B) the date specified in the relevant plan document for benefit termination (assuming that the
Executive was employed until age 65 or the normal retirement date, if any, specified in such
document).

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          (2) In the event the Executive dies during the remaining term of this Agreement following
his termination without Disability or Cause and he is not survived by a spouse, (i) STWA shall
thereafter make the remaining payments described in Paragraphs 6(b)(1) through 6(b)(3) directly to
his estate, (ii) the extent of the rights of any person to the accrued benefits described in
Paragraph 6(b)(4) shall be determined by reference to the relevant plan provisions and any
elections made under such plans, and (iii) STWA’s obligation to provide the continued benefits
described in Paragraph 6(b)(5) shall terminate.

     11. TERMINATION BY THE EXECUTIVE FOR GOOD REASON.

(a) IN GENERAL. In the event the Executive intends to terminate his employment for Good
Reason, he shall deliver a Notice of Termination to STWA which specifies a Date of Termination not
less than 30 days following the date of such notice.

(b) COMPENSATION AND BENEFITS DURING REMAINING TERM OF AGREEMENT. In the event of the
termination of the Executive’s employment under Subparagraph 11(a), STWA shall pay or provide the
compensation and benefits described in Paragraph 6(b), except that all such compensation and
benefits shall be for a term of three (3) years from the Date of Termination and the term of this
Agreement shall continue until all such compensation and benefits are paid to Executive in full.

(c) ADJUSTMENT TO CERTAIN SUBPARAGRAPH (b) COMPENSATION AND BENEFITS. In the event the
Executive suffers a Disability during the remaining term of this Agreement following the Date of
Termination, STWA’s obligation to pay or fund any disability insurance premiums on his behalf shall
be suspended while his Disability continues, provided the cessation of payment or funding does not
result in the termination of disability benefits. Any amounts described in Paragraph 6(b) and
otherwise payable under Subparagraph 11(b) shall be reduced (but not below zero) by the dollar
amount of disability benefits received by him pursuant to plans or policies funded, directly at its
cost, by STWA.

(d) EARLIER CESSATION OF CERTAIN WELFARE BENEFITS. Notwithstanding the provisions of
Subparagraph 11(b), STWA shall not be required to provide, at its cost, the welfare benefits
covered by Paragraph 6(b)(5) after the later of (i) the attainment by the Executive and his spouse
(if any) of age 65, or (ii) the date specified in the relevant plan document for benefit
termination (assuming that he was employed until age 65 or the normal retirement date, if any,
specified in such document).

(e) DEATH DURING REMAINING TERM OF AGREEMENT.

          (1) In the event the Executive dies during the remaining term of this Agreement
following his termination for Good Reason and he is survived by a spouse, the compensation and
benefits required to be paid and provided under Subparagraph (b) shall be unaffected by his death
and shall be paid and provided to her or on her behalf; provided, however, that the extent of her
rights to the accrued benefits described in Paragraph 6(b)(4) shall be determined by reference to
the relevant plan provisions and any elections made under such

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plans; and provided further, that STWA shall not be required to provide continued benefits with
respect to her deceased husband; and provided further, that in no event shall STWA be required to
provide, at its cost, the other welfare benefits described in Paragraph 6(b)(5) to such spouse and
her eligible dependents after the earlier of (i) her death, or (ii) the later of (A) her attainment
of age 65, or (B) the date specified in the relevant plan document for benefit termination
(assuming that the Executive was employed until age 65 or the normal retirement date, if any,
specified in such document).

          (2) In the event the Executive dies during the remaining term of this Agreement following
his termination for Good Reason and he is not survived by a spouse, (i) STWA shall thereafter make
the remaining payments described in Paragraphs 6(b)(1) through 6(b)(3) directly to his estate, (ii)
the extent of the rights of any person to the accrued benefits described in Paragraph 6(b)(4) shall
be determined by reference to the relevant plan provisions and any elections made under such plans,
and (iii) STWA’s obligation to provide the continued benefits described in Paragraph 6(b)(5) shall
terminate.

     12. PROVISIONS RELATING TO EXCISE TAXES.

(a) IN GENERAL. In the event the Executive becomes liable, for any taxable year, for the
payment of an Excise Tax (because of a change in control) with respect to the compensation and
benefits payable by STWA under this Agreement or otherwise, STWA shall make one or more Gross-Up
Payments to the Executive or on his behalf. The amount of any Gross-Up Payment shall be calculated
by a certified public accountant or other tax professional designated jointly by the Executive and
STWA. The provisions of this paragraph shall apply with respect to the Executive’s surviving spouse
or estate, where relevant.

(b) METHODOLOGY FOR CALCULATION OF GROSS-UP PAYMENT. For purposes of determining the amount of
any Gross-Up Payment, the Executive shall be deemed to pay income taxes at the highest federal,
state, and local marginal rates of tax for the calendar year in which the Gross-Up Payment is to be
made, net of the maximum reduction in federal income tax which could be obtained from the deduction
of state and local income taxes. In the event that the Excise Tax is subsequently determined to be
less than the amount taken into account at the time the Gross-Up Payment was made, the Executive
shall repay to STWA, at the time that the amount of such reduction in Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable to the reduction (plus a portion of
the Gross-Up Payment attributable to the Excise Tax and the federal, state, and local income taxes
imposed on the portion of the Gross-Up Payment being repaid by the Executive to the extent such
repayment results in a reduction in Excise Tax or federal, state, or local income tax), plus
interest on the amount of such repayment. Such interest shall be calculated by using the rate in
effect under Section 1274(d)(1) of the IRC, on the date the Gross-Up Payment was made, for debt
instruments with a term equal to the period of time which has elapsed from the date the Gross-Up
Payment was made to the date of repayment. In the event that the Excise Tax is subsequently
determined to exceed the amount taken into account at the time the Gross-Up Payment was made
(including by reason of any payment the existence or amount of which could not be determined at the
time of the Gross-Up Payment), STWA shall make an additional Gross-Up Payment with respect to the
excess at the

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time the amount thereof is finally determined, plus interest calculated in a manner similar to that
described in the preceding sentence.

(c) TIME OF PAYMENT. Any Gross-Up Payment provided for herein shall be paid not later than the
30th day following the payment of any compensation or the provision of any benefit which causes
such payment to be made; provided, however, that if the amount of such payment cannot be finally
determined on or before such day, STWA shall pay on such day an estimate of the minimum amount of
such payment and shall pay the remainder of such payment (together with interest calculated in a
manner similar to that described in Subparagraph 12(b)) as soon as the amount thereof can be
determined. In the event that the amount of an estimated payment exceeds the amount subsequently
determined to have been due, such excess shall constitute a loan by STWA to the Executive, payable
on the 30th day after demand by STWA (together with interest calculated in a manner similar to that
described in Subparagraph (b)).

(d) OTHER ARRANGEMENTS. Notwithstanding the provisions of this paragraph to the contrary, the
actual amounts payable hereunder as Gross-Up Payments shall be coordinated with any similar amounts
paid to the Executive under any other contract, plan, or arrangement.

     13. FEES AND EXPENSES OF THE EXECUTIVE. After a Change in Control and except as provided
in the following sentence, STWA shall pay, within 30 days following demand by the Executive, all
legal, accounting, actuarial, and related fees and expenses incurred by him in connection with the
enforcement of this Agreement. An arbitration panel or a court of competent jurisdiction shall be
empowered to deny payment to the Executive of such fees and expenses only if it determines that he
instituted a proceeding hereunder, or otherwise acted, in bad faith.

     14. REDUCTION FOR COMPENSATION AND BENEFITS RECEIVED UNDER STWA SEVERANCE POLICY, ETC.
Notwithstanding anything herein to the contrary, in the event the Executive, his surviving spouse,
or any other person becomes entitled to continued compensation and benefits hereunder by reason of
the Executive’s termination of employment and, in addition, compensation or similar benefits are
payable under a severance policy, program or arrangement maintained by STWA (other than retirement
plans), then the compensation or benefits otherwise payable hereunder shall be reduced by the
compensation or benefits provided under such severance policy, program or arrangement.

     15. MITIGATION. The Executive shall not be required to mitigate the amount of any
compensation or benefits which may become payable hereunder by reason of his termination by seeking
other employment or otherwise, nor, except as otherwise provided in the following sentence or
elsewhere herein, shall the amount of any such compensation or benefits be reduced by any
compensation or benefits received by the Executive as the result of his employment by another
employer. Notwithstanding anything in this Agreement to the contrary, STWA’s obligation to provide
any medical and dental benefits hereunder may be suspended, with the written concurrence of the
Executive or, if applicable, his surviving spouse during any period of time that such benefits are
being provided by reason of his or her employment.

12

 

     16. FUNDING OF COMPENSATION AND BENEFITS; ACCELERATION OF CERTAIN PAYMENTS.

(a) GRANTOR TRUST. In the event (i) the Executive’s employment is terminated without Cause or
he terminates his employment for Good Reason, and (ii) and a Change in Control has occurred as of
the Date of Termination or occurs thereafter, the Executive shall have the right to require STWA to
establish a grantor trust (taxable to STWA) and fund such trust, on an actuarially sound basis, to
provide the compensation and benefits to which he is entitled hereunder, other than those which may
be paid pursuant to the provisions of Subparagraph 16(c). The specific terms of such trust shall be
as agreed to by the parties in good faith; provided, however, that the trustee shall be a financial
institution independent of STWA; and provided further, that in no event shall STWA be entitled to
withdraw funds from the trust for its benefit, or otherwise voluntarily assign or alienate such
funds, until such time as all compensation and benefits required hereunder are paid and provided.
The determination of the extent of required funding, including any supplemental funding in the
event of adverse investment performance of trust assets, shall be made by an actuary or a certified
public accountant retained by each party. To the extent such professionals cannot agree on the
proper level of funding, they shall select a third such professional whose determination shall be
binding upon the parties. Notwithstanding the foregoing, STWA shall remain liable for all
compensation and benefits required to be paid or provided hereunder.

(b) ALTERNATE SECURITY. In lieu of the right given to the Executive under Subparagraph (a), he
shall have the right under such circumstances to require that STWA provide (i) an irrevocable
standby letter of credit issued by a financial institution other than STWA or any Subsidiary of
STWA with a senior debt credit rating of “A” or better by Moody’s Investors Service or Standard &
Poor’s Corporation, or (ii) other security reasonably acceptable to him, to secure the payment of
such compensation and benefits.

(c) ACCELERATED PAYMENT OF PRESENT VALUE OF CERTAIN COMPENSATION. In the event (i) the
Executive’s employment is terminated without Cause or he terminates his employment for Good Reason,
and (ii) a Change in Control has occurred as of the Date of Termination or occurs thereafter, the
Executive shall have the continuing right to demand that the present value of the remaining
payments described in Paragraphs 6(b)(1) through (3), and payable by reason of the provisions of
Paragraph 10 or 11 (as the case may be), be paid to him in one lump sum within 30 days after the
date written demand is given. For purposes of calculating the present value of such payments, a
discount factor shall be applied to each such payment which is equal to the relevant applicable
federal rate in effect on the date written demand is given by him, determined by reference to the
period of time between the date of such notice and the scheduled time such payment would otherwise
be made. In the event any payment described in Paragraphs 6(b)(1) through (3) is not yet
determinable on the date written demand is made, the other payments shall nonetheless be made as
provided above; and the undetermined payment shall be made within 30 days after it becomes
determinable, calculated as provided in the preceding sentence but by treating the date on which
the payment becomes determinable as the date of written notice. Nothing in this subparagraph shall
be construed as affecting the Executive’s right to one or more Gross-Up Payments in accordance with
the provisions of Paragraph 12; and a Gross-Up Payment (if applicable) will be calculated and made

13

 

with any payment made under this subparagraph, as well as any other Gross-Up Payments that may be
required hereunder at a subsequent date.

     17. WITHHOLDING TAXES. All compensation and benefits provided for herein shall, to the
extent required by law, be subject to federal, state, and local tax withholding.

     18. CONFIDENTIAL INFORMATION. The Executive agrees that subsequent to his employment with
STWA, he will not, at any time, communicate or disclose to any unauthorized person, without the
written consent of the STWA, any proprietary or other confidential information concerning STWA or
any Subsidiary of STWA; provided, however, that the obligations under this paragraph shall not
apply to the extent that such matters (i) are disclosed in circumstances where the Executive is
legally obligated to do so, or (ii) become generally known to and available for use by the public
otherwise than by his wrongful act or omission; and provided further, that he may disclose any
knowledge of insurance, financial, legal and economic principles, concepts and ideas which are not
solely and exclusively derived from the business plans and activities of STWA. The Executive shall
execute and deliver to STWA such nondisclosure and confidentiality agreements as STWA shall adopt
from time to time during the term hereof.

     19. COVENANT NOT TO SOLICIT. During his employment and for period of 12 months
thereafter, the Executive shall not, whether on his own behalf or on behalf of any other individual
or business entity, solicit, endeavor to entice away from STWA, a Subsidiary or any affiliated
company, or otherwise interfere with the relationship of STWA, a Subsidiary or any affiliated
company with any person who is, or was within the then most recent 12 month period, an employee or
associate thereof; provided, however, that this subparagraph shall not apply following the
occurrence of a Change in Control.

     20. ARBITRATION. To the extent permitted by applicable law, any controversy or dispute
arising out of or relating to this Agreement, or any alleged breach hereof, shall be settled by
arbitration in Los Angeles, California in accordance with the commercial rules of the American
Arbitration Association then in existence (to the extent such rules are not inconsistent with the
provisions of this Agreement), it being understood and agreed that the arbitration panel shall
consist of three individuals acceptable to the parties hereto. In the event that the parties cannot
agree on three arbitrators within 20 days following receipt by one party of a demand for
arbitration from another party, then the Executive and STWA shall each designate one arbitrator and
the two arbitrators selected shall select the third arbitrator. The arbitration panel so selected
shall convene a hearing no later than 90 days following the selection of the panel. The arbitration
award shall be final and binding upon the parties, and judgment may be entered thereon in the
California Superior Court or in any other court of competent jurisdiction.

     21. ADDITIONAL EQUITABLE REMEDY. The Executive acknowledges and agrees that STWA’s remedy
at law for a breach or a threatened breach of the provisions of Paragraphs 18 and 19 would be
inadequate; and, in recognition of this fact and notwithstanding the provisions of Paragraph 20, in
the event of such a breach or threatened breach by him, it is agreed that STWA shall be entitled to
request equitable relief in the form of specific

14

 

performance, temporary restraining order, temporary or permanent injunction, or any other equitable
remedy which may then be available. Nothing in this paragraph shall be construed as prohibiting
STWA from pursuing any other remedy available under this Agreement for such a breach or threatened
breach.

     22. RELATED AGREEMENTS. Except as may otherwise be provided herein, to the extent that
any provision of any other agreement between STWA and the Executive shall limit, qualify,
duplicate, or be inconsistent with any provision of this Agreement, the provision in this Agreement
shall control and such provision of such other agreement shall be deemed to have been superseded,
and to be of no force or effect, as if such other agreement had been formally amended to the extent
necessary to accomplish such purpose.

     23. NO EFFECT ON OTHER RIGHTS. Except as otherwise specifically provided herein, nothing
contained in this Agreement shall be construed as adversely affecting any rights the Executive may
have under any agreement, plan, policy or arrangement to the extent any such right is not
inconsistent with the provisions hereof.

     24. EXCLUSIVE RIGHTS AND REMEDY. Except for any explicit rights and remedies the
Executive may have under any other contract, plan or arrangement with STWA, the compensation and
benefits payable hereunder and the remedy for enforcement thereof shall constitute his exclusive
rights and remedy in the event of his termination of employment.

     25. INDEMNIFICATION. In addition to, and not in limitation of, the provisions of the
Certificate of Incorporation and Bylaws of STWA, STWA hereby agrees to indemnify, save and hold
harmless the Executive from and against all claims, loss, cost, expense or liability of every kind
and nature arising out of performance of his duties, other than those arising out of his breach of
this Agreement or his gross negligence, recklessness or willful misconduct, to the fullest extent
permitted by applicable law.

     26. NOTICES. Any notice required or permitted under this Agreement shall be sufficient if
it is in writing and shall be deemed given (i) at the time of personal delivery to the addressee,
or (ii) at the time sent certified mail, with return receipt requested, addressed as follows:

	 	 	 	 	 
	 

	 	If to the Executive:
	 	Bruce McKinnon

5125 Lankershim Boulevard

North Hollywood, CA 91601
	 
	 	 	 	 
	 

	 	If to STWA
	 	5125 Lankershim Boulevard

North Hollywood, CA 91601

Attention: Chairman of the Board of Directors

The name or address of any addressee may be changed at any time and from time to
time by notice similarly given.

15

 

     27. NO WAIVER. The failure by any party to this Agreement at any time or times hereafter
to require strict performance by any other party of any of the provisions, terms, or conditions
contained in this Agreement shall not waive, affect, or diminish any right of the first party at
any time or times thereafter to demand strict performance therewith and with any other provision,
term, or condition contained in this Agreement. Any actual waiver of a provision, term, or
condition contained in this Agreement shall not constitute a waiver of any other provision, term,
or condition herein, whether prior or subsequent to such actual waiver and whether of the same or a
different type. The failure of STWA to promptly terminate the Executive’s employment for Cause or
the Executive to promptly terminate his employment for Good Reason shall not be construed as a
waiver of the right of termination, and such right may be exercised at any time following the
occurrence of the event giving rise to such right.

     28. SURVIVAL. Notwithstanding the nominal termination of this Agreement and the
Executive’s employment hereunder, the provisions hereof which specify continuing obligations,
compensation and benefits, and rights (including the otherwise applicable term hereof) shall remain
in effect until such time as all such obligations are discharged, all such compensation and
benefits are received, and no party or beneficiary has any remaining actual or contingent rights
hereunder.

     29. SEVERABILITY. In the event any provision in this Agreement shall be held illegal or
invalid for any reason, such illegal or invalid provision shall not affect the remaining provisions
hereof, and this Agreement shall be construed, administered and enforced as though such illegal or
invalid provision were not contained herein.

     30. BINDING EFFECT AND BENEFIT. The provisions of this Agreement shall be binding upon
and shall inure to the benefit of the successors and assigns of STWA and the executors, personal
representatives, surviving spouse, heirs, devisees, and legatees of the Executive.

     31. ENTIRE AGREEMENT. This Agreement embodies the entire agreement among the parties with
respect to the subject matter hereof, and it supersedes all prior discussions and oral
understandings of the parties with respect thereto.

     32. NO ASSIGNMENT. This Agreement, and the benefits and obligations hereunder, shall not
be assignable by any party hereto except by operation of law.

     33. NO ATTACHMENT. Except as otherwise provided by law, no right to receive compensation
or benefits under this Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to set off, execution, attachment,
levy, or similar process, and any attempt, voluntary or involuntary, to effect any such action
shall be null and void.

     34. CAPTIONS. The captions of the several paragraphs and subparagraphs of this Agreement
have been inserted for convenience of reference only. They constitute no part of this Agreement and
are not to be considered in the construction hereof.

16

 

     35. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of
which shall be deemed one and the same instrument which may be sufficiently evidenced by any one
counterpart.

     36. NUMBER. Wherever any words are used herein in the singular form, they shall be
construed as though they were used in the plural form, as the context requires, and vice versa.

     37. APPLICABLE LAW. Except to the extent preempted by federal law, the provisions of this
Agreement shall be construed, administered, and enforced in accordance with the domestic internal
law of the State of California without reference to its laws regarding conflict of laws.

     IN WITNESS WHEREOF, the parties have executed this Agreement, or caused it to be executed, as
of the date first above written.

	 	 	 	 	 	 	 
	 	 	/s/ BRUCE MCKINNON	 	 
	 	 	 	 	 
	 	 	Bruce McKinnon	 	 
	 
	 	 	 	 	 	 
	 	 	SAVE THE WORLD AIR, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ JOSEPH HELLEIS 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Joseph Helleis, Chairman of the Board	 	 

17

 

GLOSSARY

“BOARD OF DIRECTORS” means the board of directors of the relevant
corporation.

“CAUSE” means (i) a documented repeated and willful failure by the
Executive to perform his duties, but only after written demand and only
if termination is effected by action taken by a vote of (A) prior to a
Change in Control, at least a majority of the directors of STWA then in
office, or (B) after a Change in Control, at least 80% of the
non-officer directors of STWA then in office, (ii) his final conviction
of a felony, (iii) conduct by him which constitutes moral turpitude
which is directly and materially injurious to STWA or any Material
Subsidiary, (iv) willful material violation of corporate policy, or (v)
the issuance by the regulator of STWA or any Subsidiary or affiliated
company of an unappealable order to the effect that he be permanently
discharged.

For purposes of this definition, no act or failure to act on the part
of the Executive shall be considered “willful” unless done or omitted
not in good faith and without reasonable belief that the action or
omission was in the best interest of STWA or any of its Subsidiaries or
affiliated companies.

“CHANGE IN CONTROL” means the occurrence of any of the following
events:

     (a) any Person (except (i) STWA or any Subsidiary or
prior affiliate of STWA, or (ii) any Employee Benefit Plan (or any
trust forming a part thereof) maintained by STWA or any Subsidiary or
prior affiliate of STWA) is or becomes the beneficial owner, directly
or indirectly, of STWA’s securities representing 19.9% or more of the
combined voting power of STWA’s then outstanding securities, or 50.1%
or more of the combined voting power of a Material Subsidiary’s then
outstanding securities, other than pursuant to a transaction described
in Clause (c);

     (b) there occurs a sale, exchange, transfer or other
disposition of substantially all of the assets of STWA or a Material
Subsidiary to another entity, except to an entity controlled directly
or indirectly by STWA;

     (c) there occurs a merger, consolidation, share exchange,
division or other reorganization of or relating to STWA, unless—

          (i) the shareholders of STWA immediately before

18

 

such merger, consolidation, share exchange, division or reorganization
own, directly or indirectly, immediately thereafter at least two-thirds
of the combined voting power of the outstanding voting securities of
the Surviving Company in substantially the same proportion as their
ownership of the voting securities immediately before such merger,
consolidation, share exchange, division or reorganization; and

          (ii) the individuals who, immediately before such
merger, consolidation, share exchange, division or reorganization, are
members of the Incumbent Board continue to constitute at least
two-thirds of the board of directors of the Surviving Company;
provided, however, that if the election, or nomination for election by
STWA’s shareholders, of any new director was approved by a vote of at
least two-thirds of the Incumbent Board, such director shall, for the
purposes hereof, be considered a member of the Incumbent Board; and
provided further, however, that no individual shall be considered a
member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened Election Contest
or Proxy Contest, including by reason of any agreement intended to avoid
or settle any Election Contest or Proxy Contest; and

          (iii) no Person (except (A) STWA or any Subsidiary
or prior affiliate of STWA, (B) any Employee Benefit Plan (or any trust
forming a part thereof) maintained by STWA or any Subsidiary or prior
affiliate of STWA, or (C) the Surviving Company or any Subsidiary or
prior affiliate of the Surviving Company) has beneficial ownership of
19.9% or more of the combined voting power of the Surviving Company’s
outstanding voting securities immediately following such merger,
consolidation, share exchange, division or reorganization;

     (d) a plan of liquidation or dissolution of STWA, other
than pursuant to bankruptcy or insolvency laws, is adopted; or

     (e) during any period of two consecutive years,
individuals who, at the beginning of such period, constituted the Board
of Directors of STWA cease for any reason to constitute at least a
majority of such Board of Directors, unless the election, or the
nomination for election by STWA’s shareholders, of each new director
was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period;
provided, however, that no individual shall be considered a member of
the Board of Directors of STWA at the beginning of such period if such
individual initially assumed office as a result of either an actual or
threatened Election Contest or Proxy Contest, including by reason of
any agreement intended to avoid or settle any Election Contest or Proxy
Contest.

19

 

Notwithstanding the foregoing, a Change in Control shall not be deemed
to have occurred if a Person becomes the beneficial owner, directly or
indirectly, of securities representing 19.9% or more of the combined
voting power of STWA’s then outstanding securities solely as a result
of an acquisition by STWA of its voting securities which, by reducing
the number of shares outstanding, increases the proportionate number of
shares beneficially owned by such Person; provided, however, that if a
Person becomes a beneficial owner of 19.9% or more of the combined
voting power of STWA’s then outstanding securities by reason of share
repurchases by STWA and thereafter becomes the beneficial owner,
directly or indirectly, of any additional voting securities of STWA,
then a Change in Control shall be deemed to have occurred with respect
to such Person under Clause (a).

Notwithstanding anything contained herein to the contrary, if the
Executive’s employment is terminated and he reasonably demonstrates
that such termination (i) was at the request of a third party who has
indicated an intention of taking steps reasonably calculated to effect
a Change in Control and who effects a Change in Control, or (ii)
otherwise occurred in connection with, or in anticipation of, a Change
in Control which actually occurs, then for all purposes hereof, a
Change in Control shall be deemed to have occurred on the day
immediately prior to the date of such termination of his employment.

“DATE OF TERMINATION” means:

     (a) if the Executive’s employment is terminated for
Disability, 30 days after the Notice of Termination is given (provided
that he shall not have returned to the performance of his duties on a
full-time basis during such 30-day period);

     (b) if the Executive’s employment terminates by reason of
his death, the date of his death;

     (c) if the Executive’s employment is terminated by STWA
for Cause, the date of termination specified in the Notice of
Termination and determined in accordance with Section 8(a);

     (d) if the Executive’s employment is terminated by him
without Good Reason, the date of termination specified in the Notice of
Termination and determined in accordance with Section 9(a);

     (e) if the Executive’s employment is terminated by STWA
for any reason other than for Disability or Cause, the date specified
in the Notice of Termination and determined in accordance with
Section 10(a); or

20

 

     (f) if the Executive’s employment is terminated by him
for Good Reason, the termination date specified in the Notice of
Termination and determined in accordance with Section 11(a);

provided, however that the Date of Termination shall mean the actual
date of termination in the event the parties mutually agree to a date
other than that described above.

“DEFINED BENEFIT PLAN” has the meaning ascribed to such term in Section
3(35) of ERISA.

“DEFINED CONTRIBUTION PLAN” has the meaning ascribed to such term in
Section 3(34) of ERISA.

“DISABILITY” has the meaning ascribed to the term “permanent and total
disability” in Section 22(e)(3) of the IRC.

“ELECTION CONTEST” means a solicitation with respect to the election or
removal of directors that, if STWA was subject to the provisions of the
1934 Act, would be subject to the provisions of Rule 14a-11 of the 1934
Act.

“EMPLOYEE BENEFIT PLAN” has the meaning ascribed to such term in
Section 3(3) of ERISA.

“ERISA” means the Employee Retirement Income Security Act of 1974, as
amended and as the same may be amended from time to time.

“EXCISE TAX” means the tax imposed by Section 4999 of the IRC (or any
similar tax that may hereafter be imposed by federal, state or local
law).

“EXECUTIVE” means NAME OF EXECUTIVE, an individual residing in ADDRESS,
California.

“GOOD REASON” means:

     (a) prior to a Change in Control—

(i) the Executive’s demotion to a lesser
position, or any material diminution in his duties or
responsibilities;

(ii) a reduction in the Executive’s base

21

 

compensation, other than a reduction which is
proportionate to a company-wide reduction in
executive pay;

(iii) a failure to increase the Executive’s base
compensation, consistent with his performance rating,
within 24 months since the last increase, other than
similar treatment on a company-wide basis for
executives or a voluntary deferral by him of an
increase; or

(iv) any purported termination of the Executive’s
employment which is not in accordance with the terms
of this Agreement; and

     (b) after a Change in Control—

(i) a change in the Executive’s status or
position, or any material diminution in his duties or
responsibilities;

(ii) any increase in the Executive’s duties
inconsistent with his position;

(iii) any reduction in the Executive’s base
compensation;

(iv) a failure to increase the Executive’s base
compensation, consistent with his performance review,
within 12 months of the last increase; or a failure
to consider Executive for an increase within 12
months of his last performance review;

(v) a failure to continue in effect any Employee
Benefit Plan in which the Executive participates,
including (whether or not they constitute Employee
Benefit Plans) incentive bonus, stock option, or
other qualified or nonqualified plans of deferred
compensation (A) other than as a result of the normal
expiration of such a plan, or (B) unless such plan is
merged or consolidated into, or replaced with, a plan
with benefits which are of equal or greater value;

(vi) requiring the Executive to be based anywhere
other than the county where his principal office was

22

 

located immediately prior to the Change in Control;

(vii) refusal to allow the Executive to attend to
matters or engage in activities in which he was
permitted to engage prior to the Change in Control;

(viii) delivery to the Executive of a Notice of
Nonextension;

(ix) failure to secure the affirmation by a
Successor, within three business days prior to a
Change in Control, of this Agreement and its or
STWA’s continuing obligations hereunder (or where
there is not at least three business days advance
notice that a Person may become a Successor, within
one business day after having notice that such Person
may become or has become a Successor); or

(x) any purported termination of the Executive’s
employment which is not in accordance with the terms
of this Agreement.

Notwithstanding anything herein to the contrary, at the election of the
Executive, beginning with the 181st day following a Change in Control and
continuing through the first anniversary of such Change in Control, he may
terminate his employment for any reason or no reason and such termination will
be treated as having occurred for Good Reason.

     “GROSS-UP PAYMENT” means an additional payment to be made to or on
behalf of the Executive in an amount such that the net amount retained by him,
after deduction of any Excise Tax on the Total Payments and any federal, state,
and local income tax and Excise Tax on such additional payment, equals the Total
Payments.

     “INCUMBENT BOARD” means the Board of Directors of STWA as constituted
at any relevant time.

     “IRC” means the Internal Revenue Code of 1986, as amended and as the
same may be amended from time to time.

     “MATERIAL SUBSIDIARY” means a Subsidiary whose net worth, determined
under generally accepted accounting principles, at the fiscal year end
immediately prior to any relevant time is at least 25% of the aggregate net
worth of the controlled group of corporations of which STWA is parent.

     “1934 ACT” means the Securities Exchange Act of 1934, as amended and as

23

 

the same may be amended from time to time.

     “NOTICE OF NON-EXTENSION” means a written notice delivered to or by the
Executive which advises that the Agreement will not be extended as provided in
Paragraph 3.

     “NOTICE OF TERMINATION” means a written notice that (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive’s employment under the provision so indicated, and
(iii) gives the required advance notice of termination.

  “PERSON” has the same meaning as such term has for purposes of Sections
13(d) and 14(d) of the 1934 Act.

     “PROXY CONTEST” means the solicitation of proxies or consents by or on
behalf of a Person other than the Board of Directors of STWA.

     “SUBSIDIARY” means any business entity of which a majority of its
voting power or its equity securities or equity interests is owned, directly or
indirectly by STWA.

     “SUCCESSOR” means any Person that succeeds to, or has the practical
ability to control (either immediately or with the passage of time), STWA’s
business directly, by merger or consolidation, or indirectly, by purchase of
STWA’s voting securities or all or substantially all of its assets.

     “SURVIVING COMPANY” means the business entity that is a resulting
company following a merger, consolidation, share exchange, division or other
reorganization of or relating to STWA.

     “TOTAL PAYMENTS” means the compensation and benefits that become
payable under the Agreement or otherwise (and which may be subject to an Excise
Tax) by reason of the Executive’s termination of employment, less the federal,
state and local income tax (but not any Excise Tax) on such compensation and
benefits, in each case determined without regard to any Gross-Up Payments that
may also be made.

     “WELFARE BENEFIT PLAN” has the meaning ascribed to the term “employee
welfare benefit plan” in Section 3(1) of ERISA. For purposes of determining the Executive’s or his
dependents’ right to continued welfare benefits hereunder
following his termination of employment, the meaning of such term shall include any retiree health
plan maintained by STWA at any time after the relevant Date
of Termination, notwithstanding the fact that the Executive is not a participant
therein prior to such date.

24exv10w33

 

Exhibit 10.33

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

          This
Amended and Restated Employment Agreement (this “Agreement”) is made and entered
into as of the 1st day of March, 2006 by and between SAVE THE WORLD AIR, INC., a Nevada corporation
(“STWA”) and John Richard Bautista, III (the “Executive”).

RECITALS

     A. STWA and the Executive are parties to that certain Employment Agreement dated as of the
1st day of July, 2005 (the “Original Agreement”), which sets forth the terms and
conditions upon which STWA employed the Executive as its Vice President of Operations for a term to
and including December 31, 2005.

     B. The term of the Original Agreement was extended for a period of one year, to and including
December 31, 2006 in accordance with the terms of the Agreement.

     C. STWA and the Executive desire to amend the Original Agreement in certain respects,
including to promote the Executive to the position of Executive Vice President of Operations of
STWA effective on and as of February 21, 2006 and to increase the annual base compensation payable
to executive from $120,000 to $150,000 effective on and as of March 1, 2006.

     D. In order to memorialize the amendments to the Original Agreement described above, STWA and
the Executive have agreed to amend and restate the Original Agreement in its entirety.

AGREEMENT

          NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements
of the parties contained herein, and intending to be legally bound hereby, the parties hereto agree
as follows:

     1. DEFINITIONS AND SPECIAL PROVISIONS. Each capitalized word and
term used herein shall have the meaning ascribed to it in the glossary appended hereto. Such
glossary is incorporated herein by reference and made a part hereof.

     2. EMPLOYMENT. STWA hereby agrees to employ the Executive, and the Executive hereby
agrees to accept employment with STWA, on the terms and conditions set forth herein.

     3. TERM OF AGREEMENT. The Executive’s employment under the Original Agreement shall
commence on July 1, 2005 and, except as otherwise provided herein, shall continue until December
31, 2005; provided, however, that commencing on December 31, 2005

 

 

and each anniversary thereafter, the term of this Agreement shall automatically be extended for one
additional year beyond the term otherwise established unless, prior to such date, STWA or the
Executive shall have given a Notice of Non-Extension. The parties hereto have previously extended
the original term of this Agreement until December 31, 2006 and effective on and as of the date of
this Agreement hereby extend the term of this Agreement to December 31, 2007, subject to further
extension as provided for in the preceding sentence.

     4. POSITION AND DUTIES. For the period from July 1, 2005 to February 20, 2006, the
Executive shall serve as Vice President of Operations of STWA and, effective February 21, 2006, he
shall serve as Executive Vice President of Operations of STWA. In such capacities he shall have
such responsibilities, duties and authority as may, from time to time, be generally associated with
such positions and as may be specifically directed by the Board of Directors of STWA from time to
time during the term of this Agreement, including any extensions thereof. In addition, the
Executive shall serve in such capacity, with respect to each Subsidiary or affiliated company, as
the Board of Directors of each such Subsidiary or affiliated company shall designate from time to
time. During the term of this Agreement, he shall devote substantially all of his working time and
efforts to the business and affairs of STWA, the Subsidiaries and affiliated companies; provided,
however, that nothing herein shall be construed as precluding him from devoting a reasonable amount
of time to civic, charitable, trade association and similar activities that do not represent
conflicts and are not otherwise in any way detrimental to STWA.

     5. COMPENSATION AND RELATED MATTERS.

(a) BASE COMPENSATION. During the period of the Executive’s employment hereunder, STWA
shall pay to him annual base compensation for the period from
July 1, 2005 to February 28, 2006 of
$120,000. STWA shall pay to the Executive the annual base
compensation of $150,000 for the period
commencing March 1, 2006 and continuing thereafter during the term of this Agreement. The Board(s) of Directors of STWA shall
periodically review the Executive’s employment performance, in accordance with policies generally
in effect from time to time, for possible merit or cost-of-living increases in such base
compensation. Except for a reduction, should such reduction occur, which is proportionate to a
company-wide reduction in executive pay, the annual base compensation paid to the Executive in any
period shall not be less than the annual base compensation paid to him in any prior period. The
frequency and manner of payment of such base compensation shall be in accordance with STWA’s
executive payroll practices from time to time in effect. Nothing herein shall be construed as
precluding the Executive from entering into any salary reduction or deferral plan or arrangement
during the term of this Agreement; provided, however, that his base compensation shall be
determined without regard to any such salary reduction or deferral for purposes of calculating the
amount of any compensation and benefits to which he or his surviving spouse may be entitled under
Paragraph 6, 7, 10, or 11 hereof following his termination of employment. The amounts set forth in
the first sentence of this subparagraph 5(a) shall be pro rated to the extent such period is less
than a year.

(b) INCENTIVE COMPENSATION. During the period of the Executive’s employment hereunder, he
shall be entitled to participate in all incentive plans, stock option plans, and similar

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arrangements as may be in effect and maintained by STWA for executive officers on a basis and at
award levels consistent and commensurate with his position and duties hereunder.

(c) EMPLOYEE BENEFIT PLANS AND OTHER PLANS OR ARRANGEMENTS. The Executive shall be
entitled to participate in all Employee Benefit Plans of STWA that either, are in effect at present
or that may be adopted in the future. In addition, he shall be entitled to participate in and enjoy
any other plans and arrangements which provide for sick leave, vacation, sabbatical, or personal
days, club memberships and dues, education payment or reimbursement, business-related seminars, and
similar fringe benefits provided to or for the executive officers of STWA from time to time.
Notwithstanding the foregoing, Executive shall be entitled to at least four (4) weeks vacation per
calendar year during each year of employment. Such vacation shall be prorated during the year 2005
based on the date of this Agreement.

(d) EXPENSES. During the period of the Executive’s employment hereunder, he shall be entitled
to receive prompt reimbursement for all reasonable and customary expenses, including transportation
expenses, incurred by him in performing services hereunder in accordance with the general policies
and procedures established by STWA.

(e) AUTOMOBILE. STWA shall provide for a monthly automobile allowance of $900.00. The company
may, at its discretion, provide an automobile, mutually acceptable, to the Executive for his
exclusive use.

(f) MEDICAL INSURANCE. Notwithstanding the provisions of Paragraph 5(c) hereof, the Executive
shall not be entitled to participate in any group health insurance plan which may, from time to
time, be offered to employees of STWA; provided however, that commencing March 1,
2006 and continuing during the term of this Agreement, STWA will reimburse the Executive for his
out-of-pocket insurance premiums incurred in connection with maintaining health insurance for
himself, his spouse and their minor-aged children, which out-of-pocket cost was, at March 1, 2006,
$1,400 per month.

     6. TERMINATION BY REASON OF DISABILITY.

(a) IN GENERAL. In the event the Executive becomes unable to perform his duties on a full-time
basis by reason of the occurrence of his Disability and, within 30 days after a Notice of
Termination is given, he shall not have returned to the full-time performance of such duties, his
employment may be terminated by STWA.

(b) COMPENSATION AND BENEFITS. In the event of the termination of the Executive’s employment
pursuant to Subparagraph 6(a), the term of this Agreement shall continue for one year after the
Date of Termination, and STWA shall pay or provide the compensation and benefits set forth below:

          (1) The Executive shall be paid an amount per annum equal to the greater of (i) his
highest annual base compensation (including the car allowance provided for in subparagraph 5(e))
received during one of the two calendar years immediately preceding the calendar year in which the
Date of Termination occurs, or (ii) his base compensation (including

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the car allowance provided for in subparagraph 5(e)) in effect immediately prior to the Date of
Termination (or prior to any reduction which entitled him to terminate his employment for Good
Reason), over a period of one year beginning with such Date of Termination. The frequency and
manner of payment of such amounts shall be in accordance with STWA’s executive payroll
practices from time to time in effect.

          (2) The Executive shall be paid an amount equal to the higher of the aggregate bonuses
paid to him with respect to one of the two years immediately preceding the year in which the Date
of Termination occurs. Such amount shall be paid to him in cash on the first anniversary date of
the Date of Termination.

          (3) The Executive shall be paid an amount equal to the highest annual contribution made
on his behalf (other than his own salary reduction contributions) to each tax-qualified and
non-qualified Defined Contribution Plan of STWA with respect to the year in
which the Date of Termination occurs or one of the two years immediately preceding such year. The
amount separately determined for each such plan shall be aggregated and shall be paid to him in
cash on the first anniversary date of the Date of Termination.

          (4) The Executive shall accrue benefits equal to the excess of (i) the aggregate
retirement benefits he would have received under the terms of each tax-qualified and non-qualified
Defined Benefit Plan of STWA as in effect immediately prior to the Date of Termination had he (A)
continued to be employed for one more year, and (B) received (on a pro rated basis, as appropriate)
the greater of (I) the highest compensation taken into account under each such plan with respect to
one of the two years immediately preceding the year in which the Date of Termination occurs, or
(II) his annualized base compensation in effect immediately prior to the Date of Termination (or
prior to any reduction which entitled him to terminate his employment for Good Reason), over (ii)
the retirement benefits he actually receives under such plans. The frequency, manner and extent of
payment of such benefits shall be consistent with the terms of the plans to which they relate and
any elections made thereunder.

          (5) The Executive and his eligible dependents shall be entitled to continue to
participate at the same aggregate benefit levels, for one year and at no out-of-pocket or tax cost
to him, in the Welfare Benefit Plans in which he was a participant immediately prior to the Date of
Termination, to the extent permitted under the terms of such plans and applicable law. To the
extent STWA is unable to provide for continued participation in a Welfare Benefit Plan, it shall
provide an equivalent benefit directly at no out-of-pocket or tax cost to him. For purposes of the
preceding two sentences, STWA shall be deemed to have provided a benefit at no tax cost to him if
it pays an additional amount to him or on his behalf, with respect to those benefits which would
otherwise be nontaxable to him, calculated in a manner consistent with the provisions of Paragraph
12.

(c) ADJUSTMENT TO CERTAIN SUBPARAGRAPH 6(b) COMPENSATION AND BENEFITS. Notwithstanding the
provisions of Subparagraph 6(b)(5), STWA’s obligation to pay or fund any disability insurance
premiums on behalf of the Executive shall be suspended while his Disability continues, provided the
cessation of payment or funding does not result in the termination of disability benefits. Any
amounts otherwise due under Subparagraph (b) shall be

4

 

reduced (but not below zero) by the dollar amount of disability benefits received by him pursuant
to plans or policies funded, directly at its cost, by STWA.

(d) EARLIER CESSATION OF CERTAIN WELFARE BENEFITS. Notwithstanding the provisions of
Subparagraph (b)(5), STWA shall not be required to provide, at its cost, the welfare benefits
covered therein after the later of (i) the attainment by the Executive and his spouse (if any) of
age 65, or (ii) the date specified in the relevant plan document for benefit termination (assuming
that he was employed until age 65 or the normal retirement date, if any, specified in such
document).

(e) DEATH DURING REMAINING TERM OF AGREEMENT.

          (1) In the event the Executive dies during the remaining term of this Agreement following
his termination for Disability and he is survived by a spouse, the compensation and benefits
remaining to be paid and provided under Subparagraph 6(b) shall be unaffected by his death and
shall be paid and provided to her or on her behalf; provided, however, that the extent of her
rights to the accrued benefits described in Subparagraph 6(b)(4) shall be determined by reference
to the relevant plan provisions and any elections made under such plans; and provided further, that
STWA shall not be required to provide continued benefits with respect to her deceased husband; and
provided further, that in no event shall STWA be required to provide, at its cost, the other
welfare benefits described in Subparagraph 6(b)(5) to such spouse and her eligible dependents after
the earlier of (i) her death, or (ii) the later of (A) her attainment of
age 65, or (B) the date specified in the relevant plan document for benefit termination (assuming
that the Executive was employed until age 65 or the normal retirement date, if any, specified in
such document).

          (2) In the event the Executive dies during the remaining term of this Agreement following
his termination for Disability and he is not survived by a spouse, (i) STWA shall thereafter make
the remaining payments described in Subparagraphs 6(b)(1) through 6(b)(3) directly to his estate,
(ii) the extent of the rights of any person to the accrued benefits described in Subparagraph
6(b)(4) shall be determined by reference to the relevant plan provisions and any
elections made under such plans, and (iii) STWA’s obligation to provide continued benefits under
Subparagraph 6(b)(5) shall terminate.

(f) COMPENSATION AND BENEFITS UPON EXPIRATION OF REMAINING TERM OF AGREEMENT. Upon the
expiration of the remaining term of this Agreement following the Executive’s termination for
Disability, and provided his Disability then continues, he shall be entitled to receive the
compensation and benefits provided under the terms of any long-term disability plan of STWA in
effect on the Date of Termination or, if greater, at the expiration of such remaining term. If such
plan exists, such compensation and benefits shall continue until the earlier of (i) his death, or
(ii) the later of (A) his attainment of age 65, or (B) the date specified in the plan document for
benefit termination. To the extent STWA is unable to provide such compensation and benefits under
its long-term disability plan, if any, it shall provide equivalent compensation and benefits
directly at no out-of-pocket or tax cost to him. For purposes of the preceding sentence, STWA shall
be deemed to have provided compensation and benefits at no tax cost to him if it pays an additional
amount to him or on his behalf, with respect to the

5

 

compensation and benefits which would otherwise be nontaxable to him, calculated in a manner
consistent with the provisions of Paragraph 12.

6

 

     7. TERMINATION BY REASON OF DEATH.

(a) COMPENSATION AND BENEFITS TO SURVIVING SPOUSE. In the event the Executive dies while he is
employed under this Agreement and is survived by a spouse, STWA shall pay or provide the
compensation and benefits set forth below:

          (1) The surviving spouse shall be paid an amount equal to the greater of (i) the
Executive’s highest base compensation received during one of the two calendar years immediately
preceding the calendar year in which the Date of Termination occurs, or (ii) his base compensation
in effect immediately prior to the Date of Termination (or prior to any reduction
which entitled him to terminate his employment for Good Reason) for a period of one year,
beginning with such Date of Termination. The frequency and manner of payment of such amounts shall
be in accordance with STWA’s executive payroll practices from time to time
in effect.

          (2) The surviving spouse shall be paid an amount equal to the highest payment made to
Executive under each incentive bonus plan of STWA with respect to one of the two years immediately
preceding the year in which the Date of Termination occurs. Such amount shall be paid in cash to
her within 30 days after the Date of Termination.

          (3) The surviving spouse shall be paid an amount equal to the sum of the highest annual
contribution made on the Executive’s behalf (other than his own salary reduction contributions) to
each tax-qualified and non-qualified Defined Contribution Plan of STWA with respect to the year in
which the Date of Termination occurs or one of the two years immediately preceding such year. Such
amount shall be paid in cash to her within 30 days after the Date of
Termination or within 30 days after such amount can first be determined, whichever is later.

          (4) Subject to the following sentence, the surviving spouse shall be paid benefits
determined by reference to the excess of (i) the aggregate retirement benefits the Executive would
have accrued under the terms of each tax-qualified and non-qualified Defined Benefit Plan as in
effect immediately prior to the Date of Termination, had he (A) continued to be employed for a
period of one year following the Date of Termination, and (B) received
(on a pro rated basis, as appropriate) the greater of (I) the highest compensation taken into
account under each such plan with respect to one of the two years immediately preceding the year in
which the Date of Termination occurs, or (II) his annualized base compensation in effect
immediately prior to the Date of Termination (or prior to any reduction which entitled him to
terminate his employment for Good Reason), over (ii) the retirement benefits actually determined
under such plans. The frequency, manner, and extent of payment of such benefits shall be consistent
with the terms of the plans to which they relate and any elections made thereunder.

          (5) The surviving spouse and her eligible dependents shall be entitled to continue to
participate at the same aggregate benefit levels, for a period of one year following the Date of
Termination and at no out-of-pocket or tax cost to her, in the Welfare Benefit Plans in which the
Executive was a participant immediately prior to the Date of Termination, to the extent permitted
under the terms of such plans and applicable law; provided however, that STWA shall

7

 

not be required to provide continued benefits with respect to her deceased husband; and provided
further, that STWA shall not thereafter be required to provide, at its cost, the other welfare
benefits covered by such plans to such spouse and her eligible dependents after the earlier of (i)
her death, or (ii) the later of (A) her attainment of age 65, or (B) the date specified in the
relevant plan document for benefit termination (assuming the Executive was employed until age 65 or
the normal retirement date, if any, specified in such document). To the extent STWA is unable to
provide for continued participation in a Welfare Benefit Plan as required, it shall provide an
equivalent benefit directly at no out-of-pocket or tax cost to her. For purposes of the preceding
two sentences, STWA shall be deemed to have provided a benefit at no tax cost to her if it pays an
additional amount to her or on her behalf, with respect to those benefits which would otherwise be
nontaxable to her, calculated in a manner consistent with the provisions of Paragraph 12.

(b) COMPENSATION AND BENEFITS TO ESTATE, ETC. In the event the Executive dies while he is
employed under this Agreement and is not survived by a spouse, (i) STWA shall make the payments
described in Subparagraphs (a)(1) through (a)(3) directly to his estate, (ii) the extent of the
rights of any person to the accrued benefits described in Subparagraph (a)(4) shall be determined
by reference to the relevant plan provisions and any elections made under such plans, and (iii)
STWA’s obligation to provide benefits under Subparagraph (a)(5) shall terminate.

     8. TERMINATION BY STWA FOR CAUSE.

(a) IN GENERAL. In the event STWA intends to terminate the Executive’s employment for Cause,
it shall deliver a Notice of Termination to him which specifies a Date of Termination not less than
30 days following the dat of such notice, unless a shorter period of notice is required by the
principal regulator of STWA or any affiliate of STWA.

(b) COMPENSATION. Promptly after the Executive’s termination under Subparagraph 8(a), STWA
shall pay him, in one lump sum, his accrued but unpaid base compensation and vacation compensation
earned through the Date of Termination.

     9. TERMINATION BY THE EXECUTIVE WITHOUT GOOD REASON.

(a) IN GENERAL. In the event the Executive intends to terminate his employment without Good
Reason, he shall deliver a Notice of Termination to STWA which specifies a Date of Termination not
less than (i) 90 days following the date of such notice, if a Change in Control shall not have
occurred, or (ii) 30 days following the date of such notice, if a Change in Control shall have
occurred.

(b) COMPENSATION. Promptly after the Executive’s termination under Subparagraph 9(a), STWA
shall pay him, in one lump sum, his accrued but unpaid base compensation and vacation compensation
earned through the Date of Termination.

8

 

     10. TERMINATION BY STWA WITHOUT DISABILITY OR CAUSE.

(a) IN GENERAL. In the event STWA intends to terminate the Executive’s employment for any
reason other than Disability or Cause, it shall deliver a Notice of Termination to him which
specifies a Date of Termination not less than 90 days following the date of such notice.

(b) COMPENSATION AND BENEFITS DURING REMAINING TERM OF AGREEMENT. In the event of the
termination of the Executive’s employment under Subparagraph (a), STWA shall pay or provide the
compensation and benefits described in Paragraph 6(b), except that all such compensation and
benefits shall be for the remaining term of this Agreement determined in accordance with Section 3
hereof, unless a change in control has occurred prior to such termination of employment, in which
case all such compensation and benefits shall be for a term of three (3) years from the Date of
Termination and the term of this Agreement shall continue until all such compensation and benefits
are paid to Executive in full.

(c) ADJUSTMENT TO CERTAIN SUBPARAGRAPH (b) COMPENSATION AND BENEFITS. In the event the
Executive suffers a Disability during the remaining term of this Agreement following the Date of
Termination, STWA’s obligation to pay or fund any disability insurance premiums on his behalf shall
be suspended while his Disability continues, provided the cessation of payment or funding does not
result in the termination of disability benefits. Any amounts described in Paragraph 6(b) and
otherwise payable under Subparagraph (b) shall be reduced (but not below zero) by the dollar amount
of disability benefits received by him pursuant to plans or policies funded, directly at its cost,
by STWA.

(d) EARLIER CESSATION OF CERTAIN WELFARE BENEFITS. Notwithstanding the provisions of
Subparagraph (b), STWA shall not be required to provide, at its cost, the welfare benefits covered
by Paragraph 6(b)(5) after the later of (i) the attainment by the Executive and his spouse (if any)
of age 65, or (ii) the date specified in the relevant plan document for benefit termination
(assuming that he was employed until age 65 or the normal retirement date, if any, specified in
such document).

(e) DEATH DURING REMAINING TERM OF AGREEMENT.

          (1) In the event the Executive dies during the remaining term of this Agreement following
his termination without Disability or Cause by STWA and he is survived by a spouse, the
compensation and benefits required to be paid and provided under Subparagraph 10(b) shall be
unaffected by his death and shall be paid and provided to her or on her behalf; provided, however,
that the extent of her rights to the accrued benefits described in Paragraph 6(b)(4) shall be
determined by reference to the relevant plan provisions and any elections made under such plans;
and provided further, that STWA shall not be required to provide continued benefits with respect to
her deceased husband; and provided further, that in no event shall STWA be required to provide, at
its cost, the other welfare benefits described in Paragraph 6(b)(5) to such spouse and her eligible
dependents after the earlier of (i) her death, or (ii) the later of (A) her attainment of age 65,
or (B) the date specified in the relevant plan document for benefit termination (assuming that the
Executive was employed until age 65 or the normal retirement date, if any, specified in such
document).

9

 

          (2) In the event the Executive dies during the remaining term of this Agreement following
his termination without Disability or Cause and he is not survived by a spouse, (i) STWA shall
thereafter make the remaining payments described in Paragraphs 6(b)(1) through 6(b)(3) directly to
his estate, (ii) the extent of the rights of any person to the accrued benefits described in
Paragraph 6(b)(4) shall be determined by reference to the relevant plan provisions and any
elections made under such plans, and (iii) STWA’s obligation to provide the continued benefits
described in Paragraph 6(b)(5) shall terminate.

     11. TERMINATION BY THE EXECUTIVE FOR GOOD REASON.

(a) IN GENERAL. In the event the Executive intends to terminate his employment for Good
Reason, he shall deliver a Notice of Termination to STWA which specifies a Date of Termination not
less than 30 days following the date of such notice.

(b) COMPENSATION AND BENEFITS DURING REMAINING TERM OF AGREEMENT. In the event of the
termination of the Executive’s employment under Subparagraph 11(a), STWA shall pay or provide the
compensation and benefits described in Paragraph 6(b), except that all such compensation and
benefits shall be for a term of three (3) years from the Date of Termination and the term of this
Agreement shall continue until all such compensation and benefits are paid to Executive in full.

(c) ADJUSTMENT TO CERTAIN SUBPARAGRAPH (b) COMPENSATION AND BENEFITS. In the event the
Executive suffers a Disability during the remaining term of this Agreement following the Date of
Termination, STWA’s obligation to pay or fund any disability insurance premiums on his behalf shall
be suspended while his Disability continues, provided the cessation of payment or funding does not
result in the termination of disability benefits. Any amounts described in Paragraph 6(b) and
otherwise payable under Subparagraph 11(b) shall be reduced (but not below zero) by the dollar
amount of disability benefits received by him pursuant to plans or policies funded, directly at its
cost, by STWA.

(d) EARLIER CESSATION OF CERTAIN WELFARE BENEFITS. Notwithstanding the provisions of
Subparagraph 11(b), STWA shall not be required to provide, at its cost, the welfare benefits
covered by Paragraph 6(b)(5) after the later of (i) the attainment by the Executive and his spouse
(if any) of age 65, or (ii) the date specified in the relevant plan document for benefit
termination (assuming that he was employed until age 65 or the normal retirement date, if any,
specified in such document).

(e) DEATH DURING REMAINING TERM OF AGREEMENT.

          (1) In the event the Executive dies during the remaining term of this Agreement
following his termination for Good Reason and he is survived by a spouse, the compensation and
benefits required to be paid and provided under Subparagraph (b) shall be unaffected by his death
and shall be paid and provided to her or on her behalf; provided, however, that the extent of her
rights to the accrued benefits described in Paragraph 6(b)(4) shall be determined by reference to
the relevant plan provisions and any elections made under such

10

 

plans; and provided further, that STWA shall not be required to provide continued benefits with
respect to her deceased husband; and provided further, that in no event shall STWA be required to
provide, at its cost, the other welfare benefits described in Paragraph 6(b)(5) to such spouse and
her eligible dependents after the earlier of (i) her death, or (ii) the later of (A) her attainment
of age 65, or (B) the date specified in the relevant plan document for benefit termination
(assuming that the Executive was employed until age 65 or the normal retirement date, if any,
specified in such document).

          (2) In the event the Executive dies during the remaining term of this Agreement following
his termination for Good Reason and he is not survived by a spouse, (i) STWA shall thereafter make
the remaining payments described in Paragraphs 6(b)(1) through 6(b)(3) directly to his estate, (ii)
the extent of the rights of any person to the accrued benefits described in Paragraph 6(b)(4) shall
be determined by reference to the relevant plan provisions and any elections made under such plans,
and (iii) STWA’s obligation to provide the continued benefits described in Paragraph 6(b)(5) shall
terminate.

     12. PROVISIONS RELATING TO EXCISE TAXES.

(a) IN GENERAL. In the event the Executive becomes liable, for any taxable year, for the
payment of an Excise Tax (because of a change in control) with respect to the compensation and
benefits payable by STWA under this Agreement or otherwise, STWA shall make one or more Gross-Up
Payments to the Executive or on his behalf. The amount of any Gross-Up Payment shall be calculated
by a certified public accountant or other tax professional designated jointly by the Executive and
STWA. The provisions of this paragraph shall apply with respect to the Executive’s surviving spouse
or estate, where relevant.

(b) METHODOLOGY FOR CALCULATION OF GROSS-UP PAYMENT. For purposes of determining the amount of
any Gross-Up Payment, the Executive shall be deemed to pay income taxes at the highest federal,
state, and local marginal rates of tax for the calendar year in which the Gross-Up Payment is to be
made, net of the maximum reduction in federal income tax which could be obtained from the deduction
of state and local income taxes. In the event that the Excise Tax is subsequently determined to be
less than the amount taken into account at the time the Gross-Up Payment was made, the Executive
shall repay to STWA, at the time that the amount of such reduction in Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable to the reduction (plus a portion of
the Gross-Up Payment attributable to the Excise Tax and the federal, state, and local income taxes
imposed on the portion of the Gross-Up Payment being repaid by the Executive to the extent such
repayment results in a reduction in Excise Tax or federal, state, or local income tax), plus
interest on the amount of such repayment. Such interest shall be calculated by using the rate in
effect under Section 1274(d)(1) of the IRC, on the date the Gross-Up Payment was made, for debt
instruments with a term equal to the period of time which has elapsed from the date the Gross-Up
Payment was made to the date of repayment. In the event that the Excise Tax is subsequently
determined to exceed the amount taken into account at the time the Gross-Up Payment was made
(including by reason of any payment the existence or amount of which could not be determined at the
time of the Gross-Up Payment), STWA shall make an additional Gross-Up Payment with respect to the
excess at the

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time the amount thereof is finally determined, plus interest calculated in a manner similar to that
described in the preceding sentence.

(c) TIME OF PAYMENT. Any Gross-Up Payment provided for herein shall be paid not later than the
30th day following the payment of any compensation or the provision of any benefit which causes
such payment to be made; provided, however, that if the amount of such payment cannot be finally
determined on or before such day, STWA shall pay on such day an estimate of the minimum amount of
such payment and shall pay the remainder of such payment (together with interest calculated in a
manner similar to that described in Subparagraph 12(b)) as soon as the amount thereof can be
determined. In the event that the amount of an estimated payment exceeds the amount subsequently
determined to have been due, such excess shall constitute a loan by STWA to the Executive, payable
on the 30th day after demand by STWA (together with interest calculated in a manner similar to that
described in Subparagraph (b)).

(d) OTHER ARRANGEMENTS. Notwithstanding the provisions of this paragraph to the contrary, the
actual amounts payable hereunder as Gross-Up Payments shall be coordinated with any similar amounts
paid to the Executive under any other contract, plan, or arrangement.

     13. FEES AND EXPENSES OF THE EXECUTIVE. After a Change in Control and except as provided
in the following sentence, STWA shall pay, within 30 days following demand by the Executive, all
legal, accounting, actuarial, and related fees and expenses incurred by him in connection with the
enforcement of this Agreement. An arbitration panel or a court of competent jurisdiction shall be
empowered to deny payment to the Executive of such fees and expenses only if it determines that he
instituted a proceeding hereunder, or otherwise acted, in bad faith.

     14. REDUCTION FOR COMPENSATION AND BENEFITS RECEIVED UNDER STWA SEVERANCE POLICY, ETC.
Notwithstanding anything herein to the contrary, in the event the Executive, his surviving spouse,
or any other person becomes entitled to continued compensation and benefits hereunder by reason of
the Executive’s termination of employment and, in addition, compensation or similar benefits are
payable under a severance policy, program or arrangement maintained by STWA (other than retirement
plans), then the compensation or benefits otherwise payable hereunder shall be reduced by the
compensation or benefits provided under such severance policy, program or arrangement.

     15. MITIGATION. The Executive shall not be required to mitigate the amount of any
compensation or benefits which may become payable hereunder by reason of his termination by seeking
other employment or otherwise, nor, except as otherwise provided in the following sentence or
elsewhere herein, shall the amount of any such compensation or benefits be reduced by any
compensation or benefits received by the Executive as the result of his employment by another
employer. Notwithstanding anything in this Agreement to the contrary, STWA’s obligation to provide
any medical and dental benefits hereunder may be suspended, with the written concurrence of the
Executive or, if applicable, his surviving spouse during any period of time that such benefits are
being provided by reason of his or her employment.

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     16. FUNDING OF COMPENSATION AND BENEFITS; ACCELERATION OF CERTAIN PAYMENTS.

(a) GRANTOR TRUST. In the event (i) the Executive’s employment is terminated without Cause or
he terminates his employment for Good Reason, and (ii) and a Change in Control has occurred as of
the Date of Termination or occurs thereafter, the Executive shall have the right to require STWA to
establish a grantor trust (taxable to STWA) and fund such trust, on an actuarially sound basis, to
provide the compensation and benefits to which he is entitled hereunder, other than those which may
be paid pursuant to the provisions of Subparagraph 16(c). The specific terms of such trust shall be
as agreed to by the parties in good faith; provided, however, that the trustee shall be a financial
institution independent of STWA; and provided further, that in no event shall STWA be entitled to
withdraw funds from the trust for its benefit, or otherwise voluntarily assign or alienate such
funds, until such time as all compensation and benefits required hereunder are paid and provided.
The determination of the extent of required funding, including any supplemental funding in the
event of adverse investment performance of trust assets, shall be made by an actuary or a certified
public accountant retained by each party. To the extent such professionals cannot agree on the
proper level of funding, they shall select a third such professional whose determination shall be
binding upon the parties. Notwithstanding the foregoing, STWA shall remain liable for all
compensation and benefits required to be paid or provided hereunder.

(b) ALTERNATE SECURITY. In lieu of the right given to the Executive under Subparagraph (a), he
shall have the right under such circumstances to require that STWA provide (i) an irrevocable
standby letter of credit issued by a financial institution other than STWA or any Subsidiary of
STWA with a senior debt credit rating of “A” or better by Moody’s Investors Service or Standard &
Poor’s Corporation, or (ii) other security reasonably acceptable to him, to secure the payment of
such compensation and benefits.

(c) ACCELERATED PAYMENT OF PRESENT VALUE OF CERTAIN COMPENSATION. In the event (i) the
Executive’s employment is terminated without Cause or he terminates his employment for Good Reason,
and (ii) a Change in Control has occurred as of the Date of Termination or occurs thereafter, the
Executive shall have the continuing right to demand that the present value of the remaining
payments described in Paragraphs 6(b)(1) through (3), and payable by reason of the provisions of
Paragraph 10 or 11 (as the case may be), be paid to him in one lump sum within 30 days after the
date written demand is given. For purposes of calculating the present value of such payments, a
discount factor shall be applied to each such payment which is equal to the relevant applicable
federal rate in effect on the date written demand is given by him, determined by reference to the
period of time between the date of such notice and the scheduled time such payment would otherwise
be made. In the event any payment described in Paragraphs 6(b)(1) through (3) is not yet
determinable on the date written demand is made, the other payments shall nonetheless be made as
provided above; and the undetermined payment shall be made within 30 days after it becomes
determinable, calculated as provided in the preceding sentence but by treating the date on which
the payment becomes determinable as the date of written notice. Nothing in this subparagraph shall
be construed as affecting the Executive’s right to one or more Gross-Up Payments in accordance with
the provisions of Paragraph 12; and a Gross-Up Payment (if applicable) will be calculated and made

13

 

with any payment made under this subparagraph, as well as any other Gross-Up Payments that may be
required hereunder at a subsequent date.

     17. WITHHOLDING TAXES. All compensation and benefits provided for herein shall, to the
extent required by law, be subject to federal, state, and local tax withholding.

     18. CONFIDENTIAL INFORMATION. The Executive agrees that subsequent to his employment with
STWA, he will not, at any time, communicate or disclose to any unauthorized person, without the
written consent of the STWA, any proprietary or other confidential information concerning STWA or
any Subsidiary of STWA; provided, however, that the obligations under this paragraph shall not
apply to the extent that such matters (i) are disclosed in circumstances where the Executive is
legally obligated to do so, or (ii) become generally known to and available for use by the public
otherwise than by his wrongful act or omission; and provided further, that he may disclose any
knowledge of insurance, financial, legal and economic principles, concepts and ideas which are not
solely and exclusively derived from the business plans and activities of STWA. The Executive shall
execute and deliver to STWA such nondisclosure and confidentiality agreements as STWA shall adopt
from time to time during the term hereof.

     19. COVENANT NOT TO SOLICIT. During his employment and for period of 12 months
thereafter, the Executive shall not, whether on his own behalf or on behalf of any other individual
or business entity, solicit, endeavor to entice away from STWA, a Subsidiary or any affiliated
company, or otherwise interfere with the relationship of STWA, a Subsidiary or any affiliated
company with any person who is, or was within the then most recent 12 month period, an employee or
associate thereof; provided, however, that this subparagraph shall not apply following the
occurrence of a Change in Control.

     20. ARBITRATION. To the extent permitted by applicable law, any controversy or dispute
arising out of or relating to this Agreement, or any alleged breach hereof, shall be settled by
arbitration in Los Angeles, California in accordance with the commercial rules of the American
Arbitration Association then in existence (to the extent such rules are not inconsistent with the
provisions of this Agreement), it being understood and agreed that the arbitration panel shall
consist of three individuals acceptable to the parties hereto. In the event that the parties cannot
agree on three arbitrators within 20 days following receipt by one party of a demand for
arbitration from another party, then the Executive and STWA shall each designate one arbitrator and
the two arbitrators selected shall select the third arbitrator. The arbitration panel so selected
shall convene a hearing no later than 90 days following the selection of the panel. The arbitration
award shall be final and binding upon the parties, and judgment may be entered thereon in the
California Superior Court or in any other court of competent jurisdiction.

     21. ADDITIONAL EQUITABLE REMEDY. The Executive acknowledges and agrees that STWA’s remedy
at law for a breach or a threatened breach of the provisions of Paragraphs 18 and 19 would be
inadequate; and, in recognition of this fact and notwithstanding the provisions of Paragraph 20, in
the event of such a breach or threatened breach by him, it is agreed that STWA shall be entitled to
request equitable relief in the form of specific

14

 

performance, temporary restraining order, temporary or permanent injunction, or any other equitable
remedy which may then be available. Nothing in this paragraph shall be construed as prohibiting
STWA from pursuing any other remedy available under this Agreement for such a breach or threatened
breach.

     22. RELATED AGREEMENTS. Except as may otherwise be provided herein, to the extent that
any provision of any other agreement between STWA and the Executive shall limit, qualify,
duplicate, or be inconsistent with any provision of this Agreement, the provision in this Agreement
shall control and such provision of such other agreement shall be deemed to have been superseded,
and to be of no force or effect, as if such other agreement had been formally amended to the extent
necessary to accomplish such purpose.

     23. NO EFFECT ON OTHER RIGHTS. Except as otherwise specifically provided herein, nothing
contained in this Agreement shall be construed as adversely affecting any rights the Executive may
have under any agreement, plan, policy or arrangement to the extent any such right is not
inconsistent with the provisions hereof.

     24. EXCLUSIVE RIGHTS AND REMEDY. Except for any explicit rights and remedies the
Executive may have under any other contract, plan or arrangement with STWA, the compensation and
benefits payable hereunder and the remedy for enforcement thereof shall constitute his exclusive
rights and remedy in the event of his termination of employment.

     25. INDEMNIFICATION. In addition to, and not in limitation of, the provisions of the
Certificate of Incorporation and Bylaws of STWA, STWA hereby agrees to indemnify, save and hold
harmless the Executive from and against all claims, loss, cost, expense or liability of every kind
and nature arising out of performance of his duties, other than those arising out of his breach of
this Agreement or his gross negligence, recklessness or willful misconduct, to the fullest extent
permitted by applicable law.

     26. NOTICES. Any notice required or permitted under this Agreement shall be sufficient if
it is in writing and shall be deemed given (i) at the time of personal delivery to the addressee,
or (ii) at the time sent certified mail, with return receipt requested, addressed as follows:

	 	 	 	 	 
	 

	 	If to the Executive:
	 	John Richard Bautista, III

16890 Church Street #19

Morgan Hill, CA 95037
	 
	 	 	 	 
	 

	 	If to STWA
	 	5125 Lankershim Boulevard

North Hollywood, CA 91601

Attention: Chairman of the Board of Directors

The name or address of any addressee may be changed at any time and from time to
time by notice similarly given.

15

 

     27. NO WAIVER. The failure by any party to this Agreement at any time or times hereafter
to require strict performance by any other party of any of the provisions, terms, or conditions
contained in this Agreement shall not waive, affect, or diminish any right of the first party at
any time or times thereafter to demand strict performance therewith and with any other provision,
term, or condition contained in this Agreement. Any actual waiver of a provision, term, or
condition contained in this Agreement shall not constitute a waiver of any other provision, term,
or condition herein, whether prior or subsequent to such actual waiver and whether of the same or a
different type. The failure of STWA to promptly terminate the Executive’s employment for Cause or
the Executive to promptly terminate his employment for Good Reason shall not be construed as a
waiver of the right of termination, and such right may be exercised at any time following the
occurrence of the event giving rise to such right.

     28. SURVIVAL. Notwithstanding the nominal termination of this Agreement and the
Executive’s employment hereunder, the provisions hereof which specify continuing obligations,
compensation and benefits, and rights (including the otherwise applicable term hereof) shall remain
in effect until such time as all such obligations are discharged, all such compensation and
benefits are received, and no party or beneficiary has any remaining actual or contingent rights
hereunder.

     29. SEVERABILITY. In the event any provision in this Agreement shall be held illegal or
invalid for any reason, such illegal or invalid provision shall not affect the remaining provisions
hereof, and this Agreement shall be construed, administered and enforced as though such illegal or
invalid provision were not contained herein.

     30. BINDING EFFECT AND BENEFIT. The provisions of this Agreement shall be binding upon
and shall inure to the benefit of the successors and assigns of STWA and the executors, personal
representatives, surviving spouse, heirs, devisees, and legatees of the Executive.

     31. ENTIRE AGREEMENT. This Agreement embodies the entire agreement among the parties with
respect to the subject matter hereof, and it supersedes all prior discussions and oral
understandings of the parties with respect thereto.

     32. NO ASSIGNMENT. This Agreement, and the benefits and obligations hereunder, shall not
be assignable by any party hereto except by operation of law.

     33. NO ATTACHMENT. Except as otherwise provided by law, no right to receive compensation
or benefits under this Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to set off, execution, attachment,
levy, or similar process, and any attempt, voluntary or involuntary, to effect any such action
shall be null and void.

     34. CAPTIONS. The captions of the several paragraphs and subparagraphs of this Agreement
have been inserted for convenience of reference only. They constitute no part of this Agreement and
are not to be considered in the construction hereof.

16

 

     35. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of
which shall be deemed one and the same instrument which may be sufficiently evidenced by any one
counterpart.

     36. NUMBER. Wherever any words are used herein in the singular form, they shall be
construed as though they were used in the plural form, as the context requires, and vice versa.

     37. APPLICABLE LAW. Except to the extent preempted by federal law, the provisions of this
Agreement shall be construed, administered, and enforced in accordance with the domestic internal
law of the State of California without reference to its laws regarding conflict of laws.

     IN WITNESS WHEREOF, the parties have executed this Agreement, or caused it to be executed, as
of the date first above written.

	 	 	 	 	 	 	 
	 	 	/s/ JOHN RICHARD BAUTISTA, III	 	 
	 	 	 	 	 
	 	 	John Richard Bautista, III	 	 
	 
	 	 	 	 	 	 
	 	 	SAVE THE WORLD AIR, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ JOSEPH HELLEIS 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Joseph Helleis, Chairman of the Board	 	 

17

 

GLOSSARY

“BOARD OF DIRECTORS” means the board of directors of the relevant
corporation.

“CAUSE” means (i) a documented repeated and willful failure by the
Executive to perform his duties, but only after written demand and only
if termination is effected by action taken by a vote of (A) prior to a
Change in Control, at least a majority of the directors of STWA then in
office, or (B) after a Change in Control, at least 80% of the
non-officer directors of STWA then in office, (ii) his final conviction
of a felony, (iii) conduct by him which constitutes moral turpitude
which is directly and materially injurious to STWA or any Material
Subsidiary, (iv) willful material violation of corporate policy, or (v)
the issuance by the regulator of STWA or any Subsidiary or affiliated
company of an unappealable order to the effect that he be permanently
discharged.

For purposes of this definition, no act or failure to act on the part
of the Executive shall be considered “willful” unless done or omitted
not in good faith and without reasonable belief that the action or
omission was in the best interest of STWA or any of its Subsidiaries or
affiliated companies.

“CHANGE IN CONTROL” means the occurrence of any of the following
events:

     (a) any Person (except (i) STWA or any Subsidiary or
prior affiliate of STWA, or (ii) any Employee Benefit Plan (or any
trust forming a part thereof) maintained by STWA or any Subsidiary or
prior affiliate of STWA) is or becomes the beneficial owner, directly
or indirectly, of STWA’s securities representing 19.9% or more of the
combined voting power of STWA’s then outstanding securities, or 50.1%
or more of the combined voting power of a Material Subsidiary’s then
outstanding securities, other than pursuant to a transaction described
in Clause (c);

     (b) there occurs a sale, exchange, transfer or other
disposition of substantially all of the assets of STWA or a Material
Subsidiary to another entity, except to an entity controlled directly
or indirectly by STWA;

     (c) there occurs a merger, consolidation, share exchange,
division or other reorganization of or relating to STWA, unless—

          (i) the shareholders of STWA immediately before

18

 

such merger, consolidation, share exchange, division or reorganization
own, directly or indirectly, immediately thereafter at least two-thirds
of the combined voting power of the outstanding voting securities of
the Surviving Company in substantially the same proportion as their
ownership of the voting securities immediately before such merger,
consolidation, share exchange, division or reorganization; and

          (ii) the individuals who, immediately before such
merger, consolidation, share exchange, division or reorganization, are
members of the Incumbent Board continue to constitute at least
two-thirds of the board of directors of the Surviving Company;
provided, however, that if the election, or nomination for election by
STWA’s shareholders, of any new director was approved by a vote of at
least two-thirds of the Incumbent Board, such director shall, for the
purposes hereof, be considered a member of the Incumbent Board; and
provided further, however, that no individual shall be considered a
member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened Election Contest
or Proxy Contest, including by reason of any agreement intended to avoid
or settle any Election Contest or Proxy Contest; and

          (iii) no Person (except (A) STWA or any Subsidiary
or prior affiliate of STWA, (B) any Employee Benefit Plan (or any trust
forming a part thereof) maintained by STWA or any Subsidiary or prior
affiliate of STWA, or (C) the Surviving Company or any Subsidiary or
prior affiliate of the Surviving Company) has beneficial ownership of
19.9% or more of the combined voting power of the Surviving Company’s
outstanding voting securities immediately following such merger,
consolidation, share exchange, division or reorganization;

     (d) a plan of liquidation or dissolution of STWA, other
than pursuant to bankruptcy or insolvency laws, is adopted; or

     (e) during any period of two consecutive years,
individuals who, at the beginning of such period, constituted the Board
of Directors of STWA cease for any reason to constitute at least a
majority of such Board of Directors, unless the election, or the
nomination for election by STWA’s shareholders, of each new director
was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period;
provided, however, that no individual shall be considered a member of
the Board of Directors of STWA at the beginning of such period if such
individual initially assumed office as a result of either an actual or
threatened Election Contest or Proxy Contest, including by reason of
any agreement intended to avoid or settle any Election Contest or Proxy
Contest.

19

 

Notwithstanding the foregoing, a Change in Control shall not be deemed
to have occurred if a Person becomes the beneficial owner, directly or
indirectly, of securities representing 19.9% or more of the combined
voting power of STWA’s then outstanding securities solely as a result
of an acquisition by STWA of its voting securities which, by reducing
the number of shares outstanding, increases the proportionate number of
shares beneficially owned by such Person; provided, however, that if a
Person becomes a beneficial owner of 19.9% or more of the combined
voting power of STWA’s then outstanding securities by reason of share
repurchases by STWA and thereafter becomes the beneficial owner,
directly or indirectly, of any additional voting securities of STWA,
then a Change in Control shall be deemed to have occurred with respect
to such Person under Clause (a).

Notwithstanding anything contained herein to the contrary, if the
Executive’s employment is terminated and he reasonably demonstrates
that such termination (i) was at the request of a third party who has
indicated an intention of taking steps reasonably calculated to effect
a Change in Control and who effects a Change in Control, or (ii)
otherwise occurred in connection with, or in anticipation of, a Change
in Control which actually occurs, then for all purposes hereof, a
Change in Control shall be deemed to have occurred on the day
immediately prior to the date of such termination of his employment.

“DATE OF TERMINATION” means:

     (a) if the Executive’s employment is terminated for
Disability, 30 days after the Notice of Termination is given (provided
that he shall not have returned to the performance of his duties on a
full-time basis during such 30-day period);

     (b) if the Executive’s employment terminates by reason of
his death, the date of his death;

     (c) if the Executive’s employment is terminated by STWA
for Cause, the date of termination specified in the Notice of
Termination and determined in accordance with Section 8(a);

     (d) if the Executive’s employment is terminated by him
without Good Reason, the date of termination specified in the Notice of
Termination and determined in accordance with Section 9(a);

     (e) if the Executive’s employment is terminated by STWA
for any reason other than for Disability or Cause, the date specified
in the Notice of Termination and determined in accordance with
Section 10(a); or

20

 

     (f) if the Executive’s employment is terminated by him
for Good Reason, the termination date specified in the Notice of
Termination and determined in accordance with Section 11(a);

provided, however that the Date of Termination shall mean the actual
date of termination in the event the parties mutually agree to a date
other than that described above.

“DEFINED BENEFIT PLAN” has the meaning ascribed to such term in Section
3(35) of ERISA.

“DEFINED CONTRIBUTION PLAN” has the meaning ascribed to such term in
Section 3(34) of ERISA.

“DISABILITY” has the meaning ascribed to the term “permanent and total
disability” in Section 22(e)(3) of the IRC.

“ELECTION CONTEST” means a solicitation with respect to the election or
removal of directors that, if STWA was subject to the provisions of the
1934 Act, would be subject to the provisions of Rule 14a-11 of the 1934
Act.

“EMPLOYEE BENEFIT PLAN” has the meaning ascribed to such term in
Section 3(3) of ERISA.

“ERISA” means the Employee Retirement Income Security Act of 1974, as
amended and as the same may be amended from time to time.

“EXCISE TAX” means the tax imposed by Section 4999 of the IRC (or any
similar tax that may hereafter be imposed by federal, state or local
law).

“EXECUTIVE” means NAME OF EXECUTIVE, an individual residing in ADDRESS,
California.

“GOOD REASON” means:

     (a) prior to a Change in Control—

(i) the Executive’s demotion to a lesser
position, or any material diminution in his duties or
responsibilities;

(ii) a reduction in the Executive’s base

21

 

compensation, other than a reduction which is
proportionate to a company-wide reduction in
executive pay;

(iii) a failure to increase the Executive’s base
compensation, consistent with his performance rating,
within 24 months since the last increase, other than
similar treatment on a company-wide basis for
executives or a voluntary deferral by him of an
increase; or

(iv) any purported termination of the Executive’s
employment which is not in accordance with the terms
of this Agreement; and

     (b) after a Change in Control—

(i) a change in the Executive’s status or
position, or any material diminution in his duties or
responsibilities;

(ii) any increase in the Executive’s duties
inconsistent with his position;

(iii) any reduction in the Executive’s base
compensation;

(iv) a failure to increase the Executive’s base
compensation, consistent with his performance review,
within 12 months of the last increase; or a failure
to consider Executive for an increase within 12
months of his last performance review;

(v) a failure to continue in effect any Employee
Benefit Plan in which the Executive participates,
including (whether or not they constitute Employee
Benefit Plans) incentive bonus, stock option, or
other qualified or nonqualified plans of deferred
compensation (A) other than as a result of the normal
expiration of such a plan, or (B) unless such plan is
merged or consolidated into, or replaced with, a plan
with benefits which are of equal or greater value;

(vi) requiring the Executive to be based anywhere
other than the county where his principal office was

22

 

located immediately prior to the Change in Control;

(vii) refusal to allow the Executive to attend to
matters or engage in activities in which he was
permitted to engage prior to the Change in Control;

(viii) delivery to the Executive of a Notice of
Nonextension;

(ix) failure to secure the affirmation by a
Successor, within three business days prior to a
Change in Control, of this Agreement and its or
STWA’s continuing obligations hereunder (or where
there is not at least three business days advance
notice that a Person may become a Successor, within
one business day after having notice that such Person
may become or has become a Successor); or

(x) any purported termination of the Executive’s
employment which is not in accordance with the terms
of this Agreement.

Notwithstanding anything herein to the contrary, at the election of the
Executive, beginning with the 181st day following a Change in Control and
continuing through the first anniversary of such Change in Control, he may
terminate his employment for any reason or no reason and such termination will
be treated as having occurred for Good Reason.

     “GROSS-UP PAYMENT” means an additional payment to be made to or on
behalf of the Executive in an amount such that the net amount retained by him,
after deduction of any Excise Tax on the Total Payments and any federal, state,
and local income tax and Excise Tax on such additional payment, equals the Total
Payments.

     “INCUMBENT BOARD” means the Board of Directors of STWA as constituted
at any relevant time.

     “IRC” means the Internal Revenue Code of 1986, as amended and as the
same may be amended from time to time.

     “MATERIAL SUBSIDIARY” means a Subsidiary whose net worth, determined
under generally accepted accounting principles, at the fiscal year end
immediately prior to any relevant time is at least 25% of the aggregate net
worth of the controlled group of corporations of which STWA is parent.

     “1934 ACT” means the Securities Exchange Act of 1934, as amended and as

23

 

the same may be amended from time to time.

     “NOTICE OF NON-EXTENSION” means a written notice delivered to or by the
Executive which advises that the Agreement will not be extended as provided in
Paragraph 3.

     “NOTICE OF TERMINATION” means a written notice that (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive’s employment under the provision so indicated, and
(iii) gives the required advance notice of termination.

  “PERSON” has the same meaning as such term has for purposes of Sections
13(d) and 14(d) of the 1934 Act.

     “PROXY CONTEST” means the solicitation of proxies or consents by or on
behalf of a Person other than the Board of Directors of STWA.

     “SUBSIDIARY” means any business entity of which a majority of its
voting power or its equity securities or equity interests is owned, directly or
indirectly by STWA.

     “SUCCESSOR” means any Person that succeeds to, or has the practical
ability to control (either immediately or with the passage of time), STWA’s
business directly, by merger or consolidation, or indirectly, by purchase of
STWA’s voting securities or all or substantially all of its assets.

     “SURVIVING COMPANY” means the business entity that is a resulting
company following a merger, consolidation, share exchange, division or other
reorganization of or relating to STWA.

     “TOTAL PAYMENTS” means the compensation and benefits that become
payable under the Agreement or otherwise (and which may be subject to an Excise
Tax) by reason of the Executive’s termination of employment, less the federal,
state and local income tax (but not any Excise Tax) on such compensation and
benefits, in each case determined without regard to any Gross-Up Payments that
may also be made.

     “WELFARE BENEFIT PLAN” has the meaning ascribed to the term “employee
welfare benefit plan” in Section 3(1) of ERISA. For purposes of determining the Executive’s or his
dependents’ right to continued welfare benefits hereunder
following his termination of employment, the meaning of such term shall include any retiree health
plan maintained by STWA at any time after the relevant Date
of Termination, notwithstanding the fact that the Executive is not a participant
therein prior to such date.

24

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