Document:

EXHIBIT 10.2

 

CATALYTICA ENERGY SYSTEMS, INC.

 

RETENTION AGREEMENT

 

This Retention Agreement (the “Agreement”) is
made and entered into by and between Joseph Barry (the “Employee”) and
Catalytica Energy Systems, Inc. (the “Company”), effective as of the latest
date set forth by the signatures of the parties hereto below (the “Effective
Date”).

 

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

 

2.                                       At-Will Employment.  The
Company and the Employee acknowledge that the Employee’s employment is and
shall continue to be at-will, as defined under applicable law.  If the Employee’s employment terminates for
any reason, including (without limitation) any termination after an
announcement of Change of Control and prior to twenty-four (24) months
following a Change of Control or the announcement of a Change of Control,
whichever comes later, the Employee shall not be entitled to any payments,
benefits, damages, awards or compensation other than as provided by this
Agreement.

 

3.                                       Severance Benefits.

 

(a)                                  Termination
Not in Connection with a Change of Control. 
If the Employee’s employment terminates as a result of Involuntary
Termination (as defined below) other than for Cause at any time prior to an
announcement of a Change of Control or on or after the date that is twenty-four
(24) months following a Change of Control or the announcement of a Change of
Control, whichever comes later (a “Non-Change of Control Severance Termination”),
then, subject to Employee (i) executing and not revoking a standard
release of claims in favor of the Company; provided, however, that such release
shall preserve all indemnification rights of Employee and all other rights of
Employee under the any indemnification agreement or similar agreement with the
Company (a “Release”), and (ii) not breaching the provisions of Section 5
hereof, then Employee shall be entitled to receive the following severance
benefits:

 

(i)             Severance Payment.  Following the Employment Termination Date the
Company shall pay Employee an aggregate amount equal to one hundred percent
(100%) of his Annual Compensation, less applicable taxes, ratably over the
remaining payroll periods in the same calendar year in which Employee
terminated.

 

(ii)          Subsidized COBRA.  Subject to Employee timely electing
continuation coverage under Title X of the Consolidated Budget Reconciliation
Act of 1985 (“COBRA”), the Company shall subsidize Employee and his eligible
dependent’s COBRA premiums so that Employee pays the same premium as an active
employee of the Company for a period equal to the lesser of (i) twelve
months following the Employee’s termination date, or (ii) the date upon
which Employee becomes covered under the group health plans of another employer
with comparable group health benefits and levels of coverage.

 

 

(b)                                 Termination
in Connection with a Change of Control. 
If the Employee’s employment terminates as a result of Involuntary
Termination (as defined below) other than for Cause at any time after an
announcement of a Change of Control and prior to twenty-four (24) months
following a Change of Control or the announcement of a Change of Control,
whichever comes later (the “Change of Control Period”) (a “Change of Control
Severance Termination”), then, subject to Employee (i) executing and not
revoking a Release, (ii) not breaching the provisions of Section 5
hereof, and (iii) the provisions of Section 7 hereof, the Employee
shall be entitled to receive the following severance benefits:

 

(i)             Severance Payment.  A cash payment in an amount equal to two
hundred percent (200%) of the Employee’s Annual Compensation plus a pro rata
cash payment of the current year bonus award based on the target bonus for the
Employee, less any Change of Control Retention Payments (as defined in Section 4
hereof) already paid to Employee;

 

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

 

(iii)       Option and Restricted
Stock Accelerated Vesting.  One
Hundred percent (100%) of the unvested portion of any stock option or
restricted stock (including restricted stock units) held by the Employee shall
automatically be accelerated in full so as to become completely vested.

 

(iv)      Timing of Severance
Payments.  Any Change of Control
Severance payment to which Employee is entitled under Section 3(b)(1) shall
be paid by the Company to the Employee (or to the Employee’s successor in
interest, pursuant to Section 9(b)) in cash and in full, not later than
thirty (30) calendar days following the Termination Date, subject to Section 11(f).

 

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

 

(d)                                 Disability;
Death.  If the Company terminates the
Employee’s employment as a result of the Employee’s Disability, or such
Employee’s employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits

 

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except for those (if any)
as may then be established under the Company’s then existing severance and
benefits plans and practices or pursuant to other agreements with the Company.

 

4.                                       Retention Payments.

 

(a)                                  Change
of Control Retention Payments.  In
the event of a Change of Control (other than a liquidation or dissolution of
the Company) wherein Employee is employed by the acquiring entity in the
position of Vice-President of Engineering and Program Management or a greater
position, then Employee shall receive cash retention payments (the “Change of
Control Retention Payments”) as to 1/3 of Annual Compensation on the date of
the Change of Control, another 1/3 of Annual Compensation on the date that is
six months following the Change of Control, and a final 1/3 of Annual
Compensation on the one year anniversary of the Change of Control, subject to
his remaining employed by the acquiring entity through such dates.

 

(b)                                 [*]
Retention Payments.  In the event of
a [*] (as defined herein) that does not constitute a Change of Control in which
the acquiring entity hires Employee as a full-time employee at the level of
vice-president or greater, Employee shall receive retention payments (the “[*]
Retention Payments”) as to $100,000 on the date of the [*], another $100,000 on
the date that is six months following the [*], and a final $100,000 on the one
year anniversary of the [*], subject to his remaining employed by the acquiring
entity through such dates; provided, however, that if following the [*]
Employee is terminated by the acquiring entity as a result of an Involuntary
Termination, then, subject to Employee (i) executing and not revoking a
Release, (ii) not breaching the provisions of Section 5 hereof, and (iii) the
provisions of Section 7 hereof, the Employee shall be entitled to receive
any remaining [*] Retention Payments that have not yet been paid to Employee.

 

(c)                                  No
Duplicate Payments.  In no event
shall Employee receive both Change of Control Retention Payments and [*]
Retention Payments.  Moreover, if
Employee receives [*] Retention Payments, he shall not be eligible to receive
any severance benefits under Section 3 hereof.

 

5.                                       Conditional Nature of Section 3 and 4
Payments.

 

(a)                                  Noncompete.  Employee acknowledges that the nature of the
Company’s business is such that if Employee were to become employed by, or
substantially involved in, the business of a competitor of the Company during
the 12 months following the termination of Employee’s employment with the
Company, it would be very difficult for Employee not to rely on or use the
Company’s trade secrets and confidential information.  Thus, to avoid the inevitable disclosure of
the Company’s trade secrets and confidential information, Employee agrees and
acknowledges that Employee’s right to receive the payments set forth in Section 3
or 4 (to the extent Employee is otherwise entitled to such payments) shall be
conditioned upon Employee not directly or indirectly engaging in (whether as an
employee, consultant, agent, proprietor, principal, partner, stockholder,
corporate officer, director or otherwise), nor having any ownership interested
in or

 

[*]  This provision is the subject of a
Confidential Treatment Request.

 

3

 

participating in the
financing, operation, management or control of, any person, firm, corporation
or business that competes with the Company or is a customer or client of the
Company during the one year period following the Employment Termination Date (“Competition”);
provided, however, that nothing in this Section 5 shall prevent Employee
from performing services for the acquirer of the Company’s [*] following a [*];
provided, further, that following his termination of employment with the
Company, Employee shall be permitted to work for an entity in Competition with
the Company whose primary business is not providing products or services competitive with the
products or services of the Company, so long Employee does not engage in
a business that makes such entity in Competition with the Company.  Notwithstanding the foregoing, Employee may,
without violating this Section 5, own, as a passive investment, shares of
capital stock of a publicly-held corporation that engages in Competition where
the number of shares of such corporation’s capital stock that are owned by
Employee represent less than three percent of the total number of shares of
such corporation’s capital stock outstanding.

 

(b)                                 Non-Solicitation. 
Until the date 12 months after the termination of Employee’s employment
with the Company for any reason, Employee agrees and acknowledges that Employee’s
right to receive the severance and retention payments set forth in Section 3
and 4 (to the extent Employee is otherwise entitled to such payments) shall be
conditioned upon Employee not either directly or indirectly soliciting,
inducing, recruiting or encouraging an employee to leave his or her employment
either for Employee or for any other entity or person with which or whom
Employee has a business relationship.

 

(c)                                  Understanding
of Covenants.  Employee represents
that he (i) is familiar with the foregoing covenants not to compete and
not to solicit, and (ii) is fully aware of his obligations hereunder,
including, without limitation, the reasonableness of the length of time, scope
and geographic coverage of these covenants.

 

(d)                                 Remedy
for Breach.  Upon any breach of this section by
Employee, all severance and retention payments pursuant to Section 3 or 4
shall immediately cease, and that shall be the sole remedy available to the
Company for such breach.

 

6.                                       Attorney Fees, Costs and Expenses.  With
respect to any Change of Control Severance Termination only, the Company shall
reimburse Employee for the reasonable attorney fees, costs and expenses
incurred by the Employee in connection with any action brought by Employee to
enforce his rights hereunder, provided such action is not decided in favor of
the Company.

 

7.                                       Limitation on Payments.

 

(a)                                  In
the event that the severance and other benefits provided for in this Agreement
or otherwise payable to the Employee (i) constitute “parachute payments”
within the meaning of Section 280G of the Internal Revenue Code of 1986,
as amended (the “Code”) and

 

[*]  This provision is the subject of a
Confidential Treatment Request.

 

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(ii) but for this Section 7,
would be subject to the excise tax imposed by Section 4999 of the Code,
then the Employee’s severance and/or retention benefits under this Agreement
shall be either

 

(A)                              delivered
in full, or

 

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

 

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

 

(b)                                 If
a reduction in the payments and benefits that would otherwise be paid or
provided to the Employee under the terms of this Agreement is necessary to
comply with the provisions of Section 7(a), the Employee shall be entitled
to select which payments or benefits will be reduced and the manner and method
of any such reduction of such payments or benefits (including but not limited
to the number of options or other awards that would vest under Section 3(b))
subject to reasonable limitations (including, for example, express provisions
under the Company’s benefit plans) (so long as the requirements of Section 7(a) are
met).  Within thirty (30) days after the
amount of any required reduction in payments and benefits is finally determined
in accordance with the provisions of Section 7(c), the Employee shall
notify the Company in writing regarding which payments or benefits are to be
reduced.  If no notification is given by
the Employee, the Company will determine which amounts to reduce.  If, as a result of any reduction required by Section 7(a),
amounts previously paid to the Employee exceed the amount to which the Employee
is entitled, the Employee will promptly return the excess amount to the
Company.

 

(c)                                  Unless
the Company and the Employee otherwise agree in writing, any determination
required under this Section 7 shall be made in writing by the Company’s
primary outside tax advisors immediately prior to the Change of Control (the “Accountants”),
whose determination shall be conclusive and binding upon the Employee and the
Company for all purposes.  For purposes
of making the calculations required by this Section 7, the Accountants
may, after taking into account the information provided by the Employee, make
reasonable assumptions and approximations concerning applicable taxes and may
rely on reasonable, good faith interpretations concerning the application of
Sections 280G and 4999 of the Code. 
The Company and the Employee shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. 
The Company shall bear all costs the Accountants may reasonably incur in
connection with any calculations contemplated by this Section 7.

 

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

 

(a)                                  Annual
Compensation.  “Annual Compensation”
means an amount equal to the greater of (i) Employee’s base salary for the
twelve (12) months preceding the Change of Control plus the employee’s target
bonus for the same period (but not less than 75% of such base salary), or (ii) Employee’s
base salary on an annualized basis and the employee’s target bonus as of the
Termination Date (but not less than 75% of such base salary).

 

(b)                                 Cause.  “Cause” shall mean (i) any act of
personal dishonesty taken by the Employee in connection with his
responsibilities as an employee and intended to result in substantial personal
enrichment of the Employee, (ii) the conviction of or plea of nolo
contendere to a felony, (iii) a willful act by the Employee that
constitutes gross misconduct and that is injurious to the Company, or (iv) for
a period of not less than thirty (30) days following delivery to the Employee
of a written demand for performance from the Company that describes the basis
for the Company’s belief that the Employee has not substantially performed his
duties, continued violations by the Employee of the Employee’s obligations to
the Company that are demonstrably willful and deliberate on the Employee’s
part.  Any dismissal for cause must be
approved by the Company’s Board of Directors prior to the dismissal date.

 

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

 

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

 

(ii)          A change in the
composition of the Board occurring within a twelve-month period, as a result of
which fewer than a majority of the directors are Incumbent Directors.  “Incumbent Directors” shall mean directors
who either (A) are directors of the Company as of the date hereof, or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or nomination is
in connection with an actual or threatened proxy contest relating to the
election of directors to the Company);

 

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

 

6

 

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

 

(d)                                 Disability.  “Disability” shall mean that the Employee has
been unable to perform his Company duties as the result of his incapacity due
to physical or mental illness, and such inability, at least twenty-six (26)
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the
Employee or the Employee’s legal representative (such Agreement as to
acceptability not to be unreasonably withheld). 
Termination resulting from Disability may only be effected after at
least thirty (30) days’ written notice by the Company of its intention to
terminate the Employee’s employment.  In
the event that the Employee resumes the performance of substantially all of his
duties hereunder before the termination of his employment becomes effective,
the notice of intent to terminate shall automatically be deemed to have been
revoked.

 

(e)                                  Involuntary
Termination.  “Involuntary
Termination” shall mean (i) without the Employee’s express written
consent, the significant reduction of the Employee’s duties, authority or
responsibilities, relative to the Employee’s duties, authority or
responsibilities as in effect immediately prior to such reduction, or the
assignment to Employee of such reduced duties, authority or responsibilities;
provided, however, that so long as Employee’s title, duties, authority and
responsibility are at the level of Vice-President of Engineering and Program
Management or greater, whether at the Company or at an acquirer following a
Change of Control, then that will not constitute an Involuntary Termination
under this clause (i), (ii) without the Employee’s express written consent,
a substantial reduction, without good business reasons, of the facilities and
perquisites (including office space and location) available to the Employee
immediately prior to such reduction; (iii) a reduction by the Company in
the base salary or target bonus of the Employee as in effect immediately prior
to such reduction; (iv) a material reduction by the Company in the kind or
level of employee benefits to which the Employee was entitled immediately prior
to such reduction with the result that the Employee’s overall benefits package
is significantly reduced; (v) the relocation of the Employee to a facility
or a location more than twenty-five (25) miles from the Employee’s then present
location, without the Employee’s express written consent; (vi) any purported
termination of the Employee by the Company that is not effected for Disability
or for Cause, or, during the Change of Control Period only, any purported
termination for which the grounds relied upon are not valid; (vii) the
failure of the Company to obtain the assumption of this Agreement by any
successors contemplated in Section 9(a) below; or (viii) during
the Change of Control Period only, any act or set of facts or circumstances
that would, under California case law or statute constitute a constructive
termination of the Employee.  However,
with respect to any Non-Change of Control Severance Termination, an Involuntary
Termination shall not be deemed to have occurred unless Employee provides written notice to the Company describing the
nature of the event that he believes forms the basis for Involuntary
Termination and the Company does not cure such event within ten (10) days
following receipt of such notice.

 

(f)                                    [*]

 

[*]  This provision is the subject of a
Confidential Treatment Request.

 

7

 

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

 

9.                                       Successors.

 

(a)                                  Company’s
Successors.  Any successor to the
Company (whether direct or indirect and whether by purchase, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company’s business and/or assets shall assume the obligations under this
Agreement and agree expressly to perform the obligations under this Agreement
in the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession.  For all purposes under this Agreement, the
term “Company” shall include any successor to the Company’s business and/or
assets which executes and delivers the assumption agreement described in this Section 9(a) or
which becomes bound by the terms of this Agreement by operation of law.

 

(b)                                 Employee’s
Successors.  The terms of this
Agreement and all rights of the Employee hereunder shall inure to the benefit
of, and be enforceable by, the Employee’s personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees.

 

10.                                 Notice.

 

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

 

(b)                                 Notice
of Termination.  Any termination by
the Company for Cause or by the Employee as a result of a voluntary resignation
or an Involuntary Termination shall be communicated by a notice of termination
to the other party hereto given in accordance with Section 10 (a) of
this Agreement.  Such notice shall
indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination under the provision so indicated, and shall
specify the termination date (which shall be not more than thirty (30) days
after the giving of such notice).  The
failure by

 

8

 

the Employee to include
in the notice any fact or circumstance which contributes to a showing of
Involuntary Termination shall not waive any right of the Employee hereunder or
preclude the Employee from asserting such fact or circumstance in enforcing his
rights hereunder.

 

11.                                 Miscellaneous Provisions.

 

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

 

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

 

(c)                                  Whole
Agreement.  This Agreement and any
outstanding stock option agreements represent the entire understanding of the
parties hereto with respect to the subject matter hereof and supersedes in
their entirety all prior arrangements and understandings regarding same,
including the Change of Control Severance Agreement previously entered into by
and between Employee and the Company and any offer letter, promotion letter,
employment agreement or other agreement regarding Employee’s employment terms
with the Company.  Other than the
agreements described in the preceding sentence, no agreements, representations
or understandings (whether oral or written and whether express or implied)
which are not expressly set forth in this Agreement have been made or entered
into by either party with respect to the subject matter hereof.

 

(d)                                 Choice
of Law.  The validity,
interpretation, construction and performance of this Agreement shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of Arizona without regard to principles
of conflicts of laws.

 

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

 

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

 

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

 

9

 

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

 

	
  COMPANY

  	
  CATALYTICA ENERGY SYSTEMS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Robert
  Zack

  
	
   

  	
   

  	
  Robert Zack, President and CEO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Date:

  	
    September 27, 2005

  	
   

  
	
   

  	
   

  
	
  EMPLOYEE

  	
    /s/ Joseph Barry

  
	
   

  	
   

  
	
   

  	
  Date:

  	
    September 27, 2005

  	
   

  
						

 

10EXHIBIT 10.3

 

SEVERANCE,
CONSULTING AND RELEASE AGREEMENT

 

This Severance, Consulting and Release Agreement (“Agreement”) is made
by and between Catalytica Energy Systems, Inc. (the “Company”), and Dominic
Geraghty (“Consultant”).

 

WHEREAS, Consultant has been employed as Senior Vice President,
Corporate Development by the Company, and has had a Change of Control Severance
Agreement (the “Change of Control Agreement”) with the Company as an employee;

 

WHEREAS, the Company and Consultant have agreed
to (i) terminate the employment relationship, (ii) to transition Consultant
into a position wherein he provides consulting services to the Company;

 

WHEREAS, the Company and the Consultant have
agreed that the Consultant does not, nor will not, have material influence on,
or control of, the schedule or timing of any Change of Control (defined
hereunder) between the Company and any other entity;

 

WHEREAS, the Company and the Consultant have
agreed that the Company may schedule the timing of any Change of Control
(defined hereunder) between the Company and any other entity or any other
corporate transaction as it determines, in its sole discretion, without regard
to the effect such timing has on Consultant or upon this Agreement;

 

WHEREAS, the Consultant has agreed to release
the Company and related parties from all claims;

 

NOW THEREFORE, in consideration of the mutual
promises made herein, the Company and Consultant (collectively referred to as “the
Parties”) hereby agree as follows:

 

1.             Termination.  Consultant’s employment with the Company
shall be hereby terminated as of September 15, 2005 (the “Employment
Termination Date”).

 

2.             Payment of Salary.  Consultant acknowledges and represents that
the Company has paid all salary, wages, accrued vacation and any and all other
benefits due to Consultant as of the Employment Termination Date.

 

3.             Consulting
Relationship.  The Company agrees to
retain Consultant as a consultant to the Company to (a) assist the Company
in developing and pursuing strategic alternatives and to (b) assist the
Company in various business matters, as specified in writing by the Company’s
Chief Executive Officer.  For work
defined in (b) above, Consultant shall be paid at the rate of One Hundred
Fifty Dollars ($150) per hour for performing such business services, but in no
event to exceed One Thousand Two Hundred ($1,200) for any day for performing
such services, provided that the Company

 

 

provides Consultant with office facilities as specified hereunder.  If such work involves out-of-pocket travel,
subsistence, or entertainment expenses, all of which will require pre-approval
by the Company, these expenses shall be reimbursed to the Consultant according
to Company policies applicable to employees upon receipt by the Company of an
expenses invoice and receipts from the Consultant.  Consultant acknowledges and agrees that he
shall not be entitled to any hourly compensation for matters relating to (a) hereabove:
developing or pursuing strategic alternatives, including any strategic
transaction designed to result in or resulting in a Change of Control (as
defined herein), and shall be entitled only to the compensation, if any, set
forth in Section 4 hereof with respect to a Change of Control.  Consultant’s stock options (see Exhibit A)
shall continue to vest and remain outstanding while Consultant remains in a
consulting relationship with the Company. 
While performing consulting services hereunder, the Company shall
provide Consultant with the same or equivalent office space, furniture,
telephones and Blackberry equipment and services (provided, however, that
Company reimbursement for telephone and Blackberry services used by Consultant
shall not exceed $125 for any month), personal computer, and other office
support equipment and supplies as previously used by the Consultant as an
employee of the Company, and part-time administrative support.  Consultant shall have complete freedom of
action as to the details, methods and means of performing consulting services
hereunder, subject only to any explicit restrictions in the terms and
conditions of this Agreement.  Consultant
shall provide all hourly services hereunder as an independent contractor and
shall pay all federal, state and local taxes (including SECA and other
employment taxes) with respect to any hourly payments received by the Company
for performing such services.

 

4.             Consideration.  As consideration for Consultant (i) entering
into and not revoking this Agreement, including the release of claims in
Sections 5, 6 and 7 hereof, and (ii) not breaching the provisions of Section 8
hereof, and (iii) performing the consulting services as specified in Section 3
hereof, the Company agrees to provide Consultant with the following benefits:

 

(a)           Severance
Payments and Benefits.  Following the
Employment Termination Date the Company shall pay Consultant an aggregate
amount equal to $229,500, less applicable taxes, ratably over the remaining
payroll periods in 2005.  Additionally,
subject to Consultant timely electing continuation coverage under COBRA, the
Company shall provide full payment to subsidize Consultant and his eligible
dependent’s COBRA premiums (including group dental coverage, if COBRA for such
is elected by Consultant) so that Consultant pays only the same premium as an
active employee of the Company for a period equal to the lesser of (i) one
year following the Employment Termination Date, or (ii) the date upon
which Consultant becomes covered under the group health plans of another
employer.

 

(b)           Change
of Control Payment.  In the event of
a Change of Control of the Company, as such term is defined herein (a “Change
of Control”) occurring within the one year anniversary of the Employment
Termination Date, then, subject to Consultant entering into and not revoking a
release of claims in form similar to that of Section 5 hereof (a “Release”),
Consultant shall receive an additional lump-sum payment with a maximum amount
equal to six hundred and nineteen thousand dollars ($619,000) (the “Change of
Control Payment”), less applicable withholding. 
The maximum Change of Control Payment shall be reduced by 1/12th
of the maximum Change of Control Payment (i.e., fifty-one thousand five hundred
and eighty-three dollars and thirty-three cents

 

2

 

($51,583.33)) for each full month following
the Employment Termination Date in which a Change of Control does not occur.

 

Example 1:  In the event of a Change of Control occurring
on November 10, 2005, Consultant would be due a lump-sum payment of five
hundred sixty-seven thousand four hundred sixteen dollars and sixty-seven cents
($567,416.67), less applicable withholding, because only one full month would
have elapsed since the Employment Termination Date.

 

Example 2:  In the event of a Change of Control occurring
on July 1, 2006, Consultant would be due a lump-sum payment of one hundred
fifty-four thousand seven hundred and fifty dollars ($154,750), less applicable
withholding, because nine full months would have elapsed since the Employment
Termination Date.

 

For
the purposes of this Agreement, a “Change of Control” means the occurrence of
any of the following events:

 

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

 

(ii)           A change
in the composition of the Board occurring within a twelve-month period, as a
result of which fewer than a majority of the directors are Incumbent
Directors.  “Incumbent Directors” shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board with
the affirmative votes of at least a majority of the Incumbent Directors at the
time of such election or nomination (but shall not include an individual whose
election or nomination is in connection with an actual or threatened proxy
contest relating to the election of directors to the Company); or

 

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

 

(c)           C Squared
Transaction Payment.  In the event
that, within nine months following the Employment Termination Date, the entity
known to the parties as “C Squared” merges with or into the Company in a
transaction constituting a Change of Control, then Consultant shall receive an
additional maximum payment of three hundred thousand dollars ($300,000) (the “Success
Fee”), less applicable withholding; provided, however, that Consultant’s
cumulative payments

 

3

 

pursuant to the Change of Control Payment and the Success Fee shall in
no event exceed a gross amount of $619,000.

 

Example:  In the event C Squared merges into the
Company resulting in a Change of Control occurring on November 10, 2005,
Consultant would be due a Change of Control Payment of five hundred sixty-seven
thousand four hundred sixteen dollars and sixty-seven cents ($567,416.67) and a
Success Fee of fifty-one thousand five hundred eighty-three dollars and
thirty-three cents ($51,583.33), less applicable withholding.

 

5.             Release of Claims.  Consultant agrees that the foregoing
consideration represents settlement in full of all outstanding obligations owed
to Consultant by the Company and its officers, managers, supervisors, agents
and employees.  Consultant, on his own
behalf, and on behalf of his respective heirs, family members, executors,
agents, and assigns, hereby fully and forever releases the Company and its
officers, directors, employees, agents, investors, shareholders,
administrators, affiliates, divisions, subsidiaries, predecessor and successor
corporations, and assigns, from, and agree not to sue concerning, any claim,
duty, obligation or cause of action relating to any matters of any kind,
whether presently known or unknown, suspected or unsuspected, that Consultant
may possess arising from any omissions, acts or facts that have occurred up
until and including the Effective Date of this Agreement including, without
limitation:

 

(a)           any and all claims relating to or arising from
Consultant’s employment relationship with the Company and the termination of
that relationship;

 

(b)           any and all claims relating to, or arising from,
Consultant’s right to purchase, or actual purchase of shares of stock of the
Company, including, without limitation, any claims for fraud,
misrepresentation, breach of fiduciary duty, breach of duty under applicable
state corporate law, and securities fraud under any state or federal law;

 

(c)           any and all claims under the law of any
jurisdiction including, but not limited to, wrongful discharge of employment;
constructive discharge from employment; termination in violation of public
policy; discrimination; breach of contract, both express and implied; breach of
a covenant of good faith and fair dealing, both express and implied; promissory
estoppel; negligent or intentional infliction of emotional distress; negligent
or intentional misrepresentation; negligent or intentional interference with
contract or prospective economic advantage; unfair business practices;
defamation; libel; slander; negligence; personal injury; assault; battery;
invasion of privacy; false imprisonment; and conversion;

 

(d)           any and all claims for violation of any federal,
state or municipal statute, including, but not limited to, Title VII of the
Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination
in Employment Act of 1967, the Americans with Disabilities Act of 1990, the
Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974,
The Worker Adjustment and Retraining Notification Act, Older Workers Benefit
Protection Act; the California Fair Employment and Housing Act, and the
California Labor Code;

 

(e)           any and all claims for violation of the federal,
or any state, constitution;

 

4

 

(f)            any and all claims arising
out of any other laws and regulations relating to employment or employment
discrimination; and

 

(g)           any and all claims for attorneys’ fees and costs.

 

The Company and Employee agree that the release set forth in this section shall
be and remain in effect in all respects as a complete general release as to the
matters released.  This release does not
extend to any obligations incurred under this Agreement or any of Employee’s
rights to indemnification from the Company.  
Specifically, the Company acknowledges that it provided Consultant,
while he was employed by the Company, with Directors’ and Officers’ Insurance (“D&O”),
and that such D&O remains in full force and effect.

 

6.               Acknowledgement of
Waiver of Claims Under ADEA.  Consultant
acknowledges that he is waiving and releasing any rights he may have under the
Age Discrimination in Employment Act of 1967 (“ADEA”) and that this
waiver and release is knowing and voluntary. 
Consultant and the Company agree that this waiver and release does not
apply to any rights or claims that may arise under ADEA after the Effective
Date of this Agreement.  Consultant
acknowledges that the consideration given for this waiver and release Agreement
is in addition to anything of value to which Consultant was already entitled.  Consultant further acknowledges that he has
been advised by this writing that

 

(a)           he should consult with an attorney prior to
executing this Agreement;

 

(b)           he has up to 21 days within which to consider this
Agreement;

 

(c)           he has seven (7) days following his execution
of this Agreement to revoke this Agreement;

 

(d)           this Agreement shall not be effective until the
revocation period has expired; and,

 

(e)           nothing in this Agreement prevents or precludes
Consultant from challenging or seeking a determination in good faith of the
validity of this waiver under the ADEA, nor does it impose any condition
precedent, penalties or costs for doing so, unless specifically authorized by
federal law.

 

7.           Civil Code Section 1542.  The Parties represent that they are not aware
of any claim by either of them other than the claims that are released by this
Agreement.  Consultant acknowledges that
he had the opportunity to seek the advice of legal counsel and is familiar with
the provisions of California Civil Code Section 1542, which provides as
follows:

 

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.

 

Consultant, being aware of said code section,
agrees to expressly waive any rights he may have

 

5

 

thereunder, as well as under any other
statute or common law principles of similar effect.

 

8.             Conditional Nature of Section 4 Payments.

 

(a)           Noncompete.  Consultant acknowledges that the
nature of the Company’s business is such that if Consultant were to become
employed by, or substantially involved in, the business of a competitor of the
Company during the 12 months following the termination of Consultant’s
employment with the Company, it would be very difficult for Consultant not to
rely on or use the Company’s trade secrets and confidential information.  Thus, to avoid the inevitable disclosure of
the Company’s trade secrets and confidential information, Consultant agrees and
acknowledges that Consultant’s right to receive the payments set forth in Section 4
(to the extent Consultant is otherwise entitled to such payments) shall be
conditioned upon Consultant not directly or indirectly engaging in (whether as
an employee, consultant, agent, proprietor, principal, partner, stockholder,
corporate officer, director or otherwise), nor having any ownership interested
in or participating in the financing, operation, management or control of, any
person, firm, corporation or business that competes with the Company or is a
customer or client of the Company during the one year period following the
Employment Termination Date (“Competition”) ; provided, however, that following
his termination of employment with the Company, Consultant shall be permitted
to work for an entity in Competition with the Company whose primary business is
not providing products or services competitive with the products or services of the
Company, so long Consultant does not
engage in a business that makes such entity in Competition with the Company.  Notwithstanding the foregoing, Consultant may,
without violating this Section 8, own, as a passive investment, shares of
capital stock of a publicly-held corporation that engages in Competition where
the number of shares of such corporation’s capital stock that are owned by
Consultant represent less than three percent of the total number of shares of
such corporation’s capital stock outstanding. 
Moreover, Consultant may petition the Company’s Chief Executive Officer
for written permission to be employed by an entity in Competition, which
permission shall not unreasonably be withheld if, the Chief Executive Officer
in his sole discretion, determines that such employment will not unduly
compromise the Company.

 

(b)           Non-Solicitation. 
Until the date 12 months after the termination of Consultant’s
employment with the Company for any reason, Consultant agrees and acknowledges
that Consultant’s right to receive the severance payments set forth in Section 4
(to the extent Consultant is otherwise entitled to such payments) shall be
conditioned upon Consultant not either directly or indirectly soliciting,
inducing, recruiting or encouraging an employee to leave his or her employment
either for Consultant or for any other entity or person with which or whom
Consultant has a business relationship.

 

(c)           Understanding
of Covenants.  Consultant represents
that he (i) is familiar with the foregoing covenants not to compete and
not to solicit, and (ii) is fully aware of his obligations hereunder,
including, without limitation, the reasonableness of the length of time, scope
and geographic coverage of these covenants.

 

(d)           Remedy
for Breach.  Upon any breach of this section by
Consultant, all severance payments pursuant to Section 4 shall immediately
cease, and that shall be the sole remedy available to the Company for such
breach.

 

6

 

9.             No Pending or Future Lawsuits. 
Consultant represents that he has no lawsuits, claims, or actions
pending in his name, or on behalf of any other person or entity, against the
Company or any other person or entity referred to herein.  Consultant also represents that he does not intend
to bring any claims on his own behalf or on behalf of any other person or
entity against the Company or any other person or entity referred to herein,
except as necessary to enforce his rights with respect to any continuing
obligations of the Company not released herein. 
The Company represents that the Company has no lawsuits, claims, or
actions pending in its name, or on behalf of any other person or entity,
against Consultant.

 

10.           Application for
Employment.  Consultant understands and agrees
that, as a condition of this Agreement, he shall not be entitled to any
employment with the Company, its subsidiaries, or any successor, and he hereby
waives any right, or alleged right, of employment or re-employment with the
Company, its subsidiaries or related companies, or any successor.

 

11.           Tax Consequences.  The Company makes no representations or
warranties with respect to the tax consequences of the payment of any sums to Consultant
under the terms of this Agreement and Consultant has been advised to seek the
advice of legal counsel as to the tax and other consequences of this Agreement.

 

12.           No Admission of
Liability.  No action taken by the Parties
hereto, or either of them, either previously or in connection with this
Agreement shall be deemed or construed to be (a) an admission of the truth
or falsity of any claims heretofore made or (b) an acknowledgment or
admission by either party of any fault or liability whatsoever to the other
party or to any third party.

 

13.           Costs.  The Parties shall each bear their own costs,
expert fees, attorneys’ fees and other fees incurred in connection with this
Agreement.

 

14.           Arbitration and
Equitable Relief.

 

(a)           General.  In consideration of the payments to
Consultant as specified in Section 4 hereof, Consultant agrees that any
and all controversies, claims, or disputes with anyone (including the Company
and any employee, officer, director, shareholder or benefit plan of the Company
in their capacity as such or otherwise) arising out of, or relating to this
Agreement or otherwise or the termination of Consultant’s service with the
Company, including any breach of this Agreement, shall be subject to binding
arbitration under the Arbitration Rules set forth in California Code of
Civil Procedure Section 1280 through 1294.2, including Section 1283.05
(the “Rules”) and
pursuant to California law.  Disputes
which Consultant agrees to arbitrate, and thereby agrees to waive any right to
a trial by jury, include any statutory claims under state or federal law,
including, but not limited to, claims under Title VII of the Civil Rights
Act of 1964, the Americans with Disabilities Act of 1990, the Age
Discrimination in Employment Act of 1967, the Older Workers Benefit Protection
Act, the California Fair Employment and Housing Act, the California Labor Code,
claims of harassment, discrimination or wrongful termination and any statutory
claims.  Consultant further understands
that this Agreement to arbitrate also applies to any disputes that the Company
may have with Consultant.

 

(b)           Procedure.  Consultant agrees that any arbitration will
be administered by the American Arbitration Association (“AAA”) and that a neutral
arbitrator will be selected in a manner

 

7

 

consistent with its National
Rules for the Resolution of Employment Disputes.  The arbitration shall be held in Santa Clara
County, California.  The arbitration
proceedings will allow for discovery according to the rules set forth in
the National Rules for the Resolution of Employment
Disputes or California Code of Civil Procedure.  Consultant agrees that the arbitrator shall
have the power to decide any motions brought by any party to the arbitration,
including motions for summary judgment and/or adjudication and motions to
dismiss and demurrers, prior to any arbitration hearing.  Consultant agrees that the arbitrator shall
issue a written decision on the merits. 
Consultant also agrees that the arbitrator shall have the power to award
any remedies, including attorneys’ fees and costs, available under applicable
law.  Consultant understands the Company
will pay for any administrative or hearing fees charged by the arbitrator or
AAA except that Consultant shall pay the first $200.00 of any filing fees
associated with any arbitration Consultant initiates.  Consultant agrees that the arbitrator shall
administer and conduct any arbitration in a manner consistent with the Rules and
that to the extent that the AAA’s National Rules for the Resolution of
Employment Disputes conflict with the Rules, the Rules shall take
precedence.

 

(c)           Remedy.  Except as provided by the Rules, arbitration
shall be the sole, exclusive and final remedy for any dispute between
Consultant and the Company.  Accordingly,
except as provided for by the Rules, neither Consultant nor the Company will be
permitted to pursue court action regarding claims that are subject to
arbitration.  Notwithstanding, the
arbitrator will not have the authority to disregard or refuse to enforce any
lawful Company policy, and the arbitrator shall not order or require the
Company to adopt a policy not otherwise required by law which the Company has
not adopted.

 

(d)           Availability
of Injunctive Relief.  In addition to
the right under the Rules to petition the court for provisional relief, Consultant
agrees that any party may also petition the court for injunctive relief where
either party alleges or claims a violation of this Agreement or any other
agreement regarding trade secrets, confidential information, non-solicitation
or California Labor Code §2870.  In the
event either party seeks injunctive relief, the prevailing party shall be
entitled to recover reasonable costs and attorneys fees.

 

(e)           Administrative
Relief.  Consultant understands that
this Agreement does not prohibit Consultant from pursuing an administrative
claim with a local, state or federal administrative body such as the Department
of Fair Employment and Housing, the Equal Employment Opportunity Commission or
the workers’ compensation board.  This
Agreement does, however, preclude Consultant from pursuing court action
regarding any such claim.

 

15.                                 Code Section 409A.  The parties agree to amend
this Agreement to the extent necessary to avoid imposition of any
additional tax or income recognition prior to actual payment to Consultant
under Internal Revenue Code section 409A and any temporary or final
Treasury Regulations and IRS guidance thereunder.

 

16.                                 Authority.  The Company represents and warrants that the
undersigned has the authority to act on behalf of the Company and to bind the
Company and all who may claim through it to the terms and conditions of this
Agreement.  Consultant represents and
warrants that he has the capacity to act on his own behalf and on behalf of all
who might claim through him to bind them to the terms and conditions of this
Agreement.

 

8

 

17.                                 No Representations.  Each party represents that each has had the
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Agreement.  Neither party has relied upon any
representations or statements made by the other party hereto which are not
specifically set forth in this Agreement.

 

18.                                 Severability.  In the event that any provision hereof becomes
or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.

 

19.                                 Entire Agreement.  This Agreement represents the entire
agreement and understanding between the Company and Consultant concerning Consultant’s
separation from the Company, and supersedes and replaces any and all prior
agreements and understandings concerning Consultant’s relationship with the
Company and his compensation by the Company, including, without limitation, the
Change of Control Agreement.

 

20.                                 No Oral Modification.  This Agreement may only be amended in writing
signed by Consultant and the President of the Company.

 

21.                                 Effective Date.  This Agreement is effective after it has been
signed by both parties and after eight (8) days have passed since
Consultant has signed the Agreement (the “Effective Date”), unless
revoked by Consultant within seven (7) days after the date the Agreement
was signed by Consultant.

 

22.                                 Counterparts and
Facsimile Signatures.  This Agreement
may be executed in counterparts and by facsimile signatures, and each
counterpart and facsimile signature shall have the same force and effect as an
original and shall constitute an effective, binding agreement on the part of
each of the undersigned.

 

23.           Notices. 
All notices, demands, communications and writings required under this
Agreement (“Notices”) shall be in writing and shall be addressed as follows:

 

If to the Company:

 

Catalytica Energy Systems, Inc.

1388 North Tech Boulevard

Gilbert, Arizona, 85253

Attention:  CEO

 

With a copy to:

 

Wilson Sonsini Goodrich & Rosati

650 Page Mill Road

Palo Alto, CA  94304

Attention:  Roger Stern, Esq.

 

9

 

If to Consultant:

 

Dominic Geraghty

 

 

Any party may change its address for notices
by complying with the notification provisions of this Section 23.  Notices may be made by personal service,
nationally recognized overnight delivery service or by delivery in the United
States mail, postage prepaid, certified or registered, return receipt
requested.  All Notices hereunder shall
be deemed received (a) immediately upon confirmation of personal delivery,
(b) one (1) day after confirmed receipt by overnight delivery, and (b) three
(3) days after confirmed receipt of certified mail.

 

24.                                 Voluntary Execution of
Agreement.  This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims.  The Parties acknowledge that:

 

(a)                                  They have read this
Agreement;

 

(b)                                 They have been
represented in the preparation, negotiation, and execution of this Agreement by
legal counsel of their own choice or that they have voluntarily declined to
seek such counsel;

 

(c)                                  They understand the
terms and consequences of this Agreement and of the releases it contains;

 

(d)                                 They are fully aware of
the legal and binding effect of this Agreement.

 

10

 

IN WITNESS WHEREOF, the Parties have executed this Agreement on the
respective dates set forth below.

 

 

	
   

  	
  Catalytica Energy Systems, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Dated: September 27, 2005

  	
  By 

  	
  /s/ Robert Zack

  	
   

  
	
   

  	
   

  	
  Robert Zack, President and CEO

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Dominic Geraghty, an individual

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Dated: September 27, 2005

  	
   

  	
  /s/ Dominic Geraghty

  	
   

  
					

 

11

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