Document:

Exhibit 10.1

SUBSCRIPTION
AGREEMENT

October 30, 2006

Wave Systems Corp.

480 Pleasant Street

Lee, MA 01238

The undersigned
(the “Investor”) hereby confirms its agreement with you as follows:

1.             This Subscription
Agreement (this “Agreement”) is made as of the date set forth below
between Wave Systems Corp., a Delaware corporation (the “Company”), and
the Investor.

2.             The Company has
authorized the sale and issuance to certain investors of up to 3,693,092 shares
of Class A Common Stock (the “Total Shares”), par value $0.01 per share
(the “Common Stock”), subject to adjustment by the Company’s Board of
Directors, for a purchase price of $2.73 per share (the “Purchase
Price”).

3.             The offering and
sale of the Total Shares (the “Offering”) are being made pursuant to the
Company’s registration statement including a base prospectus (the “U.S. Base
Prospectus”) on Form S-3 (Registration No. 333-130409) filed with the
United States Securities and Exchange Commission (the “Commission”)
(which, together with all amendments or supplements thereto is referred to
herein as the “Registration
Statement”) and a Prospectus Supplement containing certain
supplemental information regarding the Total Shares and terms of the Offering
that will be filed with the Commission (the “Prospectus Supplement”).

4.             The Company and
the Investor agree that the Investor will purchase from the Company and the
Company will issue and sell to the Investor that portion of the Total Shares
set forth below (the “Shares”) for the aggregate purchase price set
forth below.  The Shares shall be
purchased pursuant to the Terms and Conditions for Purchase of Shares attached
hereto as Annex I and incorporated herein by this reference as if fully
set forth herein.

5.               The transaction will to settle via DVP (as defined
below) UNLESS you have a cash
account with Security Research Associates, Inc. (“SRA”) with sufficient
cash to fund the Purchase Price and you elect to settle through such account by
initialing on the following line:

______
(Initial Here For  Settlement through
account with SRA).

“DVP” means
delivery versus payment  through DTC
(i.e., the Company shall deliver Shares registered in the Investor’s name and
address as set forth below and released by American Stock Transfer Corporation,
the Company’s transfer agent (the “Transfer Agent”) to the Investor at
the Closing directly to the account(s) at Security Research Associates, Inc.
through DTC and simultaneously therewith payment shall be made from such
account(s) by Security Research Associates, Inc. to the Company).

 

 

If
you do not have an existing account at Security Research Associates for
settlement by DVP, we will need the following information to be faxed to us
along with your signature page to this agreement. Please fax your clearing
information to Security Research Associates at 415-925-0264 to establish an
account with our clearing broker Wedbush Morgan Securities. Below is what we
will need to open your account.  A “New
Account form” is attached in Annex B for your convenience:

·                  The exact registration name of the account

·                  Tax ID or Social Security number of
registered holder

·                  Investor’s Clearing firm Prime Broker &
contact information (contact name, phone number, email address)

·                  Internal Account number at Prime Broker

·                  Institutional & Agent ID

6.             The Investor
represents that, except as set forth below, (a) it has had no position, office
or other material relationship within the past three years with the Company or
any of its affiliates and (b) it has no direct or indirect affiliation or
association with any NASD member. 
Exceptions:

(If no exceptions, write “none.” If left blank, response will be
deemed to be “none.”)

7.             The Investor
represents that, prior to or in connection with the receipt of this Agreement,
it has received the final U.S. Base Prospectus, dated January 13, 2006, which
is a part of the Company’s Registration Statement, and has received the
Prospectus Supplement.  THIS AGREEMENT SHALL NOT CONSTITUTE A BINDING
COMMITMENT ON THE PART OF THE COMPANY UNTIL (A) THE COMPANY HAS TIMELY RECEIVED
AN EXECUTED COPY OF THE COMPLETED SUBSCRIPTION AGREEMENT FROM THE INVESTOR AND
(B) THE COMPANY HAS DELIVERED TO THE INVESTOR AN EXECUTED COUNTERPART SIGNATURE
PAGE HERETO.  THE INVESTOR ACKNOWLEDGES
THAT, AT ANY TIME PRIOR TO THE DELIVERY OF ITS EXECUTED COUNTERPART SIGNATURE
PAGE, THE COMPANY MAY ELECT TO NOT ENTER INTO THIS SUBSCRIPTION AGREEMENT FOR
ANY REASON.

 2

 

 

SIGNATURE PAGE

Number of Shares:
______________________________

Purchase Price Per
Share: $2.73

Aggregate Purchase
Price: $_________________________________ 

Please confirm that the
foregoing correctly sets forth the agreement between us by signing in the space
provided below for that purpose.

	
  

  	
  Dated as of:
    October 30, 2006

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  INVESTOR

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Print Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Phone #:

  	
   

  
	
   

  	
  Email:

  	
   

  
				

 

Agreed and Accepted

October 30, 2006:

WAVE SYSTEMS CORP.

	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  

 

 

[Signature—Subscription
Agreement]

 

EXHIBIT A

WAVE
SYSTEMS CORP.

INVESTOR QUESTIONNAIRE

Pursuant to Section
3 of Annex I to this Agreement, please provide us with the following
information:

	
  1.

  	
  The exact name that your Shares are to be registered
  in. You may use a nominee name if appropriate:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  2.

  	
  The relationship between the Investor and the
  registered holder listed in response to item 1 above:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  3.

  	
  The mailing address of the registered holder listed
  in response to item 1 above:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  4.

  	
  The Social Security Number or Tax Identification
  Number of the registered holder listed in response to item 1 above:

  	
   

  	
   

  

 

 

 

 

EXHIBIT B

Institutional
DVP/RVP New Account Form.

If settling via DVP, and
the Investor does not have an existing account with Security Research
Associates, Inc., please fill out the below New Account Form and fax back to
SRA with your signature page to the Subscription Agreement.

Please Fax to SRA
at:  415-925-0264

Send “Attention Devon Wygaerts”

(Devon can be reached at 415-925-0346 or Devon@sracap.com)

	
  ACCOUNT #

  	
   

  	
  REP #

  	
   

  	
  TAX ID#

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

DVP INSTRUCTIONS:

	
  DTC #

  	
   

  	
  INSTITUTION
  #

  	
   

  	
  AGENT
  BANK #

  	
   

  	
  INTERNAL
  A/C #

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

	
  SHORT NAME:

  	
   

  
	
   

  
	
  ORIGINAL CONFIRMATION: 

  	
   

  	
   

  
	
   

  
	
   

  
	
   

  
	
   

  
	
  DUPLICATE INSTRUCTIONS:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  INSTITUTION OR I/P # 

  	
   

  
	
   

  
	
   

  
	
   

  	
   

  	
   

  
	
  TRIPLICATE INSTRUCTIONS: 

  	
   

  
	
   

  
	
   

  
							

 

	
  SENT BY:

  	
   

  	
   

  	
  DATE:

  	
   

  
	
   

  	
   

  	
   

  
	
  CONTACT INFORMATION:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name (Printed): 

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Telephone #: 

  	
   

  	
   

  	
  Email Address: 

  	
   

  
						

 

 Annex-2

 

 

ANNEX I

TERMS AND
CONDITIONS FOR PURCHASE OF SHARES

All
capitalized terms not otherwise defined in this Annex I shall have the meanings
ascribed thereto in the Subscription Agreement to which this Annex I is
attached.

1.             Authorization
and Sale of the Shares. 
Subject to the terms and conditions of this Agreement, the Company has
authorized the sale of the Shares.

2.             Agreement
to Sell and Purchase the Shares; Placement Agents.

2.1.         At the Closing (as defined in Section 3.1),
the Company will sell to the Investor, and the Investor will purchase from the
Company, upon the terms and conditions set forth herein, the number of Shares
set forth on the last page of this Agreement to which these Terms and
Conditions for Purchase of Shares are attached as Annex I (the “Signature
Page”) for the aggregate purchase price therefor set forth on the Signature
Page.

2.2.         The Company proposes to enter into
substantially this same form of Subscription Agreement with certain other
investors (the “Other Investors”) and expects to complete sales of some
or all of the remaining Total Shares to them as part of the Offering.  The Investor and the Other Investors are
hereinafter sometimes collectively referred to as the “Investors”.  The Company may complete sales of the
remaining Total Shares in this Offering to certain of the Other Investors
without requiring such Other Investors to enter into a Subscription Agreement;
such sales shall nevertheless be on the same price terms as the price terms for
all of the other sales in the Offering.

2.3.         The Investor acknowledges that the Company
intends to pay Security Research Associates, Inc. (the “Placement Agent”)
a fee (the “Placement Fee”) in respect of the sale of Shares to the
Investor pursuant to a Placement Agency Agreement (the “Placement Agreement”)
with the Placement Agent.  A copy
of the Placement Agreement is available to the Investor upon request.

3.             Closings
and Delivery of the Shares and Funds.

3.1.         Closing.  The completion of the purchase and sale of
the Shares (the “Closing”) will occur on or before November 2, 2006 (the
“Closing Date”).  At the Closing
and in accordance with paragraph 5 of the Subscription Agreement: (a) the
Company will cause the Transfer Agent to deliver to the Investor the number of
Shares set forth on the Signature Page registered in the name of the Investor
or, if so indicated on the Investor Questionnaire attached to the Subscription
Agreement as Exhibit A, in the name of a nominee designated by the
Investor; and (b) the aggregate purchase price for the Shares being purchased
by the Investor will be paid by or on behalf of the Investor to the Company in
the manner set forth in Section 3.3 below.

3.2.         (a)           Conditions to the
Company’s Obligations.  The Company’s obligation to issue
the Shares to the Investor will be subject to the receipt by the Company of the
aggregate purchase price for the Shares being purchased hereunder as set forth
on the Signature 

 Annex-3
 

 

Page, (b) the accuracy of the representations and
warranties made by the Investor in this Agreement, (c) the fulfillment of those
undertakings of the Investor to be fulfilled prior to the Closing Date, (d) the
Registration Statement remaining in effect and no stop order proceedings with
respect thereto being pending or threatened, and (e) there being no objections
raised by the staff of the NASDAQ Stock Market to the consummation of the sale
without the approval of the Company’s stockholders.

(b)           Conditions to the
Investor’s Obligations.  The Investor’s obligation to
purchase the Shares will be subject to the accuracy in all material respects on
the Closing Date of the representations and warranties made by the Company in
Section 4.1 below and the fulfillment of those undertakings of the Company with
respect to the Shares and/or the Investor to be fulfilled prior to the Closing
Date (collectively, the “Company Closing Conditions”).  The Investor’s obligations are expressly not
conditioned on the purchase by any or all of the Other Investors of the
remaining Total Shares that they have agreed to purchase from the Company.

3.3.         Delivery
of Funds; Delivery of Shares.

Subject to all of the
provisions set forth in Section 5 of the Subscription Agreement:  Unless the Investor elects to settle the
Shares purchased by such Investor by means of the cash account option set forth
in Section 5 of the Subscription Agreement, no later than three (3) business days after the execution of this
Agreement by the Investor and the Company, (i) the Investor
shall confirm that the account or accounts at SRA to be credited with the
Shares being purchased by the Investor have a minimum balance equal to the
aggregate purchase price for the Shares being purchased by the Investor (ii)
authorize and instruct SRA to execute a trade for the Shares, (an electronic
confirmation will be generated to the clearing firm which will then affirm the
trade) and  (iii) the Company shall
deliver the Shares to the Investor directly to the account(s) at SRA identified
by Investor and  simultaneously therewith
payment shall be made from such account(s) by SRA to the Company.

If the Investor elects to
settle the Shares purchased by such Investor by means of the cash account
option set forth in Section 5 of the Subscription Agreement no later than three (3) business days after the
execution of this Agreement by the Investor and the Company,the
Company shall deliver the Shares to the Investor directly to the account(s) at
SRA identified by Investor and simultaneously therewith payment shall be made
from such account(s) by SRA to the Company.

4.             Representations,
Warranties and Covenants.

4.1.         Representations,
Warranties and Covenants of the Investor

(a)           The Investor
represents and warrants to, and covenants with, the Company that: (a) the
Investor is knowledgeable, sophisticated and experienced in making, and is
qualified to make decisions with respect to, investments in shares presenting
an investment decision like that involved in the purchase of the Shares,
including investments in securities 

 Annex-4
 

 

issued by the Company and investments in comparable
companies, and has requested, received, reviewed and considered all information
it deemed relevant in making an informed decision to purchase the Shares; (b)
the Investor has answered all questions on the Signature Page for use in the
Prospectus Supplement and the answers thereto are true and correct as of the
date hereof and will be true and correct as of the Closing Date; and (c) the
Investor, in connection with its decision to purchase the number of Shares set
forth on the Signature Page, is  relying
only upon the U.S. Base Prospectus, the Prospectus Supplement and the documents
incorporated by reference therein.

(b)           The Investor
acknowledges, represents and agrees that no action has been or will be taken in
any jurisdiction outside the United States by the Company or the Placement
Agent that would permit an offering of the Shares, or possession or
distribution of offering materials in connection with the issue of the Shares
in any jurisdiction outside the United States where action for that purpose is
required.  The Investor, if outside the
United States, will comply with all applicable laws and regulations in each
foreign jurisdiction in which it purchases, offers, sells or delivers Shares or
has in its possession or distributes any offering material, in all cases at its
own expense.  The Placement Agents are
not authorized to make and have not made any representation or use of any
information in connection with the issue, placement, purchase and sale of the
Shares, except as set forth or incorporated by reference in the U.S. Base
Prospectus or the Prospectus Supplement.

(c)           The Investor further
represents and warrants to, and covenants with, the Company that: (a) the
Investor has full right, power, authority and capacity to enter into this
Agreement and to consummate the transactions contemplated hereby and has taken
all necessary action to authorize the execution, delivery and performance of
this Agreement; and (b) this Agreement constitutes a valid and binding
obligation of the Investor enforceable against the Investor in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors’ and
contracting parties’ rights generally and except as enforceability may be
subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law) and except as
the indemnification agreements of the Investor herein may be legally
unenforceable.

(d)           The Investor
understands that nothing in this Agreement or any other materials presented to
the Investor in connection with the purchase and sale of the Shares constitutes
legal, tax or investment advice.  The
Investor has consulted such legal, tax and investment advisors as it, in its sole
discretion, has deemed necessary or appropriate in connection with its purchase
of Shares.

(e)           The Investor
represents, warrants and agrees that, since the earlier to occur of (i) the
date on which the Placement Agent first contacted the Investor about the
Offering and (ii) the date that is the tenth (10th) trading day prior to the date of this
Agreement, it has not directly or indirectly (a) engaged in any short
selling, (b) established or increased any “put equivalent position” as
defined in Rule 16(a)-1(h) under the Securities Exchange Act of 1934 or (c)
granted any option for the purchase of or entered into any hedging or similar 

 Annex-5
 

 

transaction with the same economic effect as a short
sale, in each case with respect to the Company’s securities.

5.             Survival
of Representations, Warranties and Agreements.  Notwithstanding any investigation made by any
party to this Agreement, all covenants, agreements, representations and
warranties made by the Company and the Investor herein will survive the
execution of this Agreement, the delivery to the Investor of the Shares being
purchased and the payment therefor.

6.             Notices.  All notices, requests, consents and other
communications hereunder will be in writing, will be mailed (a) if within the
domestic United States by first-class registered or certified airmail, or
nationally recognized overnight express courier, postage prepaid, or by
facsimile or (b) if delivered from outside the United States, by International
Federal Express or facsimile, and will be deemed given (i) if delivered by
first-class registered or certified mail domestic, three business days after so
mailed, (ii) if delivered by nationally recognized overnight carrier, one
business day after so mailed, (iii) if delivered by International Federal Express,
two business days after so mailed, and (iv) if delivered by facsimile, upon
electric confirmation of receipt and will be delivered and addressed as
follows:

(a)           if to the Company,
to:

Wave Systems Corp.

480 Pleasant Street

Lee, MA 01238

Fax: (413) 243-0391

ATTN: Gerard Feeney, CFO

with copies to:

Bingham McCutchen LLP

399 Park Avenue

New York, NY 10022

Fax: (212) 752-5378

ATTN: Neil W. Townsend

(b)           if to the Investor, at its address on
the Signature Page hereto, or at such other address or addresses as may have
been furnished to the Company in writing.

7.             Changes.  This Agreement shall not be modified or
amended except pursuant to an instrument in writing signed by the Company and
the Investor.

8.             Headings.  The headings of the various sections of this
Agreement have been inserted for convenience of reference only and will not be
deemed to be part of this Agreement.

 Annex-6
 

 

 

9.             Severability.  In case any provision contained in this
Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein will not in any way be affected or impaired thereby.

10.          Governing
Law; Jurisdiction. 
This Agreement will be governed by, and construed in accordance with,
the internal laws of the State of New York, without giving effect to the
principles of conflicts of law that would require the application of the laws
of any other jurisdiction.  Any legal
action, suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby shall only be instituted, heard and
adjudicated (excluding appeals) only in a state or federal court located in New
York, and each party hereto knowingly, voluntarily and intentionally waives any
objection which such party may now or hereafter have to the laying of the venue
of any such action, suit or proceeding, and irrevocably submits to the
exclusive personal jurisdiction of any such court in any such action, suit or
proceeding.  Service of process in
connection with any such action, suit or proceeding may be served on each party
hereto anywhere in the world by the same methods as are specified for the
giving of notices under this Agreement.

11.          Counterparts.  This Agreement may be executed in two or more
counterparts, each of which will constitute an original, but all of which, when
taken together, will constitute but one instrument, and will become effective
when one or more counterparts have been signed by each party hereto and
delivered to the other parties.

12.          Confirmation
of Sale.  The Investor acknowledges and agrees that
such Investor’s receipt of the Company’s counterpart to this Agreement shall
constitute written confirmation of the Company’s sale of Shares to such
Investor.

13.          Entire
Agreement.  This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements and understandings between such parties
with respect to such subject matter.

14.          No Assignment.  This Agreement shall not be assigned by any
party hereto, without the express prior written consent of the Company or the
Investor.

 

 Annex-7Exhibit 10.1

 

Execution Copy

 

 

ASSET
PURCHASE AGREEMENT

 

by
and between

 

Catalytica
Energy Systems, Inc.

as Seller

and

 

Eaton
Corporation

as Buyer

 

 

 

 

Dated as of October 25, 2006

 

 

Appendix

	
  Appendix A

  	
   

  	
  Definitions

  

 

Exhibits

	
  Exhibit A

  	
   

  	
  Financial Statements

  
	
  Exhibit B

  	
   

  	
  Form of Bill of Sale

  
	
  Exhibit C

  	
   

  	
  Form of Instrument of Assumption

  
	
  Exhibit D

  	
   

  	
  Form of Patent Assignment

  
	
  Exhibit E

  	
   

  	
  Transition Services Agreement

  
	
  Exhibit F

  	
   

  	
  Lease Assignments

  

 

Schedules

	
  Schedule 1.1(a)

  	
   

  	
  Sub-leases

  
	
  Schedule 1.1(b)

  	
   

  	
  Fixed Assets

  
	
  Schedule 1.1(c)

  	
   

  	
  Precious Metals

  
	
  Schedule 1.1(e)

  	
   

  	
  Assigned Contracts

  
	
  Schedule 1.1(f)

  	
   

  	
  Registered Acquired Intellectual Property

  
	
  Schedule 1.2

  	
   

  	
  Retained Assets

  
	
  Schedule 3.2

  	
   

  	
  Purchase Price Allocation

  
	
  Schedule 5.3(a)

  	
   

  	
  Conflicts

  
	
  Schedule 5.3(b)

  	
   

  	
  Consents

  
	
  Schedule 5.4

  	
   

  	
  Title; Location of Assets

  
	
  Schedule 5.5

  	
   

  	
  Financial Statement Exceptions

  
	
  Schedule 5.6

  	
   

  	
  Changes in Conditions

  
	
  Schedule 5.7(a)

  	
   

  	
  Material Contracts

  
	
  Schedule 5.7(c)

  	
   

  	
  Material Contract Exceptions

  
	
  Schedule 5.8(a)

  	
   

  	
  Registered Acquired Intellectual Property

  
	
  Schedule 5.8(b)

  	
   

  	
  Intellectual Property Exceptions

  
	
  Schedule 5.8(d)

  	
   

  	
  Due Dates for Registered Acquired Intellectual
  Property

  
	
  Schedule 5.8(g)

  	
   

  	
  Intellectual Property Contracts

  
	
  Schedule 5.10

  	
   

  	
  Compliance with Laws Exceptions/Permits

  
	
  Schedule 5.12

  	
   

  	
  Condition and Sufficiency Exceptions

  
	
  Schedule 5.13

  	
   

  	
  Prototype Purchasers

  
	
  Schedule 5.14

  	
   

  	
  Product Warranty Exceptions; Standard Terms and
  Conditions

  
	
  Schedule 5.16

  	
   

  	
  Employees

  
	
  Schedule 5.17(a)

  	
   

  	
  Employee Benefits

  
	
  Schedule 5.17(f)

  	
   

  	
  Benefits As a Result of Transaction

  
	
  Schedule 5.18

  	
   

  	
  Environmental Exceptions

  
	
  Schedule 7.2(a)

  	
   

  	
  Apportionable Expenses

  
	
  Schedule 9.1

  	
   

  	
  Transferred Employees

  

 

 

Execution Copy

ASSET PURCHASE AGREEMENT

This Asset Purchase Agreement (this “Agreement”), dated as
of October 25, 2006, is made by and among CATALYTICA ENERGY SYSTEMS, INC.,
a Delaware corporation (“Seller”),
and EATON CORPORATION, an Ohio corporation (“Buyer”). 
Capitalized terms are used in this Agreement with the meanings assigned
those terms in Appendix A hereto.

Buyer desires to purchase from Seller, and Seller
desires to sell to Buyer, substantially all of the assets of the Business on
the terms and conditions contained in this Agreement.

Therefore, Seller and
Buyer hereby agree as follows:

ARTICLE I

PURCHASE
AND SALE OF ASSETS

1.1          Sale of Assets.  At the Closing and effective as of the
Closing Date, Seller shall sell, transfer and deliver to Buyer, and Buyer shall
purchase from Seller, free and clear of all Liens other than Permitted Liens,
all of the following assets, rights and properties of Seller (collectively, the
“Acquired Assets”):

(a)          Real
Property Leases.  The Mountain
View Lease and all of Seller’s right, title and interest in and to any and all
buildings, structures, improvements and fixtures located on the real property
subject to such lease, and the sub-leases listed on Schedule 1.1(a)
(together with the Mountain View Lease, the “Real Property Leases”);

(b)          Fixed
Assets.  All office,
laboratory and test equipment, machinery, product displays, tools, dies,
furniture and other tangible personal property used primarily in the Business
(the “Fixed Assets”),
including those Fixed Assets listed on Schedule 1.1(b);

(c)          Supplies.  All supplies of raw materials,
works-in-process, finished goods, spare parts, supplies and storeroom contents
owned or held by or on behalf of Seller relating primarily to the Business,
including those precious metals listed on Schedule 1.1(c), as the same
may be depleted or augmented prior to the Closing Date in the Ordinary Course;

(d)          Prepaid Amounts.  All
prepayments listed in Item 1 of Schedule 7.2, prorated (if applicable)
in accordance with Section 7.2;

(e)          Contracts.  All rights and incidents of interest of, and
benefits accruing to, Seller in and to the Contracts (to the extent related to
the Business) listed on Schedule 1.1(e) (the “Assigned Contracts”);

(f)           Acquired
Intellectual Property.  All
Intellectual Property owned by Seller and used primarily in the Business (the “Acquired Intellectual Property”),
including the

 2
 

 

Registered
Acquired Intellectual Property listed on Schedule 1.1(f), but excluding
the licensed software described on Schedule 1.2;

(g)          Permits.  To the extent transferable under applicable
Law, all franchises, registrations, certificates, variances, permits, licenses,
authorizations, approvals and similar rights obtained, issued or granted to
Seller by any Governmental Authority which are required to conduct the Business
in the manner conducted immediately prior to the Closing (the “Permits”);

(h)          Books
and Records.  All books and
records (or true and correct copies thereof) to the extent related to the
Business, including all computerized books and records (but excluding any
computers or computer equipment in which such computerized books and records
may reside except to the extent provided for in Section 1.1(b)) and all
Contracts, files, documents, lists, plats, correspondence, architectural plans,
drawings and specifications, invoices, forms, correspondence, customer records,
promotional and advertising materials, test results and programs, technical
data, operating records, operating manuals, instructional documents, employee
files for Transferred Employees (to the extent permitted under applicable Law)
and other printed or written materials to the extent related to the Business; provided, however, that none of the
following shall constitute Acquired Assets: 
(i) any records and documents prepared
in connection with the transactions contemplated hereby (other than such
records and documents to be delivered to Buyer pursuant to the express terms of
this Agreement or any of the Ancillary Agreements), (ii) any records or
documents that Seller is required by Law to retain in its possession (but if
legally permissible Seller shall provide Buyer with copies thereof), (iii)
any records and documents to the extent that such records and documents are
subject to the attorney-client privilege (except to the extent that such
records and documents relate to the Acquired Intellectual Property), (iv) any
financial records and documents which relate to the financial condition of
Seller and do not solely relate to the Business, and (v) any documents or
records relating to the minutes or proceedings of the board of directors of
Seller; provided, further, that
Seller shall have the right to retain and use, subject to the restrictions
contained herein, copies of any such books and records that are also used in or
relate to any of Seller’s retained businesses.

(i)           Warranties.  All rights under or pursuant to all
warranties and guarantees, whether express or implied, made by suppliers,
manufacturers, contractors and other third parties with respect to any of the
Acquired Assets;

(j)           Other
Intangible Assets.  The Business
as carried on and conducted by Seller as a going concern, including any and all
goodwill and similar intangible assets associated therewith, including but not
limited to (except as otherwise set forth in this Agreement, including Sections
1.1(d) and 7.2), all claims, actions, deposits, prepayments, refunds, causes of action,
rights of recovery, rights of set off, and rights of recoupment of any kind or
nature relating to the Acquired Assets; and

(k)          All
Other
Assets.  All other tangible
assets of Seller related primarily to the Business, including all customer
lists, supplier lists, catalogues, sales brochures and other marketing data.

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1.2          Retained Assets.  All assets, rights and properties other than
the Acquired Assets (collectively, the “Retained Assets”), including those Retained
Assets listed on Schedule 1.2, shall be retained by Seller, and
Buyer will in no way be construed to have purchased (or to be obligated to
purchase) any interest whatsoever in any Retained Assets.

1.3          Non-Assignable Assets; Beneficial
Ownership. 
Notwithstanding any provision of this Agreement to the contrary, this Article I
does not constitute an agreement to assign or sell any Acquired Assets that are
not capable of being validly assigned or sold without the Consent of any third
party (the “Non-Assignable
Assets”).  Subject to Section 7.1(b),
to the extent that any sale or assignment contemplated by this Agreement has
not occurred as of the Closing, Seller and Buyer shall thereafter cooperate for
a period of 180 days from the Closing Date to effect such sales or
assignment.  Notwithstanding the
foregoing, neither Seller nor Buyer will be liable in any manner to any Person
who is not a party to this Agreement for any failure of any of the transfers
contemplated by this Agreement to be consummated on or after the Closing Date.

ARTICLE
II

ASSUMPTION
OF LIABILITIES

2.1          Assumed Liabilities.  At the Closing and effective as of the
Closing Date, Buyer shall assume and thereafter perform, pay and discharge in
accordance with their terms only the following Liabilities of Seller
(collectively, the “Assumed
Liabilities”):

(a)          Assigned Contracts.  All Liabilities under the Real Property
Leases and Assigned Contracts to the extent that such Liabilities relate to the
Business and first arise on or after the Closing.

(b)          Employment Liabilities.  All Liabilities to be borne by Buyer pursuant
to Article IX.

(c)          Other
Liabilities of the Business. 
Liabilities under Article 25 of the Mountain View Lease and all
Liabilities arising on or after the Closing relating to the Acquired Assets and
operation of the Business by Buyer, including the sale of products related to
the Business.

(d)          All Liabilities to be borne by Buyer
pursuant to Section 7.1(b).

(e)          The Buyer Environmental and Facilities
Liabilities.

2.2          Retained Liabilities.  All Liabilities of Seller of any kind and
nature, whether related to the Business or not and whether known or unknown,
contingent or fixed, that are not Assumed Liabilities are “Retained
Liabilities”.  Seller shall retain all Retained Liabilities
and Buyer shall have no obligation whatsoever to perform, pay or discharge any
Retained Liabilities.

 4
 

 

ARTICLE
III

PURCHASE
PRICE

3.1          Purchase Price.  In consideration for the transfer of the Acquired
Assets, at the Closing, Buyer shall (a) pay Seller an amount in cash equal
to $2,400,000; and (b) assume the Assumed Liabilities (such cash amount,
collectively with the value of the Assumed Liabilities, the “Purchase Price”).  Such cash amount shall be paid by wire
transfer of immediately available funds to an account designated in writing for
such purpose by Seller prior to the Closing.

3.2          Purchase Price Allocation.  The Purchase Price plus the Assumed
Liabilities (collectively, the “Total Consideration”) will be allocated among the
Acquired Assets and the non-competition agreement contained in Section 7.4
as shown on Schedule 3.2. 
The Total Consideration and such schedule shall be adjusted to reflect
any payments made after Closing pursuant to Article VIII.  Unless otherwise required under applicable
Law, each Party shall report the purchase and sale of the Acquired Assets on
all Tax Returns, including timely filed Internal Revenue Service Forms 8594, in
accordance with the allocation shown on Schedule 3.2, as adjusted,
and no Party will take any position (whether in audits, Tax Returns or
otherwise) that is inconsistent with such allocation.

ARTICLE
IV

CLOSING
AND DELIVERIES

4.1          Closing.  The closing of the transactions contemplated
hereby (the “Closing”)
shall take place at 1111 Superior Avenue, Cleveland, Ohio, at 10:00 a.m. local
time on the date hereof.  The time and
date on which the Closing is actually held is referred to herein as the “Closing Date.”  All proceedings required to be taken and all
documents required to be executed and delivered by all Parties at the Closing
will be deemed to have been taken and executed simultaneously and no such
proceedings will be deemed to have been taken nor such documents executed or
delivered until all have been taken, executed and delivered.  Regardless of the time at which Closing
occurs, Closing will be deemed for all purposes to have occurred on the Closing
Date at 12:01 a.m. local time in Cleveland, Ohio.

4.2          Deliveries by Seller.  At the Closing, Seller shall deliver or cause
to be delivered (unless previously delivered) to Buyer the following items:

(a)           the Bill of Sale, duly executed by
Seller;

(b)           the Instrument of Assumption, duly
executed by Seller;

(c)           the Lease Assignment, duly executed
by Seller;

(d)           the Patent Assignment, duly executed
by Seller;

(e)           the Transition Services Agreement,
duly executed by Seller;

 5
 

 

(f)            a Consent and Estoppel Certificate,
in form and substance satisfactory to Buyer signed by Jack Dymond Associates
related to the Mountain View Lease;

(g)           UCC termination statements and any
other documents necessary to release any Liens other than Permitted Liens on
the Acquired Assets; and

(h)           such
other documents, instruments of sale, transfer, conveyance or assignment as are
required to vest title in and to the Acquired Assets in Buyer.

4.3          Deliveries by Buyer.  At the Closing, Buyer shall deliver or cause
to be delivered (unless previously delivered) to Seller the following items:

(a)           the
cash portion of the Purchase Price pursuant to Section 3.1; 

(b)           the
Bill of Sale, duly executed by Buyer;

(c)           the
Instrument of Assumption, duly executed by Buyer;

(d)           the
Lease Assignment, duly executed by Buyer;

(e)           the
Transition Services Agreement, duly executed by Buyer; and

(f)            such
other documents and instruments as are required to evidence the assumption of
the Assumed Liabilities by Buyer.

ARTICLE V

REPRESENTATIONS
AND WARRANTIES OF SELLER

Seller hereby represents and warrants to Buyer,
subject to such exceptions and disclosures as set forth in the Disclosure
Letter supplied by Seller to Buyer on the date hereof  (the “Disclosure Letter”) (which exceptions and disclosures will reference the appropriate section
of this Article V to which they relate and each of which exceptions and
disclosures shall be deemed to be incorporated by reference into such
representations and warranties; provided,
that any information disclosed in the text of any section of the Disclosure
Letter shall be deemed disclosed and incorporated in any other section, subsection,
clause or paragraph hereof, as the case may be, where it is reasonably apparent
from the text of such disclosure that it is applicable to such other section,
subsection, clause or paragraph hereof, as the case may be), as follows:

5.1          Organization and
Standing. 
Seller is a corporation duly incorporated, validly existing and in good
standing under the laws of the state of its incorporation.  Seller is duly qualified to do business and
in good standing in the states of the United States in which the character of
the properties owned or leased by it and used by it in the Business or in which
the conduct of the Business requires it to be so qualified, except for those
jurisdictions where failure to be so qualified would not, individually or in
the aggregate, constitute or reasonably be likely to constitute a Seller
Material Adverse Effect.

 6
 

 

5.2          Authority,
Validity and Effect. 
Seller has all requisite corporate power and authority to execute,
deliver and perform its obligations under this Agreement and the Ancillary
Agreements to which it is a party and to consummate the transactions
contemplated hereby and thereby.  This
Agreement and each of the Ancillary Agreements to which Seller is party has
been duly executed and delivered by Seller. 
This Agreement and each of the Ancillary Agreements to which Seller is
party is the legal, valid and binding obligation of Seller, enforceable against
Seller in accordance with its respective terms, except as limited by
(i) applicable bankruptcy, reorganization, insolvency, moratorium or other
similar laws affecting the enforcement of creditors’ rights generally from time
to time in effect, (ii) the availability of equitable remedies (regardless
of whether enforceability is considered in a proceeding at law or in equity) or
(iii) rules concerning specific performance (the “General
Enforceability Exceptions”).

5.3          No
Conflict; Required Filings and Consents.

(a)           Neither
the execution and delivery of this Agreement or any Ancillary Agreement by
Seller, nor the consummation by Seller of the transactions contemplated hereby
or thereby, nor compliance by Seller with any of the provisions hereof or
thereof, will (i) conflict with or result in a
breach of any provision of Seller’s Certificate of Incorporation or By-Laws; (ii) except as set forth on Schedule 5.3(a)
of the Disclosure Letter, conflict with, constitute or result in the material
breach of any term, condition or provision of, or constitute a material default
under, result in or give rise to any right of termination, cancellation or
acceleration with respect to, or result in the creation or imposition of any
Lien (other than Permitted Liens) upon any of the Acquired Assets pursuant to,
or require any notice under, any note, bond, mortgage, indenture, Contract or
other instrument or obligation to which Seller is a party or by which the
Business is subject; or (iii) assuming the approvals referred to in Section 5.3(b)
are obtained, materially violate any Order or Law to which Seller, the Business
or the Acquired Assets are subject.

(b)           Other
than as set forth on Schedule 5.3(b) of the Disclosure Letter, no
notice to, filing with, authorization of, exemption by or Consent of any Person
is necessary for the consummation by Seller of the transactions contemplated by
this Agreement and the Ancillary Agreements.

5.4          Title.

(a)           Seller
has good and marketable title to or a valid leasehold interest in each Acquired
Asset, free and clear of all Liens other than Permitted Liens.  Except as set forth on Schedule 5.4
of the Disclosure Letter, no Person other than Seller owns any interest in any
of the Acquired Intellectual Property. 
None of Seller’s Affiliates or subsidiaries operates the Business or
owns any assets or rights used in or related to the Business.  All tangible Acquired Assets are located at
the property to be leased by Buyer under the Mountain View Lease or at the
locations set forth on Schedule 5.4 of the Disclosure Letter.  None of the Acquired Assets are subject to or
held under any security, conditional sales or other title retention Contract.

(b)           Neither
Kawasaki Heavy Industries, Ltd. nor any of its subsidiaries or affiliates has
any claims against Seller or any of its subsidiaries or affiliates in
connection with the Acquired Assets, the Business, this Agreement or the transactions
contemplated hereby.

 7
 

 

5.5          Financial
Condition.

(a)           Attached
as Exhibit A to the Disclosure Letter is a schedule
of the Acquired Assets and Assumed Liabilities as of September 30, 2006 (the “Asset and
Liability Schedule”) and the statement of income for the Business for the
seven month period ended July 31, 2006 (the “Statement of
Income”) (collectively the “Financial Statements”).  Except as
set forth in  Schedule 5.5(a)  of the Disclosure Letter, the Financial Statements are true,
correct and complete, the components of the Financial Statements as presented
were prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and
present in all material respects the results of operations of the
Business as of and for the periods ending on their respective dates except that (i) the Statement of Income will not be fully
representative of the results of operations of the Business as certain
expenses, including but not limited to, accounting, information systems,
investor relations, human resources and other corporate services have not been
included in the Statement of Income, (ii) the Statement of Income does not
include certain expenses that would likely be incurred on a stand-alone
operation, (iii) the Asset and Liability Schedule excludes any Liability that
may result from the decommissioning of the Mountain View Facilities as required
under the Mountain View Lease and (iv) the Financial Statements do not include
any of the footnotes required by GAAP for annual financial statements.

(b)           On
the Closing Date, after giving effect to the consummation of this Agreement (i)
the fair market value of the assets of Seller will as of such date exceed the
fair market value of the Liabilities of Seller, (ii) Seller will not have
an unreasonably small amount of capital with which to conduct its respective
businesses, and (iii) Seller will be able to pay its respective debts as they
mature.

5.6          Changes
in Condition.

(a)           Since
December 31, 2005, and except as set forth on Schedule 5.6 of the
Disclosure Letter, Seller has operated the Business only in the Ordinary Course
and, without limiting the generality of the foregoing, since that date, in
connection with the Business:

(i)            Seller has not sold, leased,
transferred or assigned any of the Acquired Intellectual Property or other
intangible assets related to the Business;

(ii)           Seller has not entered into any
Contract with respect to the Business outside the Ordinary Course;

(iii)          no Person (including Seller) has
accelerated, terminated, modified or cancelled any Contract with respect to the
Business and which Seller is party;

(iv)          Seller has not incurred any
Indebtedness (except for Indebtedness that has been indefeasibly satisfied as
of the Closing) or imposed any Lien (other than mechanics,’ workmen’s,
materialmen’s, landlords,’ carriers’ or other similar Liens arising in the
Ordinary Course with respect to Liabilities that are not yet due and payable or
that are being contested in good faith) on any Acquired Asset;

 8
 

 

(v)           Seller has not made or committed to
make any capital expenditures that, individually or in the aggregate, exceed
$25,000 with respect to the Business which are included in the Assumed
Liabilities;

(vi)          Seller has not delayed or postponed
the payment of Accounts Payable or other Liabilities related to the Business;

(vii)         Seller has not incurred any material
damage to, destruction or loss of any Acquired Assets;

(viii)        other than normal merit salary increases
consistent with the past practice of the Business, Seller has not increased the
salaries or other compensation of, granted any rights to severance benefits,
stay pay, or termination pay to any Business employee or made any advance or
loan to, or made any changes in the terms of employment of any Business employees
or discussed termination of employment with any Business employees; and

(ix)           Seller has not entered into any
Contract with respect to or committed to engage in any of the foregoing with
respect to the Business which are included in the Assumed Liabilities.

(b)           No
Seller Material Adverse Effect has occurred since December 31, 2005.

5.7          Material
Contracts.

(a)           Schedule 5.7(a)
of the Disclosure Letter identifies those Contracts (or any groups of related
or similar Contracts) to which Seller or any of its Affiliates is party in
connection with or relating to the Business or the Acquired Assets that:

(i)            require payment by any party thereto
in excess of $25,000 per year;

(ii)           is not terminable on less than three
months’ notice without payment by, penalty or other adverse consequence to the
Business;

(iii)          involve the lease or use of real
property;

(iv)          involve the lease, purchase or service
of tangible personal property requiring payments in excess of $25,000 per year;

(v)           relate to capital expenditures to be
made after Closing in an amount in excess of $25,000;

(vi)          create a partnership or joint venture;

(vii)         create, incur or guarantee Indebtedness
or impose a Lien on any of the Acquired Assets;

 9
 

 

(viii)        grant a license to Acquired Intellectual
Property or require the payment of royalties;

(ix)           is a management, consulting,
employment, compensation, termination, severance or similar Contract involving
payments in excess of $25,000;

(x)            require the payment of bonuses or
similar incentives to any Person in connection with the Business or the
transaction contemplated hereby;

(xi)           appoint a Person as a manufacturer’s
representative, distributor or sales agent;

(xii)          create any Liability for or related to
asbestos, silica, refractory ceramic fibers or other substance that could be
harmful to human health;

(xiii)         concern confidentiality or
non-competition;

(xiv)        provide for indemnification by or of
Seller;

(xv)         involve an option to purchase, a right
of first refusal or other preferential right to acquire any Acquired Asset;

(xvi)        grant a power of attorney with respect
to the Business;

(xvii)       have as a party an employee, officer,
director or an Affiliate of Seller (other than Seller) or an entity in which
any such Person has an interest or a Governmental Authority; or

(xviii)      the consequences of a default under which
would constitute or reasonably be expected to constitute a Seller Material
Adverse Effect.

(b)           Prior
to the date hereof, Seller has made available to Buyer or its representatives
an accurate and complete copy of each Material Contract (or a written
description of the material terms of any Material Contract that is not
written).

(c)           Except as set forth
on Schedule 5.7(c) of the Disclosure Letter, each Material Contract
is valid, binding and enforceable in accordance with its terms, except as
limited by the General Enforceability Exceptions, and is in full force and
effect.  Except as set forth on Schedule 5.7(c)
of the Disclosure Letter, the transactions contemplated by this Agreement and
the Ancillary Agreements will not give rise to a material breach of, or right
of acceleration or termination under, any Material Contract.  Except as set forth on Schedule 5.7(c)
of the Disclosure Letter, there are no existing material defaults by Seller
under any of the Material Contracts and no event has occurred or to Seller’s
Knowledge is likely to occur that (whether with or without notice, lapse of
time or the happening or occurrence of any other event) would constitute a
material default under any Material Contract by Seller.  Except as set forth on Schedule 5.7(c)
of the Disclosure Letter, to Seller’s Knowledge in each case, there are no
existing material defaults by any party (other than Seller) to a Material
Contract and no event has occurred or is likely to occur that (whether with or
without notice, lapse of time or the happening

 10

 

or occurrence
of any other event) would constitute a material default under any Material
Contract by any party thereto other than Seller.

(d)           Schedule 5.7(a)
of the Disclosure Letter lists any outstanding bid or proposal made by or to
Seller, or to or by any customer, supplier, vendor or service provider in
connection with the Business that if accepted would constitute a Contract of a
type described in Section 5.7(a).

5.8          Intellectual
Property.

(a)           Schedule 1.1(f)
sets forth, with the title (or appropriate description), filing date, issue
date, ownership, registration or application indicated, as applicable, a
complete and correct list of all Registered Acquired Intellectual Property.

(b)           Except
as set forth on Schedule 5.8(b) of the Disclosure Letter, there are no
and have never been any Actions instituted, commenced, pending against Seller
or, to Seller’s Knowledge, against any other Person or, to Seller’s Knowledge,
threatened against Seller or any other Person, that (i) challenge the
rights of Seller regarding ownership in or the scope of any Acquired
Intellectual Property or is otherwise adverse to the use, registration, right
to use, validity or enforceability of the Acquired Intellectual Property; or
(ii) assert that the operation of the Business as conducted by Seller is or was
infringing or otherwise in violation of any Intellectual Property of any other
Person.  Except as set forth on Schedule
5.8(b), to Seller’s Knowledge, no Person is infringing upon or otherwise in
violation of the Acquired Intellectual Property.  Except as set forth on Schedule 5.8(b),
to Seller’s Knowledge, none of the Acquired Intellectual Property, nor the
conduct of the Business as presently conducted or any of its current products
or processes, violates, infringes upon or misappropriates the intellectual
property rights of any other Person. 
Except as set forth on Schedule 5.8(b) of the Disclosure Letter,
Seller has not received any opinion of counsel (outside or inside) relating to
infringement, invalidity or unenforceability of any Acquired Intellectual
Property as it relates to the Business.

(c)           All
works of authorship and all other materials subject to copyright protection
that are included in the Acquired Intellectual Property, including the computer
software, documentation, software design, technical and functional
specifications, and all other materials subject to copyright protection that
are included in the Acquired Intellectual Property are original and were either
created by employees of Seller within the scope of their employment or are
otherwise works made for hire, or all right, title and interest in and to such
works of authorship have been legally and fully assigned and transferred to
Seller and all such employees or other creators of such works have waived their
moral rights thereto in favor of, as applicable, Seller.  All rights in all inventions and discoveries
(i) made, written, developed or conceived by any employee or independent
contractor of Seller, during the course of such employee’s employment (or other
retention) by Seller and relating to or included in the Acquired Intellectual
Property, (ii) made, written, developed or conceived with the use or assistance
of any of any Seller’s facilities or resources, or (iii) that are the subject
of one or more certificates of patent or patent applications and that relate to
or are included in the Acquired Intellectual Property, have been assigned in
writing to Seller.  All employees and
independent contractors of Seller and its Affiliates have signed documents
confirming that each of them (i) will protect the secrecy and confidentiality
of all confidential know how and/or trade secrets, and (ii) will assign to (or
with

 11
 

 

respect to moral rights, will waive in favor of) Seller all
Intellectual Property rights related to the Business and made, written,
developed or conceived by them (A) during the course of their employment (or
other retention) by Seller or its Affiliates and/or (B) with the use or
assistance of Seller’s facilities or resources, to the extent that ownership of
any such Acquired Intellectual Property rights does not vest in Seller by
operation of law, and, to Seller’s Knowledge, no such employee is in violation
or breach of any term of any such written agreement that would impair the
Acquired Intellectual Property.  For the
purposes of this Section 5.8(c), Affiliate shall be deemed to exclude
any director or stockholder of Seller, unless such director or stockholder owns
or controls, directly or indirectly, more than 50% of the outstanding voting
securities of  Seller.

(d)           (i)
Seller has timely made all filings with and payments to Governmental
Authorities that are required in order to maintain in subsistence or protect
its ownership rights in each item of Registered Acquired Intellectual Property;
(ii) all registrations with and applications to any Governmental Authority in
respect of the Registered Acquired Intellectual Property are in full force and
effect and, to Seller’s Knowledge, all Registered Acquired Intellectual
Property is valid, subsisting and enforceable; (iii) except as set forth on Schedule 5.8(d)
of the Disclosure Letter, no due dates for filings or payments concerning any
Registered Acquired Intellectual Property (including, without limitation,
office action responses, affidavits of use, affidavits of continuing use,
renewals, requests for extension of time, maintenance fees, application fees
and foreign convention priority filings) fall due within four months after the
Closing; (iv) no Registered Acquired Intellectual Property has been abandoned,
canceled or adjudicated invalid, or is subject to any outstanding order,
judgment or decree restricting the ability of Seller to use or enforce such
Registered Acquired Intellectual Property, or is the subject of any suit,
action, reissue, reexamination, public protest, interference, arbitration,
mediation, opposition, cancellation or other proceeding; and (v) to Seller’s
Knowledge, Seller is in compliance with all government regulations regarding
the manufacture, advertising, sale, import, and export of any Acquired
Intellectual Property and any product of Seller that incorporates or is made
using any Acquired Intellectual Property.

(e)           Seller
has taken all reasonable precautions to protect and preserve the secrecy,
confidentiality and value of all material confidential Acquired Intellectual
Property, including all material know how and/or trade secrets included in the
Acquired Intellectual Property (other than Acquired Intellectual Property that
is the subject of a published patent or published patent application).

(f)            Upon
the Closing, Buyer shall have the rights that Seller had immediately prior to
Closing to:  (i) sue for (and otherwise
assert claims for) and recover damages and obtain any and all other remedies
available at law or in equity for any past, present or future infringement,
misappropriation or other violation of any of the Acquired Intellectual
Property (and to settle all such suits, actions and proceedings); (ii) seek
protection therefor (including the right to seek and obtain copyright, trademark
and service mark registrations and certificates of patent in the United States
and all other countries and governmental divisions); and (iii) to claim all
rights and priority thereunder.

(g)           (i)
There are no restrictions on the direct or indirect transfer of any license or
other contract or agreement pursuant to which Seller has been granted any right
to use any

 12
 

 

Intellectual
Property of a third party that is material to the Business (“Intellectual Property Contract”);
(ii) there exists no event, condition or occurrence which, with or without the
giving of notice or lapse of time, or both, would constitute a material breach
or default by Seller under any Intellectual Property Contract, and Seller has
not received notice of any such event, condition or occurrence; (iii) no party
has given Seller notice of any breach of any Intellectual Property Contract or
of its intention to cancel, terminate or fail to renew any Intellectual
Property Contract; (iv) to Seller’s Knowledge, each Person who is a party to
any Intellectual Property Contract had and has all rights, power and authority
necessary to enter into, be bound by and fully perform such license, contract
or agreement; (v) Seller has timely made all royalty payments and other
payments required to be made under each Intellectual Property Contract and no
such payments will be due and owing as of the Closing Date except in the
Ordinary Course as set forth in any of the Intellectual Property Contracts; and
(vi) no suit is pending against Seller or, to Seller’s Knowledge, against any
other Person, nor, to Seller’s Knowledge, has any claim been threatened or
asserted (in writing or otherwise) against Seller or any other Person
concerning any Intellectual Property owned by any third party, which
Intellectual Property is a subject of an Intellectual Property Contract or is
otherwise material to the Business, to the extent such suit or claim could
reasonably be expected to adversely affect the rights of Seller in such
Intellectual Property, including any suit concerning a claim or position that
such Intellectual Property has been violated or is invalid, unenforceable,
unpatentable, unregisterable, cancelable, not owned or not owned exclusively by
the party that has purported to have granted rights to Seller in connection
with such Acquired Intellectual Property.

5.9          Litigation.  There is no Action with respect to the
Business pending, or to Seller’s Knowledge, threatened against Seller or any
Affiliate of Seller that would restrict the consummation of the transactions
under this Agreement or the Ancillary Agreements.  Neither the Acquired Assets nor the Business
is subject to any Action or Order.

5.10        Compliance
with Laws. 
Except (a) as set forth on Schedule 5.10 of the
Disclosure Letter, and (b) as would not reasonably be expected to
materially or adversely affect the Business or the Acquired Assets, Seller
(i) is in compliance with and, since January 1, 2003, has been in
compliance with all Laws, Permits and Orders applicable to the Business in all
material respects, and (ii) since January 1, 2003, has not received
any written notification from any Governmental Authority asserting that Seller
is not in compliance with any Law, Permit or Order applicable to the Business
or the Acquired Assets.  Schedule 5.10
of the Disclosure Letter contains a complete and accurate list of all Permits
held or required to be held by Seller in connection with the Business, and all
such Permits are in full force and effect.

5.11        No
Gifts or Similar Benefits.  Neither Seller nor any of its directors,
officers, or to Seller’s Knowledge, its agents, employees or Persons acting on
their behalf has, in connection with the Business, directly or indirectly,
given or agreed to give anything of value or provide any benefit to any foreign
or domestic governmental official, foreign or domestic political party or
official thereof, supplier, customer or other Person who was, is or may be in a
position to help or hinder the Business or assist in connection with any actual
or proposed transaction under circumstances that involve a violation of any
applicable Law, including, without limitation, the Foreign Corrupt Practices
Act.

 13
 

 

5.12        Condition
and Sufficiency. 
The Acquired Assets are in good condition and repair (subject to normal
wear and tear consistent with the age of the assets and properties) and
constitute all of Seller’s assets and other rights necessary to conduct the
Business as currently conducted by Seller and as conducted by Seller during the
periods represented by the Financial Statements.

5.13        Purchasers
of Prototypes.  Schedule 5.13
of the Disclosure Letter sets forth a complete and accurate list of all Persons
who have purchased prototypes from Seller related to the Business (the “Prototype Purchasers”).  Except as set forth on Schedule 5.13
of the Disclosure Letter, Seller is not involved in any claim, dispute or
controversy with any Prototype Purchaser. 
Except as set forth on Schedule 5.13 of the Disclosure Letter,
the Business has not sold any products.

5.14        Product
Warranty.  Each
product of the Business sold or delivered to a third party by Seller has been
sold or delivered, as applicable, in conformity with all applicable material
contractual commitments (including any applicable warranties), and except as
set forth on Schedule 5.14 of the Disclosure Letter, Seller has no
material Liability in connection with the Business for replacement or repair
thereof or other damages in connection therewith.  Except as set forth on Schedule 5.14
of the Disclosure Letter, no product of the Business sold or delivered to a
third party by Seller is subject to any guaranty, warranty or other indemnity
beyond the applicable Seller’s standard terms and conditions of sale, copies of
which are set forth on Schedule 5.14 of the Disclosure Letter.

5.15        Labor
Matters.  Seller
is not party to or bound by any union contract or collective bargaining
agreement, and Seller has not agreed to recognize any union or other collective
unit.  No union or collective bargaining
unit has been certified as representing Seller’s employees and no
organizational attempt has been made or threatened by or on behalf of any labor
union or collective bargaining unit with respect to Seller’s employees.  Seller has not experienced any labor strike,
dispute, slowdown or stoppage or any other material labor difficulty during the
past five years.  Seller has complied in
all material respects with all applicable Laws relating to the employment of
labor.

5.16        Employees.  Schedule 5.16 of the Disclosure
Letter sets forth a complete and accurate list of all employees or independent
contractors engaged primarily in the Business on behalf of Seller and, for each
such Person, his or her position, current base salary and most recent annual
bonus, and the date on which he or she became employed or engaged as a
consultant (or has been deemed by Seller to have become employed or engaged) by
Seller.  Schedule 5.16 of the
Disclosure Letter also lists any employee of Seller who is not at work as of
the Closing Date due to leave of absence, disability or workers’ compensation
leave or military leave and specifies for each such employee the category of
leave and the date on which such leave commenced.  Seller does not employ any Person who cannot
be dismissed immediately and without notice to the employee or Liability to
such Person (other than for benefits required by applicable Law, salary or
wages for time worked, and benefits disclosed on Schedule 5.17(a)
of the Disclosure Letter).

 14
 

 

5.17        Employee
Benefit Plans.

(a)           Schedule 5.17(a)
of the Disclosure Letter sets forth a complete and accurate list of the
benefits Seller provides to or for the Persons listed on Schedule 5.16
of the Disclosure Letter.  Each “employee
benefit plan,” as defined in Section 3(3) of ERISA, maintained,
contributed to or required to be contributed to by Seller or any of its ERISA
Affiliates for the benefit of current, former or retired employees (the “Seller ERISA Plans”)
and each other plan, contract, program or arrangement maintained, contributed
to or required to be contributed to by Seller or any of its ERISA Affiliates
for the benefit of current, former or retired employees (the “Seller Benefit Arrangements”)
complies in all material respects with its terms and all applicable Laws,
including ERISA and the Code, and no “reportable event” or “prohibited
transaction” (as such terms are defined in ERISA) or termination has occurred
with respect to any Seller ERISA Plan under circumstances that present a risk
of any material Liability to Seller. 
Copies or descriptions of each Seller ERISA Plan and Seller Benefit
Arrangement in which current employees of the Business participate have been
provided to Buyer prior to the date hereof. 
Except as set forth on Schedule 5.17(a) of the Disclosure
Letter, neither Seller nor any of its ERISA Affiliates has any obligation to
provide medical or life insurance coverage to any Transferred Employee under
the Seller ERISA Plans, the Seller Benefit Arrangements or any other plan or
Contract, except as required by applicable laws.

(b)           No
Seller ERISA Plan or any other plan sponsored or contributed to by Seller or
any of its ERISA Affiliates has incurred any “accumulated funding deficiency”
as such term is defined in Section 302 of ERISA and Section 412 of
the Code (whether or not waived).

(c)           Neither
Seller nor any of its ERISA Affiliates has contributed to or completely or
partially withdrawn from a “multiemployer plan” (as such term is defined in
Section (3)(37) of ERISA) within the last six years.

(d)           Neither
Seller nor any of its Affiliates has at any time provided or maintained any
plan, program or arrangement providing post-retirement medical or other
post-retirement benefits for or on behalf of the employees of the Business
(other than as required by applicable Laws) and there has been no communication
to employees that could reasonably be interpreted to promise or guarantee such
post retirement benefits.

(e)           Neither
Seller nor any of its ERISA Affiliates has ever maintained or contributed to a
defined benefit pension plan (as defined in Section 3(2) of ERISA) subject
to Title IV of ERISA.

(f)            No
Person listed on Schedule 5.16 of the Disclosure Letter will become
entitled to any retirement, severance or any other increased or accelerated
compensation or benefit solely as a result of the transactions contemplated
hereby.

5.18        Environmental
Matters.  Except
as set forth on Schedule 5.18 of the Disclosure Letter:

(a)           The
Business has been conducted in compliance with all applicable Environmental
Laws so as to prevent any Hazardous Materials from being released into the soil
and groundwater of the Mountain View Facilities and, so as to prevent any
Hazardous Materials

 15
 

 

from being
released into the soil and groundwater, the Business possesses and has
been in compliance with  all permits and other governmental authorizations
required under applicable Environmental Laws, except where non-compliance or
the absence of a permit could not reasonably be expected to have a material
adverse effect on the Business after the Closing.

(b)           There
is no pending, or to Seller’s Knowledge threatened, investigation, claim or
administrative proceeding against Seller under any Environmental Law with
respect to the Business, and Seller has not received any notice alleging that
the conduct of the Business is in violation of applicable Environmental Law.

(c)           There
have been no unpermitted Releases of Hazardous Materials to the soil or
groundwater of the Mountain View Facilities (i) by Seller or its Related
Persons, or (ii) to Seller’s Knowledge, any other Person, or (iii) otherwise in
the course of the conduct of the Business, which are reasonably likely to give
rise to an obligation by Buyer to take any response, investigation, removal, or
other action with respect to the soil or groundwater of the Mountain
View Facilities under any Environmental Law or the Mountain View Lease.

(d)           There
is no asbestos, silica, refractory ceramic fibers or other substance that is in
a condition or concentration harmful to human health present in the facility
subject to the Mountain View Lease or used in the Business, other than
Hazardous Material used in the conduct of the Business in the Ordinary Course
and stored, used, and disposed of in all material respects in accordance with
applicable Environmental Law.

Notwithstanding the foregoing, Seller makes no
representation or warranty whatsoever pursuant to this Section 5.18,
regarding (i) any matter that is within the Buyer Environmental and
Facility Liabilities, or (ii) except to
the extent of the Seller Environmental Liabilities, any Hazardous
Material which has or hereafter migrates onto the Mountain View Facilities from
any other property.

5.19        Taxes.  To the extent failure to do so would
adversely impact the Acquired Assets or Buyer’s ownership of the Acquired
Assets or the operation of the Business, Seller has filed all Tax Returns
required to be filed by it with respect to the Business, and has paid (or made
adequate provision in its financial statements for the payment of) all Taxes
shown on such returns to be owed by it, and no Claims for additional Taxes with
respect to the Acquired Assets or the Business for any prior fiscal years are
pending.  Seller is not a party to any
pending Action, nor to Seller’s Knowledge is any Action threatened, by any
Governmental Authority for the assessment or collection of Taxes with respect
to the Business.  Seller is not a foreign
Person pursuant to Section 1445(b)(2) of the Code.  None of the Assumed Liabilities is an
obligation to make a payment or is an agreement that under certain
circumstances could require a payment that would not be deductible under
Section 280G of the Code.  Seller has
duly and timely withheld from salaries, wages and other compensation paid to
employees engaged primarily in the Business and paid over to the appropriate
tax authorities all amounts required to be so withheld and paid over for the
pertinent periods under all applicable Laws and has collected all material
sales and use Taxes required to be collected in respect of the Business, and
has remitted such amounts to the appropriate Governmental Authorities, or has
been furnished properly completed exemption certificates and has maintained all
such records and supporting documents in the manner required by all applicable
sales and use Tax Laws.

 16
 

 

5.20        No
Brokers.  Except for the fees and expenses payable to
W.Y. Campbell & Company, which are Retained Liabilities, no broker, finder
or similar agent has been employed by or on behalf of Seller in connection with
the transactions contemplated by this Agreement or any of the Ancillary Agreements,
and Seller has no Liability to pay any brokerage commission, finder’s fee or
any similar compensation in connection with this Agreement or the Ancillary
Agreements or the transactions contemplated hereby or thereby.

ARTICLE
VI

REPRESENTATIONS
AND WARRANTIES OF BUYER

Buyer represents and
warrants to Seller as follows:

6.1          Organization
and Standing. 
Buyer is a corporation duly incorporated, validly existing and in good
standing under the laws of the state of its incorporation.  Buyer is duly qualified to do business and in
good standing in the states of the United States in which the character of the
properties owned or leased by it or in which the conduct of its business
requires it to be so qualified.

6.2          Authority,
Validity and Effect. 
Buyer has all requisite corporate power and authority to execute,
deliver and perform its obligations under this Agreement and the Ancillary
Agreements to which it is a party and to consummate the transactions
contemplated hereby or thereby.  This
Agreement and each of the Ancillary Agreements to which Buyer is a party has
been duly executed and delivered by Buyer. 
This Agreement and each of the Ancillary Agreements to which Buyer is a
party is the legal, valid and binding obligation of Buyer, enforceable against
Buyer in accordance with its terms, except as limited by the General
Enforceability Exceptions.

6.3          No
Conflict; Required Filings and Consents.

(a)           Neither
the execution and delivery of this Agreement or any Ancillary Agreement by
Buyer, nor the consummation by Buyer of the transactions contemplated hereby or
thereby, nor compliance by Buyer with any of the provisions hereof or thereof,
will (i) conflict with or result in a breach
of any provision of Buyer’s Certificate of Incorporation or By-Laws; (ii) 
conflict with, constitute or result in the breach of any term, condition or
provision of, or constitute a default under, result in or give rise to any
right of termination, cancellation or acceleration with respect to, or result
in the creation or imposition of any Lien upon any material assets of Buyer
pursuant to, or require any notice under, any note, bond, mortgage, indenture,
Contract or other instrument or obligation to which Buyer is a party or by
which it or any of its material assets is subject; or (iii) violate any
Order or Law to which Buyer is subject.

(b)           No
notice to, filing with, authorization of, exemption by or Consent of any Person
is necessary for the consummation by Buyer of the transactions contemplated by
this Agreement.

6.4          Litigation.  There are and have been no Actions
instituted, commenced, pending or threatened against Buyer that would restrict
the consummation of the transactions under this Agreement or the Ancillary
Agreements.

 17
 

 

6.5          No
Brokers.  No
broker, finder or similar agent has been employed by or on behalf of Buyer in
connection with the transactions contemplated by this Agreement or any of the
Ancillary Agreements and Buyer has no Liability to pay any brokerage
commission, finder’s fee or any similar compensation in connection with this
Agreement or the Ancillary Agreements or the transactions contemplated hereby
or thereby.

ARTICLE
VII

COVENANTS

7.1          Further
Assurances; Subsequent Transfers.

(a)           Seller
and Buyer shall execute and deliver such further instruments of conveyance,
transfer and assignment and shall take such other actions as a Party may
reasonably request of the other in order to effectuate the purposes of this
Agreement and the Ancillary Agreements and to carry out the terms hereof and
thereof.  After the Closing, if for any reason
Seller does not or is unable to execute such further documents as are necessary
or required to be executed by Seller hereunder within ten (10) business days of
Buyer’s written request, Seller hereby irrevocably appoints Buyer as its
attorney in fact (which appointment is coupled with an interest) to execute and
deliver such assignments, applications or other instruments as shall be
necessary to effectuate the purposes of this Agreement and the Ancillary
Agreements and to protect and vest title in and to the Acquired Assets.  Notwithstanding anything to the contrary in
this Agreement, the power of attorney granted by the preceding sentence shall
terminate no later than the fifth-year anniversary of the Closing Date.

(b)           Beginning
on the date hereof  and ending 180 days
following the Closing Date, each Party, at its own expense, shall use
commercially reasonable efforts to obtain any Consent required to assign the
Non-Assignable Assets to Buyer; provided
that neither Seller nor Buyer will be obligated to pay any consideration
(except for de minimis filing fees or other administrative charges) to any
third party from whom such Consents are sought. 
If and to the extent that the Parties are unable to obtain any such required
Consent through the use of commercially reasonable methods, unless prohibited
by applicable Law or the terms hereof, (i) Seller shall continue to be
bound by the terms of such Non-Assignable Assets; and (ii) Buyer shall
pay, perform and discharge fully all the obligations of Seller thereunder from
and after the Closing Date, including the payment, discharge and satisfaction
of any related Liabilities that, but for the lack of such Consent, would be
Assumed Liabilities.  Seller shall,
without further consideration therefor, pay, assign and remit to Buyer promptly
all monies, rights and other considerations received in respect of such
performance by Buyer.  Seller shall
exercise or exploit its rights and options under all such Non-Assignable Assets
only as reasonably directed by Buyer and at Buyer’s expense.  If and when any such Consent is obtained or
such Non-Assignable Asset otherwise becomes assignable or able to be novated,
Seller shall promptly assign its rights and obligations thereunder to Buyer,
without payment of further consideration therefor, and Buyer shall, without the
payment of any further consideration therefor, assume all such rights and
obligations, in which case such Non-Assignable Asset shall thereafter
constitute an Acquired Asset (and Liabilities thereunder shall constitute
Assumed Liabilities) for all purposes under this Agreement.  Seller shall not request any release of its
obligations for any Assumed Liabilities

 18
 

 

from any
Person without Buyer’s prior written Consent, which Consent will not be
unreasonably withheld, conditioned or delayed.

7.2          Prorations;
Post-Closing Receipts.

(a)           On
and after the Closing Date, the Parties will cooperate to prorate the receipts
and expenses set forth on Schedule 7.2(a) and any other mutually agreed upon operating expenses
(collectively, “Apportionable
Expenses”).  The
Apportionable Expenses shall be apportioned on a per diem basis in accordance
with the principle that Apportionable Expenses related to or arising from time
periods on or prior to the Closing Date will be borne by Seller and
Apportionable Expenses related to or arising from time periods after the
Closing Date will be borne by Buyer.  The
amount of Apportionable Expenses that can be determined on the Closing Date
will be fixed and the respective obligations of the Parties determined
accordingly on the Closing Date.  If any
Apportionable Expenses cannot be prorated or determined as of the Closing Date
then it shall be separately prorated, determined and paid by the responsible
Party as soon as practicable following the Closing Date.  If any of the foregoing proration amounts
cannot be determined as of the Closing Date due to final bills therefor not
being issued as of the Closing Date, the Parties will prorate such items as and
when the actual bills therefor are issued to the appropriate Party.  The Party owing amounts to the other by means
of such prorations shall pay the same within thirty days following such
proration.

(b)           If,
following the Closing Date, a Party receives any property or payment belonging
to the other Party, such Party will immediately forward such property or
payment to the appropriate Party in the form such payment or property was
received.  To the extent Buyer receives
any mail or packages addressed to Seller and delivered to Buyer prior to
December 31, 2006, that Buyer has reasonably determined (following inspection
or otherwise) do not primarily relate to the Business, Buyer shall promptly
deliver such mail or packages to Seller.

7.3          Transfer
Taxes.  Seller
and Buyer shall equally bear all state and local sales, transfer or similar
Taxes and all recording costs and fees, however styled or designated, that are
required to be paid in connection with the transactions contemplated by this
Agreement, regardless of the Party upon which such amounts would have been
imposed absent this provision.  The
Parties shall cooperate with each other to the extent reasonably requested and
legally permitted to minimize any such Taxes. 
The Party required by law to file such Tax Returns shall prepare and
file all necessary Tax Returns and other documentation with respect to all such
Taxes, costs and fees within the time
period prescribed by law, and the other party shall promptly reimburse such
party for 50% of the amount of such Taxes, costs and fees upon receipt of
notice that such Taxes, costs and fees have been paid.

7.4          Confidentiality,
Non-Competition and Non-Solicitation.

(a)           Necessity. 
Seller acknowledges and agrees on behalf of itself and its Affiliates as
follows:

(i)            The covenants in this Section 7.4,
including the scope of the covenants as to time, geography and activity, are
reasonable and necessary to protect and

 19
 

 

preserve Buyer’s and its Affiliates’
legitimate business interests with respect to the Business being acquired and
are not broader than necessary to protect such interests;

(ii)           Buyer and/or its Affiliates would be
irreparably damaged if Seller or its Affiliates were to breach their
obligations under this Section 7.4; and

(iii)          Buyer has been materially induced by
Seller to enter into this Agreement, and Buyer would not have taken such
action, if Seller had not covenanted as provided in this Section 7.4.

(b)           Confidentiality.  Seller will maintain in confidence and
safeguard all business and customer information primarily related to the
Business, and all technical information related to the Business, that was
maintained as a trade secret by Seller as of the date of this Agreement
(collectively, the “Confidential
Information”). 
Seller  shall not disclose any
such Confidential Information to any third party and shall not use such
Confidential Information except (A) in the performance of its obligations under
this Agreement, (B) to conduct its SCR Business, subject to the limitations of
the license granted by Section 7.6(b), and (C) to Kawasaki in the course
of complying with its obligations under the Kawasaki License Agreement to the
extent not assumed by Buyer hereunder or to defend any claim related to the
Kawasaki License Agreement (provided that Kawasaki is under a written
obligation of confidentiality with respect to such information in a form
reasonably acceptable to Buyer). 
Confidential Information shall not include any information that: (i) is,
or becomes, generally available to the public except to the extent that such
Confidential Information becomes available to the public as a result of a
breach of Seller’s obligation hereunder, (ii) is received by Seller from a
third party without an accompanying duty of confidentiality, (iii) is required
by Law to be disclosed by Seller, provided that Seller shall give Buyer
sufficient written notice that it is required by Law to make such a disclosure
so that prior to any such disclosure, Buyer may seek appropriate protective
orders;  and provided further that, in
any such case, Seller only shall be permitted to disclose such portion of the
information that Seller is advised by counsel that it is required to disclose
by Law, (iv) is disclosed by Seller to comply with a valid administrative or
Congressional subpoena or pursuant to an order of a court of competent jurisdiction,
or (v) has been approved for use or disclosure by Buyer in writing in advance
of any such use or disclosure, which approval shall not be commercially
unreasonably withheld, conditioned or delayed.

(c)           Covenant. 
For a period of five years from and after
the Closing Date, Seller will not, and will cause its current and future
Affiliates not to, directly or indirectly, whether by itself or through an
agent, employee or otherwise, or in association with any Person or entity, own,
share in the earnings of, invest in the stock, bonds or other securities of,
manage, operate, finance (whether as a lender, investor or otherwise), control,
participate in the ownership, management, operation, or control of, lend money
to, or take part in, any other Person or entity that is engaged in the
manufacturing, selling or distribution of any products or providing any
services that compete, in whole or in part, with the Business or in the
development of any such products, or be engaged or employed by any such Person
or entity in respect of such competing product or service, or consult, advise
or render services to, any such Person or entity regarding any such competing
product or service (a “Competing Activity”) anywhere in the world.

 

 20

 

(d)           Exception. 
Seller will not be in violation of Section 7.4(c) solely by
reason of investing in stock, bonds or other securities of any Person or entity
engaged in a Competing Activity (but without otherwise participating in such
Competing Activity), if:  (i) such
stock, bonds or other securities are listed on any national securities exchange
or have been registered under Section 12(g) of the Securities Exchange Act of
1934 or any successor law; and (ii) such investment does not exceed, in
the case of any class of the capital stock of any one issuer, 10% of the issued
and outstanding shares or such capital stock, or, in the case of bonds or other
securities, 10% of the aggregate principal amount thereof issued and
outstanding.

(e)           Non-Solicitation.  For a period of five years after the Closing
Date, Seller will not, and will cause its current or future Affiliates not to,
directly or indirectly cause or induce, or attempt to cause or induce, any
then-existing customer, supplier, licensee, licensor, or franchisee or other
business relation of the Business, to cease doing business with Buyer or its
Affiliates in respect of the Business, or to deal with any competitor of the
Business, or materially interfere with the relationship between Buyer and its
Affiliates and their customers, suppliers, licensees, licensors, franchisees or
other business relations in respect of the Business.  During such five-year period, Seller will
not, and will cause its current or future Affiliates not to, directly or
indirectly hire, retain, or attempt to hire or retain any employee of Buyer or
its Affiliates, engaged in the Business; provided,
however, that nothing in this Section 7.4(e) shall prohibit
the placement of bona fide public advertisements for employment by Seller that
are not specifically targeted at such employees (for the avoidance of doubt,
the foregoing proviso shall not affect Seller’s covenant pursuant to this Section
7.4(e) not to, directly or indirectly hire, retain, or attempt to hire or
retain any employee of Buyer or its Affiliates engaged in the Business, during
such five-year period).

(f)            Acquisition Exception.  Notwithstanding anything else to the contrary
in this Agreement, the restrictions of this Section 7.4 shall not apply
to (i) any Person that acquires Seller by merger, consolidation, sale of all or
substantially all of its assets, purchase or other acquisition of a majority of
Seller’s outstanding voting securities or otherwise, which Person was not an
Affiliate of Seller prior to such acquisition, or (ii) any Person that acquires
any of Seller’s assets, whether by purchase or by sale in connection with any
reorganization or liquidation of Seller, which Person was not an Affiliate of
Seller prior to such acquisition.

(g)           Modification of Covenant.  If a final judgment of a court or tribunal of
competent jurisdiction determines that any term or provision contained in Sections 7.4(c)
or 7.5(e) is invalid or unenforceable, then the court or tribunal
will have the power to reduce the scope, duration, or geographic area of the
term or provision, to delete specific words or phrases, or to replace any
invalid or unenforceable term or provision with a term or provision that is
valid and enforceable and that comes closest to expressing the intention of the
invalid or unenforceable term or provision, and this Agreement will be
enforceable as so modified after the expiration of the time within which the
judgment may be appealed.

(h)           Affiliate. 
For purposes of this Section 7.4, 
Affiliate shall be deemed to exclude any director or stockholder of
Seller, unless such director or stockholder owns or controls, directly or
indirectly, more than 50% of the outstanding voting securities of Seller.

 21
 

 

7.5          Access
to Books and Records. 
For a period of three years from the Closing Date, or for such longer
period as is required by applicable Laws, Buyer will permit Seller or its
authorized representatives reasonable access, at Seller’s expense, to any books
and records relating to the transferred Business and the Acquired Assets to the
extent reasonably required by Seller to permit it: to determine its compliance
with applicable Laws and Tax and financial reporting requirements, to comply
with its obligations under this Agreement or to discharge its obligations with
respect to Retained Liabilities.  For a
period of three years from the Closing Date, or for such longer period as is
required by applicable Laws, Seller will permit Buyer or its authorized
representatives reasonable access, at Buyer’s expense, to information relating
to the transferred Business to the extent reasonably required by Buyer to
permit it: to determine its compliance with applicable Laws and Tax and
financial reporting requirements, and to comply with its obligations under this
Agreement or to discharge its obligations with respect to the Assumed
Liabilities.  Notwithstanding anything to
the contrary in this Section 7.5, in the event that the provision of
information pursuant to this Section 7.5 could be commercially
detrimental, violate any Law or agreement, or waive any attorney-client,
or other similar privilege, the parties shall take all commercially reasonable
measures to permit the compliance with such obligations in a manner that avoids
any such harm or consequence.

7.6          Certain
IP Matters.

(a)           Seller hereby grants to Buyer and its Affiliates a non-exclusive, irrevocable, fully paid up, worldwide,
royalty-free license to use any Intellectual Property owned by Seller
that is used by Seller or its Affiliates in the conduct or operation of the
Business but is not Acquired Intellectual
Property solely in the conduct or operation of the Business, which license shall be effective as of
Closing.

(b)           Buyer
hereby grants to Seller and its Affiliates a non-exclusive, irrevocable, fully
paid up, worldwide, royalty-free license to use the Acquired Intellectual
Property (other than the Registered Acquired Intellectual Property and any
documents related to the Acquired Intellectual Property) solely in the conduct
or operation of the SCR Business, which license shall be effective as of
Closing.

7.7          Environmental
Covenants.

(a)           Within
the time allowed by applicable Environmental Laws, or if shorter,  the Mountain View Lease, Seller shall perform
all Response Actions required to discharge the Seller Environmental Liabilities
in accordance with applicable Environmental Laws and the Mountain View
Lease.  Within the time allowed by
applicable Laws, or if shorter, the Mountain View Lease, Buyer shall perform
all removals, Response Actions, and other activities required to discharge the
Buyer Environmental and Facilities Liabilities in accordance with applicable
Laws and the Mountain View Lease. 
Notwithstanding anything to the contrary in this Section 7.7
Buyer and Seller shall cooperate to discharge in accordance with applicable
Environmental Laws any removal, Response Actions and similar activities
required to address matters that are both Seller Environmental Liabilities and
Buyer Environmental and Facilities Liabilities, subject to Buyer’s and Seller’s
respective rights to indemnification under Section 8.2(a)(vi) and Section
8.2(b)(iv).

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(b)           Buyer,
at no material cost to Buyer, will reasonably cooperate, and shall not
unreasonably interfere with, Seller’s efforts to discharge Seller Environmental
Liabilities, including without limitation any Response Actions undertaken or
caused by Seller in order to discharge the Seller Environmental
Liabilities.  Such cooperation shall include, without limitation,
reasonable cooperation to make the Mountain View Facilities and the assets
therein available to Seller as needed to undertake Response
Actions, access to applicable books and records in accordance with Section
7.5 and the assignment to Seller by Buyer of any rights Buyer may have
against any third parties (other than Buyer and its subsidiaries) which would
reduce or mitigate the Seller Environmental Liabilities; provided, however,
that Seller shall use commercially reasonable efforts to reduce any
interference with the use of the Mountain View Facilities by Buyer or its
successors, subtenants, and assigns.

(c)           Each
Party’s obligation to undertake any Response Action shall be limited to the
Response Actions required by applicable Law or the Real Property Leases and
shall be subject to reasonable challenge (at no cost or additional Liability to
the Party indemnified from such obligation under this Agreement).

ARTICLE
VIII

INDEMNIFICATION

8.1          Survival
Periods.

(a)           The
representations and warranties of Seller set forth in this Agreement or in any
certificate or instrument delivered pursuant hereto (and Seller’s Liability for
breach of any such representations and warranties) shall survive until the date
that is two years after the Closing Date, except that the representations and
warranties of Seller (and Seller’s Liability for breach of any such representations
and warranties) set forth in Section 5.1 (Organization and
Standing), Section 5.2 (Authority, Validity and Effect), Section 5.4
(Title), Section 5.17 (Employee Benefit Plans), Section 5.19
(Taxes) and Section 5.20 (No Brokers) shall survive until the date
that is two months after the expiration of the applicable periods under the
Laws prescribing applicable statues of limitation with respect to the subject
matter of such representations and warranties.

(b)           The
representations and warranties of Buyer set forth in this Agreement or in any
certificate or instrument delivered pursuant hereto (and Buyer’s Liability for
breach of any such representations and warranties) shall survive until the date
that is two years after the Closing Date, except that the representations and
warranties of Buyer (and Buyer’s Liability for breach of any such
representations and warranties) set forth in Section 6.1
(Organization and Standing), Section 6.2 (Authority, Validity and
Effect) and Section 6.5 (No Brokers) shall survive until the date
that is two months after the expiration of the applicable periods under the
Laws prescribing applicable statues of limitation with respect to the subject
matter of such representations and warranties.

(c)           Except
as otherwise expressly set forth herein, each covenant made by a Party under
this Agreement shall survive the Closing in accordance with its terms.

 23
 

 

(d)           Notification of Claims.  If a Party or any of its Related Persons (the
“Indemnified Party”)
intends to seek indemnification pursuant to this Article VIII, such
Indemnified Party shall promptly notify the Party from whom such
indemnification is sought (an “Indemnifying
Party”) in writing (the “Dispute
Notice”) describing such claim in reasonable detail, including
the estimated amount of such claim; provided
that the failure to provide such notice will not affect the obligations of the
Indemnifying Party except to the extent it is actually prejudiced thereby.  The Indemnifying Party shall have a period of
30 days within which to object to the Indemnified Party’s Dispute Notice.  If the Indemnifying Party does not respond
within such 30-day period, such Party shall be deemed to have accepted
responsibility to make payment and shall have no further right to contest the
validity of such claim.

8.2          Indemnification.

(a)           Subject
to the other provisions of this Article VIII, Seller shall
indemnify and hold Buyer and its Related Persons harmless from and against any
costs or expenses (including reasonable attorneys’ fees), judgments, fines,
Liabilities, losses, claims and damages (collectively, “Damages”)
resulting from:

(i)            any breach of any representation or
warranty made by Seller in this Agreement or any of the Ancillary Agreements;

(ii)           any failure by Seller to perform or
breach of any covenant made by it in this Agreement or any of the Ancillary
Agreements;

(iii)          Seller’s failure to pay, perform or
discharge in accordance with its terms any Retained Liability;

(iv)          the failure of Seller to comply with
applicable Laws relating to bulk transfers;

(v)           any Taxes (other than Taxes required
to be reimbursed by Buyer pursuant to Section 7.3) or Indebtedness of
Seller or its Affiliates; or

(vi)          Seller Environmental Liabilities.

(b)           Subject
to the other provisions of this Article VIII, Buyer shall indemnify
and hold Seller and its Related Persons harmless from and against all Damages
resulting from:

(i)            any breach of any representation or
warranty made by Buyer in this Agreement or any of the Ancillary Agreements;

(ii)           any failure by Buyer to perform or
breach of any covenant made by it in this Agreement or any of the Ancillary
Agreements;

(iii)          Buyer’s failure to pay, perform or
discharge in accordance with its terms any Assumed Liability; or

(iv)          Buyer Environmental and Facilities
Liabilities.

 24
 

 

(c)           For
purposes of Section 8.2(a)(i), Damages shall be computed without taking
into account any materiality or Seller Material Adverse Effect qualifier
contained in the representation or warranty at issue.

8.3          Third
Party Claims. 
If an indemnification claim involves a claim by a third party against
the Indemnified Party (a “Third Party Claim”),
the Indemnifying Party will have thirty days after receipt of the Dispute
Notice to elect to undertake, conduct and control, through counsel of its own
choosing and at its own expense, the settlement or defense of the Third Party
Claim; provided that the Indemnified Party may
participate in such settlement or defense through counsel chosen and paid for
by the Indemnified Party.  If the
Indemnifying Party does not notify the Indemnified Party within thirty days
after the receipt of the Dispute Notice that it elects to undertake the defense
thereof, the Indemnified Party will have the right to contest, settle or
compromise such claim but shall not thereby waive any right to indemnity
therefor pursuant to this Agreement.  As
long as the Indemnifying Party is contesting a Third Party Claim in good faith,
the Indemnified Party shall not pay or settle any such claim.  Notwithstanding the foregoing, the
Indemnified Party may settle a Third Party Claim if the settlement includes, as
an unconditional term thereof, a written release of the Indemnifying Party from
all Liability and obligation in respect of such Third Party Claim; provided that in such event the Indemnified Party waives any
right to indemnity by the Indemnifying Party therefor.  The Indemnified Party shall cooperate fully
in all aspects of any investigation, defense, pretrial activities, trial,
compromise, settlement or discharge of any Third Party Claim, including by
providing the Indemnifying Party with reasonable access to employees and
officers (including as witnesses) and other information.

8.4          Threshold.  Notwithstanding any provision of this
Agreement to the contrary, Seller will not be obligated to indemnify Buyer for
any Damages under Section 8.2(a)(i) unless and until the amount of
all Damages exceeds $50,000 (the “Threshold”),
provided, that if Buyer’s Damages exceed
such Threshold, then Buyer shall be entitled to indemnification as set forth in
this Article VIII for the full amount of all such Damages.  Notwithstanding any provision of this
Agreement to the contrary, Seller shall not be liable to indemnify, reimburse,
or otherwise hold harmless Buyer or its Related Persons for any Damages,
Liabilities, or other amounts under Section 8.2(a)(i) or Section 8.2(a)(ii) (other
than the covenants set forth in Section 7.4 (c) and (e) of this
Agreement, which shall not be subject to the Cap (as defined below)),
individually or in the aggregate, in excess of $2,400,000 (the “Cap”).

8.5          Specific
Performance.  If
either Party breaches any of its covenants, duties or obligations set forth in
this Agreement, the other Party would encounter extreme difficulty in
attempting to prove the actual amount of damages suffered by them as a result
of such breach and would not be reasonably or adequately compensated in damages
in any action at law.  In addition to any
other remedy a Party may have at law, in equity, by statute or otherwise, if
the other Party breaches this Agreement, then the first Party will be entitled
to seek and receive temporary, preliminary and permanent injunctive and other
equitable relief from any governmental body of competent jurisdiction to
enforce any of its rights under this Agreement or otherwise to prevent
violation of this Agreement.  No remedy
conferred by any of the specific provisions of this Agreement is intended to be
exclusive of any other remedy that is otherwise available at law, in equity, by
statute or otherwise.  Subject to the
last sentence of Section 8.7 regarding the payment of expenses of
arbitration, in any action, suit or other proceeding

 25
 

 

instituted,
concerning or arising out of this Agreement, the prevailing Party will recover
all of such Party’s costs and reasonable attorneys’ fees.

8.6          Exclusive
Remedy.  Except
with respect to claims based on fraud or willful breach and for equitable
remedies as provided for in Section 8.5, the indemnification
provisions of this Article VIII are the exclusive remedy following
the Closing (i) for any breaches or alleged breaches of any
representation, warranty or other provision of this Agreement or the
transactions contemplated hereby and (ii) for any Hazardous Material
present on, in, or about the Mountain View Facilities (including, without limitation
the soil, groundwater, building materials, fixtures and equipment thereof) or
otherwise with respect to the compliance of the Business or the Mountain View
Facilities with any Environmental Law and, without limitation of the foregoing,
each Party hereby waives any and all rights that are or may otherwise be
available to it at law or equity in respect of this Agreement, any Hazardous
Material present on, in, or about the Mountain View Facilities (including,
without limitation the soil, groundwater, building materials, fixtures and
equipment thereof) or otherwise with respect to the compliance of the Business
or the Mountain View Facilities with any Environmental Law, and the
transactions contemplated hereby.  None of
the Parties, nor any of their Related Persons, may bring any action or
proceeding, at law, equity or otherwise, against the other Party or its Related
Persons, in respect of any breaches or alleged breaches of any representation,
warranty or other provision of this Agreement or any Hazardous Material present
on, in, or about the Mountain View Facilities (including, without limitation
the soil, groundwater, building materials, fixtures and equipment thereof) or
otherwise with respect to the compliance of the Business or the Mountain View
Facilities with any Environmental Law, except pursuant to the express
provisions of this Article VIII. 
Each Party hereby acknowledges that the other Party has made no
representations and warranties, express or implied, with respect to this
Agreement or the matters contemplated hereby, except as explicitly set forth in
this Agreement and the Ancillary Agreements. 
The Parties further agree that the foregoing waivers should not be
diminished by the operation of any Law to the effect that waivers of unknown
claims are not enforceable and, accordingly, the Parties, after consultation
with counsel, each waives the benefits of all such Laws, Including without
limitation, Section 1542 of the California Civil Code.

8.7          Arbitration
of Disputes. 
Notwithstanding anything to the contrary contained in this Agreement,
any claims, disputes or controversies arising out of or relating to Article
VIII, including any dispute concerning the arbitrability or the scope of
this arbitration clause, shall be exclusively settled by binding arbitration
pursuant to the Commercial Rules of the American Arbitration Association (“AAA”) (it being expressly understood
and agreed that any such claims, disputes and remedies shall be subject to the
provisions of Article VIII). 
Arbitration may be commenced by any Party hereto in Cleveland, Ohio by
giving written notice to AAA in such place, and to each other Party, that such
claim or dispute has been referred to arbitration under this Section 8.7.  The arbitration proceedings shall be
conducted, using Delaware law, and applicable federal law, before a single
neutral arbitrator (or, in the case of a claim exceeding $1,000,000, before a
panel of three (3) neutral arbitrators, with each Party selecting one
arbitrator and the two selected by the Parties selecting the third), each of
whom shall have experience with mergers and acquisitions.  Any award rendered by the arbitrator(s) shall
be conclusive, final and binding upon the Parties hereto, and nonappealable to
any court or forum; provided, however, that any such award shall be accompanied
by a concise written opinion giving the reasons for the award.  Judgment upon such award may be entered in
any court of competent jurisdiction. 
Each

 26
 

 

Party shall
pay its own expenses of arbitration, except that the costs and expenses of the
arbitrators and the arbitration proceeding shall be paid based on the
resolution of the disputed items and the relative degree of success of each
Party as determined by the 

arbitrator(s).

ARTICLE
IX

EMPLOYEE
BENEFIT MATTERS

9.1          Employment.  Buyer shall make offers of employment as of
the day after the Closing to those employees of Seller listed on Schedule
9.1 who are actively at work immediately prior to the Closing Date (those
employees who accept employment with Buyer as of the day after Closing are
collectively referred to herein as the “Transferred Employees”).  Buyer further agrees to extend offers of
employment to any employee of Seller who is not actively at work on the Closing
Date due to leave of absence, disability or workers’ compensation leave or
military leave (collectively, the “Inactive Employees”), provided that, except
as to Inactive Employees on military leave, such Inactive Employee will be
available for, and accept such offer of, employment within the six-month period
following the Closing. To the extent permitted under applicable Law, the
Acquired Assets will include Seller’ employee files of each Transferred
Employee.

9.2          Compensation
and Employee Benefits.

(a)           In General.  For a period of six months after the Closing
Date, Buyer shall provide each Transferred Employee with no less than the
current base salary set forth for such employee on Schedule 5.16
and such other employee benefits that Buyer provides to its similarly situated
employees.  Seller shall pay each Transferred
Employee his salary or wages earned through the Closing Date and all other
obligations to such employees that are not Assumed Liabilities, and all such
Liabilities are Retained Liabilities. 
Subject to the foregoing and the other provisions of this Article IX,
Buyer shall have the right to determine the compensation and employee benefits
of the Transferred Employees.

(b)           Accrued Vacation and Holiday Pay.  During the year in which Closing occurs,
Buyer shall provide each Transferred Employee with at least the number of paid
vacation days and holidays to which he would have been entitled under Seller’s
practices during such year (except to the extent used by the Transferred
Employee during such year prior to Closing).

(c)           Service Credit.  For purposes of any employee benefit plan,
program or arrangement established for or made available to the Transferred
Employees by Buyer (the “Buyer Plans”), Buyer shall credit each
Transferred Employee with service for all periods of service prior to the
Closing Date recognized by Seller or any of its Affiliates.  Such service will be credited for purposes of
determining eligibility and vesting under all Buyer Plans and for benefit
levels as applicable in the Buyer Welfare Plans (i.e., vacation, disability, severance and similar benefits).

(d)           Welfare Benefit Plans.  Coverage for all Transferred Employees and
their eligible dependents under the Seller ERISA Plans and the Seller Benefit
Arrangements that are welfare benefit plans within the meaning of Section 3(1)
of ERISA (the “Seller
Welfare Plans”)

 27
 

 

will terminate
effective as of the Closing Date (the “Final Coverage Date”).  All claims for expenses incurred prior to the
Closing Date by Transferred Employees and their eligible dependents under the
Seller Welfare Plans and workers’ compensation benefits of employees of Seller
for events occurring prior to the Closing Date are Retained Liabilities.  The Buyer Plans that are welfare benefit
plans within the meaning of Section 3(1) of ERISA (the “Buyer Welfare Plans”) shall provide coverage
and benefits to Transferred Employees (and their eligible dependents) beginning
on the day after the Final Coverage Date or, in the case of Inactive Employees,
upon their employment by Buyer pursuant to Section 9.1.  Buyer shall be responsible for all claims
under Buyer Welfare Plans for expenses incurred by the Transferred Employees
after the Closing Date, or in the case of Inactive Employees, their employment
by Buyer.  For purposes of this Section 9.2(d),
a claim shall be deemed incurred when (i) the medical or dental service
relating to the expense is provided, regardless of when the incident giving
rise to the medical or dental expense occurs provided that claims relating to a
hospital confinement that commences on or prior to the Closing Date but
continues thereafter shall be treated as incurred on or prior to the Closing
Date; or (ii) in the event of a life, travel and accident or accidental
death or dismemberment insurance, disability or workers’ compensation claim,
when the death, accident or injury, as applicable, occurs.  Buyer shall cause deductibles and
out-of-pocket payments expended by each Transferred Employee for coverage under
the Seller Welfare Plans in the plan year in which the Closing occurs to be
counted toward the deductibles and out-of-pocket maximums applicable to each
Transferred Employee under the Buyer Welfare Plans.  In addition, no pre-existing condition,
limitation, exclusion or waiting period applicable with respect to any Buyer
Welfare Plan will apply to any Transferred Employee.

9.3          COBRA.  Buyer shall have sole responsibility for “continuation
coverage” benefits provided after the Closing Date under Buyer’s group health
plans to all Transferred Employees, and “qualified beneficiaries” of
Transferred Employees, for whom a “qualifying event” occurs after the Closing
Date.  Seller shall have the sole
responsibility for “continuation coverage” benefits provided under Seller’s
group health plans to all Transferred Employees, and all “qualified
beneficiaries” of such Transferred Employees, for whom a “qualifying event” has
occurred on or prior to the Closing Date, or for any Seller employee or “qualified
beneficiary” who is not a Transferred Employee or a “qualified beneficiary” of
a Transferred Employee, regardless of when such “qualifying event” occurs, and
the obligations of Seller under this sentence are Retained Liabilities.  The terms “continuation coverage,” “qualified
beneficiaries” and “qualifying event” shall have the meaning ascribed to them
under Section 4980B of the Code and Sections 601-608 of ERISA.

9.4          Further
Assurances. 
Seller shall provide any transition services necessary to transfer the
employment of the Transferred Employees and to cooperate with Buyer in order to
effect a smooth transition for all Transferred Employees.

ARTICLE X

MISCELLANEOUS

10.1        Expenses.  All costs and expenses (including all legal,
accounting, broker, finder or investment banker fees) incurred in connection
with this Agreement and the transactions

 28
 

 

contemplated
hereby are to be paid by the Party incurring such expenses, except to the
extent otherwise provided herein.

10.2        Successors
and Assigns. 
This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors and permitted assigns, but no Party may
assign either this Agreement or any of its rights, interests or obligations
hereunder without the prior written approval of the other Party, which Consent
will not be unreasonably withheld, conditioned or delayed; provided,
that a Change of Control of Seller shall not be deemed to be an assignment
under this Section 10.2. 
Notwithstanding the foregoing, Buyer may, without the Consent of Seller,
assign this Agreement or all or any portion of its rights, interests or
obligations hereunder to any of Buyer’s Affiliates provided Buyer shall remain
fully liable for the fulfillment of all such obligations.  For purposes of this Agreement, a “Change of Control of Seller” means
(i) the acquisition of Seller by another entity by means of any transaction or
series of related transactions to which Seller is party, including, without
limitation, any stock acquisition, reorganization, merger or consolidation,
(ii) the sale of all or substantially all of the assets of Seller, provided the purchaser of such assets assumes the
Liabilities of Seller hereunder and that Seller provides written notice to
Buyer of such sale and assumption, or (iii) any liquidation, dissolution
or winding up of Seller, whether voluntary or involuntary.

10.3        Third
Party Beneficiaries. 
This Agreement does not benefit or create any legal or equitable right,
remedy or claim in or on behalf of any Person other than the Parties.  This Agreement and all of its terms and
conditions are for the sole and exclusive benefit of the Parties and their
successors and permitted assigns.

10.4        Notices.  Any notice or other communication provided
for herein or given hereunder to a Party hereto will be sufficient if in
writing, and delivered in person, sent by facsimile transmission
(electronically confirmed),  mailed by
first class registered or certified mail, postage prepaid, or sent by Federal
Express or other overnight courier of national reputation, addressed as
follows:

If to Seller:

Catalytica Energy
Systems, Inc.

301 West Warner
Road, Suite 132

Tempe, AZ  85284

Attn:       Robert W. Zack, President, CEO and CFO

                Richard Weinroth, Secretary and
Corporate Counsel

With a
copy to

Wilson Sonsini Goodrich & Rosati

Professional Corporation

650 Page Mill Road

Palo Alto, California 94304-1050

Attn:  Donna M.
Petkanics

Fax:  650.493.6811

 

 29
 

 

If to Buyer:

Eaton Corporation

1111 Superior Avenue

Cleveland, Ohio 
44114

Attn:       Office
of the Secretary

Fax:         (216) 479-7103

 

or to such other address
with respect to a Party as such Party notifies the other in writing as provided
above.  Any such notice or other
communication shall be deemed to have been given and received on the day on
which it was personally delivered or transmitted by facsimile, receipt of
complete transmission confirmed (or, if such day is not a Business Day, on the
next following Business Day) or, if mailed, by registered or certified mail, on
the third Business Day following the date of mailing or, if couriered
overnight, on the next following Business Day; provided,
however, that if at the time of mailing or within three Business
Days thereafter, there is or occurs a labor dispute or other event that might
reasonably be expected to disrupt the delivery of documents by mail, any notice
or other communication hereunder shall be delivered or transmitted by means of
overnight courier as set forth above.

10.5        Complete
Agreement.  This
Agreement (along with the Schedules, Disclosure Letter, Exhibits and Appendices
hereto) contains the complete and exclusive statement of the terms of the
agreements between the Parties with respect to the transactions contemplated
hereby and supersedes all other prior agreements and understandings between the
Parties with respect thereto, including the Exclusivity Agreement, as extended;
provided that this Agreement shall not terminate
Buyer’s right to obtain evidence supporting the payments made under the
Exclusivity Agreement, as extended, as contemplated thereby and to seek
adjustment to the extent permitted thereunder or extinguish Buyer’s obligation
to make payment for the period from October 1, 2006 through October 15, 2006.

10.6        Construction.  Each provision of this Agreement has been
subject to mutual consultation, negotiation and agreement of the Parties and
therefore is to be construed as if the Parties drafted it jointly.  The word “including” means including without
limitation.  All references to the
masculine herein shall include the feminine and neuter, all references to the
neuter herein shall include the masculine and feminine, all references to the plural
shall include the singular and all references to the singular shall include the
plural.

10.7        Headings;
References.  The
headings contained in this Agreement are for convenience of reference only and
do not affect the interpretation or construction hereof.  When a reference is made in this Agreement to
a Section or an Article, such reference is to a Section or Article of this
Agreement unless otherwise indicated.

10.8        Amendment;
Waiver.  This
Agreement may be amended or modified only in a writing referencing this Agreement
and duly executed by the Parties.  The
provisions of this Agreement may be waived only in a writing referencing this
Agreement signed by the Party from whom the waiver is sought, and a Party may
enforce any provision of this Agreement even if it has previously granted a
waiver or failed to enforce that or any other provision of this Agreement.

 30
 

 

10.9        Governing Law.  This Agreement is to be governed by, and
construed and enforced in accordance with, the laws of the State of Delaware,
without giving effect to any choice or conflict of law provision or rule
(whether of the State of Delaware or any other jurisdiction) that would cause
the application of the laws of any other jurisdiction.

10.10      Submission
to Jurisdiction. 
Each Party hereby submits to the exclusive jurisdiction of any state or
federal court sitting in Cuyahoga County in the City of Cleveland, Ohio, with
respect to any Action arising out of or relating to this Agreement and agrees
that all claims in respect of such Action may be heard and determined in any
such court.  Each Party waives any
defense of inconvenient forum to the maintenance of any Action so brought.  Any Party may make service on the other Party
by sending or delivering a copy of the process to the Party to be served at the
address and in the manner provided for the giving of notices in Section 10.4.

10.11      Severability.  Any term or provision of this Agreement that
is invalid or unenforceable in any jurisdiction will, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.  If any provision of this Agreement is so
broad as to be unenforceable, the provision is to be interpreted to be only so
broad as is enforceable.

10.12      Bulk
Transfers. 
Buyer waives compliance with the provisions of all applicable Laws
relating to bulk transfers in connection with the transfer of the Acquired
Assets.

10.13      Counterparts.  This Agreement may be executed in any number
of counterparts, each of which will be deemed an original and all of which
together will constitute one and the same instrument.  A signature to this Agreement delivered by
facsimile or Portable Document Format (PDF) will be sufficient for all purposes
between the Parties.

(Signatures
are on the following page.)

 

 31

 

                IN WITNESS
WHEREOF, Seller and Buyer have caused this Agreement to be executed by its duly
authorized officer or representative as of the date set forth in the preamble
hereto.

 

	
  SELLER:

  	
   

  	
  CATALYTICA ENERGY SYSTEMS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ ROBERT W.
  ZACK 

  
	
   

  	
  Name:

  	
  Robert W. Zack 

  
	
   

  	
  Title:

  	
  CEO

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  BUYER:

  	
   

  	
  EATON CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ DAVID S.
  BARRIE  

  
	
   

  	
  Name:

  	
  David S. Barrie 
  

  
	
   

  	
  Title:

  	
  Authorized Representative

  
	
   

  	
   

  	
   

  
	
   

  	
  And by:

  	
  /s/ MARTIN V.
  RARICK 

  
	
   

  	
  Name:

  	
  Martin V. Rarick 

  
	
   

  	
  Title:

  	
  Authorized Representative

  

 

 

 

APPENDIX A

DEFINITIONS

“AAA”
has the meaning set forth in Section 8.7.

“Acquired
Assets” has the meaning set forth in Section 1.1.

“Acquired
Intellectual Property” has the meaning set forth in Section
1.1(f).

“Action”
means any civil, criminal or administrative action, cause of action, lawsuit,
arbitration, investigation, proceeding, hearing, charge, complaint, citation,
notice, request, demand, assessment, audit, or other legal, administrative or
arbitral proceeding or investigation, regardless of whether a proceeding or
lawsuit has been initiated.

“Affiliate”
means with respect to any Person, any Person that directly or indirectly
controls, is controlled by or is under common control with such Person.

“Agreement”
has the meaning set forth in the preamble to this Agreement.

“Ancillary
Agreements” means the Bill of Sale, the Instrument of
Assumption, the Lease Assignments, the Patent Assignment, and each other
document and instrument required to be delivered in connection with the
transactions contemplated by this Agreement.

“Apportionable
Expenses” has the meaning set forth in Section 7.2(a).

“Asset
and Liability Schedule” has the meaning set forth in Schedule
5.5(a).

“Assigned
Contracts” has the meaning set forth in Section 1.1(e).

“Assumed
Liabilities” has the meaning set forth in Section 2.1.

“Bill
of Sale” means the bill of sale substantially in the form attached to
the Agreement as Exhibit B.

“Business”
means Seller’s business of developing diesel fuel processing technologies,
including its Pre-Combustion Catalyst (“PCC”), Xonon Fuel Combustor (“XFC”), Continuous
Xonon Fuel Processor (“C-XFP”)
and Xonon Fuel Processor (“XFP”)
and XEC90 programs.  In no event shall
Business be deemed to include the SCR Business.

“Business
Day” means any day other than a Saturday, Sunday or a day on
which banks in Ohio or California are authorized or obligated by Law to close.

“Buyer”
has the meaning set forth in the preamble to this Agreement.

“Buyer Environmental and Facilities
Liabilities” means:

(A)          all obligations to surrender the
Mountain View Facilities to the master lessor in accordance with the terms of
the Real Property Leases, including without limitation the

 A-1
 

 

removal of all
alterations and improvements that are required to be removed from the Mountain
View Facilities under the terms of the Real Property Leases and the repair of
all damage caused by such removal, to the extent required by the Real Property
Leases, including the disposal of any asbestos-containing building materials or
any lab furnishings, fixtures, hoods, or other building equipment that has
become coated with Hazardous Materials that have not yet migrated to the soil
or groundwater of the premises; and

(B)           the closure in accordance with
applicable Laws of the Hazardous Materials activities currently being conducted
by the Business at the Mountain View Facilities upon termination of such
activities at such facilities; and

(C)           any Response Actions required by
applicable Environmental Laws for any Hazardous Materials (i) released to the
environment of any of the Mountain View Facilities during the period commencing
on the Closing Date and ending on the date such facilities are surrendered to
the master lessor under the Real Property Leases, or (ii) generated by the
Business and transferred to any third party for disposal after the Closing
Date; and

(D)          any claims brought by any Governmental
Authority or third party to the extent arising as a consequence of any
Hazardous Material Releases described in subpart (C), above or any lack of
performance of the obligations described in subparts (A) and (B) above; and

(E)           any adverse health effect resulting
from the exposure after the Closing Date of any Person to a Hazardous Material
stored, used, generated, or disposed of in the conduct of the Business after
the Closing Date; provided, however,
that if a particular exposure occurs both before and after the Closing Date,
the Buyer Environmental and Facilities Liabilities for such adverse health
effect shall be a proportion of the total Liability for such health effect
based on the relative duration and extent of the exposure after the Closing
Date, as compared to the total duration and extent of the exposure.

“Buyer
Plans” has the meaning set forth in Section 9.2(c).

“Buyer
Welfare Plans” has the meaning set forth in Section 9.2(d).

“Cap”
has the meaning set forth in Section 8.4.

“Change
of Control of Seller” has the meaning set forth in Section
10.2.

“Closing”
has the meaning set forth in Section 4.1.

“Closing
Date” has the meaning set forth in Section 4.1.

“Code”
means the Internal Revenue Code of 1986, as amended, and the rules and
regulations promulgated thereunder.

“Competing
Activity”
has the meaning set forth in Section 7.4(c).

“Consent”
means any consent, approval, authorization, qualification, waiver or notification
of a Governmental Authority or any other Person.

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“Contracts”
means any written or oral contract, binding agreement, license, binding
commitment, undertaking or arrangement, including purchase orders and sales
orders.

“Damages”
has the meaning set forth in Section 8.2(a).

“Disclosure
Letter” has the meaning set forth in the preamble to Article
V.

“Dispute
Notice” has the meaning set forth in Section 8.1(d).

“Environmental
Laws” means all laws, ordinances, regulations, rules, order,
permits, approvals, decisions or decrees, and any common law rules, orders,
permits, approvals, decisions or decrees, and any common or civil law (whether
currently in existence or hereafter enacted) concerning the subject of the
introduction, emission, discharge or release of pollutants or contaminants into
the air, soil, or surface or ground water; the transportation, handling, use,
storage, treatment or disposal of hazardous waste materials; or the remediation
or investigation of contamination of air, soil, or surface or ground water by
pollutants, contaminants or hazardous waste materials; or exposure to hazardous
substance hazardous waste, or toxic substances; including but not limited to
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), the Resource Conservation Recovery Act, 42 U.S.C. §6901 et seq.
(RCRA), the Clean Water Act, 33 U.S.C. §1251 et seq. (CWA), the Safe
Drinking Water Act, 42 U.S.C. §300f et seq. (SWDA), the Clean Air Act,
42 U.S.C. §7401 et. seq. (CAA), the Toxic Substances Control Act,
15 U.S.C §2601 et seq. (TSCA), and the Emergency Planning and
Right-to-Know Act of 1986, 42 U.S.C. §11001 et seq. (EPCRA), and similar
federal, state, provincial, territorial, local, municipal and foreign laws; and
any laws, ordinances, regulations, rules, orders, permits, approvals, decisions
or decrees, and any common law concerning worker health or safety, including,
but not limited to, the provisions of the Occupational Health and Safety Act
(OSHA) relating to hazardous materials, and similar state, provincial,
territorial, local, municipal and foreign laws.

“ERISA”
means the Employee Retirement Income Security Act of 1974, as amended, and the
rules and regulations promulgated thereunder.

“ERISA
Affiliate” shall mean any entity which is a member of a “controlled
group of corporations” with or under “common control” with Seller as defined in
Section 414(b) or (c) of the Code.

“Exclusivity
Agreement” means the Exclusivity and Expense Reimbursement
Agreement dated June 30, 2006 between Seller and Buyer.

“Final
Coverage Date” has the meaning set forth in Section 9.2(d).

“Financial
Statements” has the meaning set forth in Section 5.5.

“Fixed
Assets”
has the meaning set forth in Section 1.1(b).

“GAAP”
means United States generally accepted accounting principles.

“General
Enforceability Exceptions” has the meaning set forth in Section 5.2.

 A-3
 

 

“Governmental
Authority” means any government or political subdivision,
whether federal, state, local or foreign, or any agency or instrumentality of
any such government or political subdivision, or any federal, state, local or
foreign court or arbitrator.

“Hazardous
Materials” shall include (a) any element, compound or
chemical that is defined, listed or otherwise classified as a contaminant,
pollutant, toxic pollutant, toxic or hazardous substance, extremely hazardous
substance or chemical, hazardous waste, medical waste, biohazardous or
infectious waste, special waste, or solid waste under Environmental Laws;
(b) petroleum, petroleum-based or petroleum-derived products;
(c) polychlorinated biphenyls; (d) any substance exhibiting a
hazardous waste characteristic including but not limited to corrosivity,
ignitibility, toxicity or reactivity as well as any radioactive or explosive
materials; (e) friable asbestos, and (f) mercury in all cases as
defined or referenced in, or regulated under, any Environmental Laws.

“Indebtedness”
means for any Person (without duplication): 
(i) all indebtedness for borrowed money, whether current,
short-term, or long-term, secured or unsecured (excluding trade accounts
payable); (ii) all indebtedness for the deferred purchase price for
purchases of property outside the Ordinary Course that is not evidenced by
trade accounts payables; (iii) any payment of obligations in respect of
letters of credit (other than stand-by letters of credit in support of Ordinary
Course trade payables); (iv) any Liability with respect to interest rate
swaps, collars, caps and similar hedging obligations; (v) any lease
obligations under leases that are required to be accounted for as capital
leases under GAAP; (vi) any indebtedness referred to in clauses
(i) through (v) above that is directly or indirectly guaranteed by such
Person.

“Indemnifying
Party” and “Indemnified
Party” have the meanings set forth in Section 8.1(d).

“Instrument
of Assumption” means the instrument of assignment and assumption
in substantially the form attached to the Agreement as Exhibit C.

“Intellectual
Property” means (i) all names and marks,
including trademarks, service marks, trade names, corporate names, trade
dress, slogans, logos and domain names, and registrations and applications for
registration thereof including, all registered and unregistered trademarks,
trade names, service marks and applications therefor and all goodwill associated
therewith; (ii) all patents, patent applications and inventions, including
any provisional, utility, continuation, continuation-in-part or
divisional applications filed in the United States or any other jurisdiction,
and all reissues thereof and all reexamination certificates issuing therefrom;
(iii) all ownership rights to any copyrightable works or works in
progress, including all related copyright registrations; (iv) all know-how
or other trade secrets, whether or not reduced to practice, including inventions,
discoveries, ideas, processes, formulae, designs, drawings, models, industrial
designs, know-how, confidential information, or proprietary information,
whether patentable or not; all computer and electronic data processing programs
and software programs and related documentation; existing research projects;
products, processes and computer software presently under development; all
product, process and software concepts owned; and all proprietary information,
processes, formulae and algorithms used in the ownership, marketing,
development, maintenance, support and delivery of such products, processes and
software; (v) other intellectual property rights, including the right to
secure

 A-4
 

 

copyright, trademark, patent or other forms of
protection therein, the right to continue the prosecution of any applications
of such intellectual property, the right to secure renewals, reissues,
extensions and the right to recover for infringement thereof and the right to
sue for and recover damages, assert, settle and/or release any claims or
demands and obtain all other remedies and relief at law or equity for any past,
present or future infringement or misappropriation of any of the foregoing
intellectual property; (vi) all licenses, options to license, agreements,
contracts and other contractual rights concerning any such intellectual
property; and (vii) goodwill associated with the foregoing or any Person
holding any of the foregoing.

“Intellectual
Property Contract” has the meaning set forth in Section
5.8(g).

“Kawasaki License Agreement”
means that certain License Agreement, dated as of September 29, 2006 between
Seller and Kawasaki Heavy Industries, Ltd., a Japanese corporation.

“Law”
means any law, statute, code, ordinance, rule, regulation, or other legally enforceable
requirement of any Governmental Authority.

“Lease
Assignment” means the assignments of the Real Property Leases
substantially in the form attached to the Agreement as Exhibit F.

“Liabilities”
means any and all debts, liabilities and obligations, whether or not accrued,
contingent, known or unknown, or reflected on a balance sheet, including those
arising under any Law, Action or
Order and those arising under any Contract.

“Lien”
means any mortgage, lien, pledge, adverse claim, interest, charge or other
similar encumbrance.

“Material
Contract” means those Contracts identified on Schedule 5.7(a).

“Mountain
View Facilities” means all of the real property currently leased
and subleased by Seller pursuant to the terms of the Real Property Leases and
all of the improvements, fixtures, equipment and other tangible property
located therein.

“Mountain
View Lease” means the Lease Agreement dated January 1, 1993
between Jack Dymond Associates and Catalytica, Inc. as assigned by Catalytica,
Inc. pursuant to Assignment of Lease effective September 15, 2000 and as
assigned to Seller pursuant to Assignment of Lease effective December 15,
2000, such Lease Agreement has been as amended by the First Addendum to Lease
dated October 23, 1997, the Second Addendum to Lease dated June 29, 1998, the
Third Amendment and Extension to Lease dated April 7, 2003, the Fourth
Amendment to Lease dated November 25, 2003, the Fifth Amendment to Lease dated
June 30, 2004, the Sixth Amendment and Extension to Lease dated June 27, 2005, regarding
the real property located at 430 Ferguson Drive, Mountain View,
California.

“Non-Assignable
Assets” has the meaning set forth in Section 1.3.

 A-5
 

 

“Order”
means any order, judgment, ruling, injunction, award, decree or writ of any
Governmental Authority.

“Ordinary
Course” means the ordinary course of business of the Business,
consistent with Seller’s past custom and practice.

“Party”
or “Parties”
means Seller, on the one hand, and Buyer, on the other hand.

“Patent
Assignment” means the patent assignment substantially in the
form attached to the Agreement as Exhibit D.

“Permits”
has the meaning set forth in Section 1.1(g).

“Permitted
Liens” means (i) Liens
arising under Laws affecting the use of real property, including zoning Laws,
building Laws and similar restrictions that are not violated by the current use
or occupancy of such real property or the operation of the Business as
currently conducted thereon; (ii) the rights of the landlord and
subtenants under the Real Property Leases and the Liens included in the Assumed
Liabilities; (iii) Liens for Taxes, assessments or governmental or other
similar charges or levies that are not yet due and payable or that, although
due and payable, are being contested in good faith; (iv) mechanics,’
workmen’s, materialmen’s, landlords,’ carriers’ or other similar Liens arising
in the Ordinary Course with respect to Liabilities that are not yet due and
payable or that are being contested in good faith; and (v) Liens disclosed
on Schedule 5.4.

“Person”
means any individual, sole proprietorship, partnership, corporation, limited
liability company, joint venture, unincorporated society or association, trust
or other entity or Governmental Authority.

“Prototype
Purchasers” has the meaning set forth in Section 5.13.

“Purchase
Price” has the meaning set forth in Section 3.1.

“Real
Property Leases” has the meaning set forth in Section 1.1(a).

“Registered
Acquired Intellectual Property” means all Acquired Intellectual
Property issued or registered by the U.S. Patent and Trademark Office, the U.S.
Copyright Office or the corresponding Governmental Authority in any other
country, and applications for any of the foregoing filed with any such
Governmental Authority.

“Release”
means any release, spill, emission, discharge, leaking, pumping, injection,
deposit, disposal, dispersal, leaching or migration into the indoor or outdoor
environment (including, without limitation, ambient air, surface water,
groundwater and surface or subsurface strata) or into or out of any property in
violation of any Environmental Law, including the movement of Hazardous
Materials Released through or in the air, surface water, groundwater or
property.

“Related
Persons” means, as to any Person, its officers, directors,
employees, Affiliates, advisors, agents or other representatives.

 A-6
 

 

“Retained
Assets” has the meaning set forth in Section 1.2.

“Retained
Liabilities” has the meaning set forth in Section 2.2.

“Schedules”
means the schedules to this Agreement.

“SCR
Business” means Seller’s business of cleaning, regenerating,
rejuvenating or manufacturing Selective Catalyst Reduction (“SCR”) catalyst or
managing SCR catalyst or any business relating to SCR catalyst.

“Seller”
has the meaning set forth in the preamble to this Agreement.

“Seller
Benefit Arrangements” has the meaning set forth in Section
5.17(a).

“Seller Environmental Liabilities”
means, whether or not disclosed on Schedule 5.18:

(A)          any cleanup, removal, response,
investigation, monitoring, and remediation (“Response
Actions”) required by applicable Environmental Laws or the
Mountain View Lease for (i) any Hazardous Materials present at the Closing in
the soil or groundwater of the Mountain View Facilities as a consequence of any
Release into the soil or groundwater of the Mountain View Facilities during the
period commencing on the commencement date of the Real Property Leases with
respect to each such facility and ending on the earlier of the date such
facility was surrendered to the master lessor under the Real Property Leases or
the Closing Date pursuant to this Agreement, or (ii) generated by the Business
and transferred to any third party for disposal by Seller or its subsidiaries
prior to the Closing Date; and

(B)           any claims brought by any
Governmental Authority or third party to the extent arising as a consequence of
any Hazardous Material Releases described in subpart (A), above; and

(C)           any adverse health effect resulting
from the exposure prior to the Closing Date of any Person to a Hazardous
Material stored, used, generated, or disposed of in the conduct of the Business
prior to the Closing Date; provided, however,
that if a particular exposure occurs both before and after the Closing Date,
the Seller Environmental Liabilities for such adverse health effect shall be a
proportion of the total Liability for said health effect, based on the relative
duration and extent of the exposure prior to the Closing Date as compared to
the total duration and extent of the exposure.

Notwithstanding
the foregoing, in no event shall Seller Environmental Liabilities include any
Hazardous Material which has or hereafter migrates onto the Mountain View
Facilities from any other property.

“Seller
ERISA Plans” has the meaning set forth in Section 5.17(a).

“Seller’s Knowledge”
means the actual knowledge of Seller’s executive officers and senior management
of the Business (including Ralph Dalla Betta and David Yee) and such knowledge
as would be reasonably expected to be known by such individuals in the ordinary
and usual course of the performance of their professional responsibilities to
Seller.

 A-7
 

 

“Seller
Material Adverse Effect” means a material adverse effect on the
business, assets, Liabilities or financial condition of the Business taken as a
whole; provided, however, that
none of the following shall be deemed, either alone or in combination, to
constitute a Seller Material Adverse Effect: any change, event, state of facts,
or effect resulting from or arising out of (a) the announcement of this
Agreement or the pendency of the transactions contemplated hereby, including actions
taken in connection with the separation of the Business in furtherance of the
transactions contemplated hereby, (b) the performance by a Party of its
obligations under this Agreement or as required by applicable Laws or
accounting requirements, (c) general economic conditions in any country
where the Business is conducted that do not disproportionately and adversely
affect the Business in any material respect, (d) general conditions in any
industry in which the Business is conducted that do not disproportionately and
adversely affect the Business in any material respect, or (e) any natural
disaster or any acts of terrorism, sabotage, military action or war (whether or
not declared) or any escalation or worsening thereof.

“Seller
Welfare Plans” has the meaning set forth in Section 9.2(d).

“Statement
of Income” has the meaning set forth in Schedule 5.5(a).

“Tax”
means any and all domestic or foreign federal, state or local income,
franchise, business, occupation, sales/use, manufacturer’s excise, payroll,
withholding, Federal Insurance Contributions Act and employment and
unemployment taxes, personal and real property taxes and all other taxes or
charges (including all interest, penalties and additions to tax) measured,
assessed, levied, imposed or collected by any Governmental Authority, including
any such taxes or other charges the payment of which has been deferred.

“Tax
Returns” means all Tax returns (including information returns)
and reports that are or were required to be filed by, or with respect to, a
Person or its income, properties or operations.

“Third
Party Claim” has the meaning set forth in Section 8.3.

“Threshold”
has the meaning set forth in Section 8.4.

“Total
Consideration” has the meaning set forth in Section 3.2.

“Transferred
Employees” has the meaning set forth in Section 9.1.

“Transition
Services Agreement” means the Transition Services Agreement
between Buyer and Seller in substantially the form attached to the Agreement as
Exhibit E.

 

 A-8

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