S-1/A

As filed with the Securities and Exchange Commission on June 18, 2002

Registration No. 333-90150

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 1

To

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Celerity Group, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	3672	94-3372329
(State or other jurisdiction of incorporation or organization)	(Primary standard industrial classification code number)	(I.R.S. Employer identification no.)

Celerity Group, Inc.

1463 Centre Pointe Drive

Milpitas, California 95035

(408) 946-3100

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

David J. Shimmon

Chief Executive Officer

1463 Centre Pointe Drive

Milpitas, California 95035

(408) 946-3100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Daniel J. Winnike, Esq.
Scott J. Leichtner, Esq.
Fenwick & West, LLP
Two Palo Alto Square
Palo Alto, CA 94306
(650) 494-0600 Charles Ayres
Frank Schiff
DB Capital Partners, Inc.
31 W. 52nd Street, 26th Floor
New York, NY 10019
(646) 324-2200 Grant Behrman
William Matthes
Behrman Capital
126 E. 56th Street, 27th Floor
New York, NY 10022
(212) 980-6500 Jeffrey D. Saper, Esq.
Robert G. Day, Esq.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300

     Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

     If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

     If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o                            

     If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o                            

     If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o                            

     If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.    o

     The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay the effective date of this Registration Statement until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

EXPLANATORY NOTE

      This Amendment No. 1 to the Registrant’s Form S-1 Registration Statement is being filed for the sole purpose of filing additional exhibits as set forth below in Item 16(a) of Part II.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 16. Exhibits and Financial Statement Schedules.

      (a) The following exhibits are filed herewith:

Exhibit
Number		Exhibit Title
	1.01	Form of Underwriting Agreement.*
	2.01	Agreement and Plan of Merger, dated as of April 10, 2002, among the Registrant, Kinetics Acquisition Corporation, Kinetics Fluid Systems, Inc., Poly Concepts, Inc. and the shareholders of Poly Concepts, Inc.**
	2.02	Form of Separation Agreement by and among the Registrant, Kinetic Systems, Inc. and Kinetics Biopharm, Inc.
	2.03	Form of Management Services Agreement by and among the Registrant, Kinetic Systems, Inc. and Kinetics Biopharm, Inc.
	2.04	Form of Confidential Disclosure Agreement by and among the Registrant, Kinetic Systems, Inc. and Kinetics Biopharm, Inc.
	2.05	Form of Tax Sharing Agreement by and among the Registrant, Kinetic Systems, Inc. and Kinetics Biopharm, Inc.
	2.06	Form of Trademark License Agreement by and among the Registrant, Kinetic Systems, Inc. and Kinetics Biopharm, Inc.
	2.07	Form of Employee Matters Agreement by and among the Registrant, Kinetic Systems, Inc. and Kinetics Biopharm, Inc.
	3.01	Restated Certificate of Incorporation of the Registrant, as filed December 14, 2001.**
	3.02	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, as filed May 3, 2002.**
	3.03	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, as filed June 10, 2002.
	3.04	Form of Restated Certificate of Incorporation to be filed upon the closing of the offering.*
	3.05	Bylaws of the Registrant.**
	3.06	Restated Bylaws of the Registrant to be effective upon the closing of the offering.*
	4.01	Specimen Common Stock Certificate.*
	4.02	Amended and Restated Shareholders Agreement, dated as of August 30, 2000 and as amended and restated on December 14, 2001, by and among the Registrant and certain investors.**
	5.01	Opinion of Fenwick & West LLP.*
	10.01	Form of Indemnity Agreement.*
	10.02	2000 Stock Option Plan, and form of stock option award agreement.**
	10.03	2000 Deferred Stock Plan, and form of deferred stock award agreement.**
	10.04	2002 Equity Incentive Plan.*
	10.05	2002 Stock Option Plan.*
	10.06	Promissory Note held by the Registrant of John R. Ferron in the principal amount of $250,000 issued in February 2000.**

II-1

Exhibit
Number		Exhibit Title
	10.07	Promissory Note held by the Registrant of Albert (Hong Chuan) Ooi in the principal amount of $200,000 issued in June 2000.**
	10.08	Promissory Note held by the Registrant of David J. Shimmon in the principal amount of $4,000,000 issued in June 2001.**
	10.09	Industrial Building Lease Agreement dated September 1, 1990 by and between Pacesetter Business Properties and Unit Instruments, Inc.**
	10.10	Lease Agreement dated April 27, 1995 by and between Prudential Insurance Company of America and Insync Systems, Inc.**
	10.11	Lease Agreement dated April 16, 1996 by and between Security Capital Industrial Trust and Insync Systems, Inc.**
	10.12	Lease Agreement dated July 13, 2000 by and between Prologis Trust and Kinetics Fluid Systems, Inc.**
	10.13	Employment Offer Letter dated January 25, 2000 to John R. Ferron.**
	10.14	Employment Offer Letter dated August 1, 2000 to Albert (Hong Chuan) Ooi.**
	10.15	Global Supply Agreement, dated as of June 1, 2002, by and between Applied Materials, Inc. and Kinetics Fluid Systems Inc.†
	10.16	Amended and Restated Intellectual Property Agreement, dated as of June 1, 2002, by and between Applied Materials, Inc. and Kinetics Fluid Systems, Inc.†
	10.17	Stock Purchase Agreement, dated as of February 28, 2001, by and among Kinetics Electronics Management, Inc., Magnolia Tree, LLC and James E. Hawthorne, as Trustee of the James and Robert Hawthorne Family Trust U/T/A dated August 31, 1999.
	21.01	List of Subsidiaries of Registrant.*
	23.01	Consent of Fenwick & West LLP (See Exhibit 5.01).*
	23.02	Consent of Ernst & Young LLP, independent auditors.**
	23.03	Consent of Perkins & Company, P.C., independent auditors.**
	24.01	Power of Attorney**

  *  To be filed by amendment.

**	Previously filed.
†	Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from this exhibit and have been filed separately with the Commission.

     (b) Financial Statement Schedules

      All financial statement schedules have been omitted because the information required to be set forth herein is not applicable or is shown either in the consolidated financial statements or the notes thereto.

II-2

SIGNATURES

      Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Milpitas, State of California, on this 18th day of June, 2002.

CELERITY GROUP, INC.

By:  /s/ DAVID J. SHIMMON

David J. Shimmon

Chairman and Chief Executive Officer

      Pursuant to the requirements of the Securities Act, this Amendment No. 1 to the Registration Statement has been signed by the following persons on behalf of the Registrant on the date indicated.

Name	Title	Date
Principal Executive Officer:
/s/ DAVID J. SHIMMON David J. Shimmon	Chairman and Chief Executive Officer	June 18, 2002
Principal Financial Officer and Principal Accounting Officer:
/s/ JOHN R. FERRON* John R. Ferron	Chief Financial Officer	June 18, 2002
Additional Directors:
/s/ DANIEL C. RUBIN* Daniel C. Rubin	Vice Chairman	June 18, 2002
/s/ R. DAVID ANDREWS* R. David Andrews	Director	June 18, 2002
/s/ NEIL R. AUSTRIAN* Neil R. Austrian	Director	June 18, 2002
/s/ CHARLES AYRES* Charles Ayres	Director	June 18, 2002
/s/ GRANT G. BEHRMAN* Grant G. Behrman	Director	June 18, 2002
/s/ GREGORY J. CHIATE* Gregory J. Chiate	Director	June 18, 2002

II-3

Name		Title	Date
/s/ MILAN MANDARIC* Milan Mandaric		Director	June 18, 2002
/s/ WILLIAM M. MATTHES* William M. Matthes		Director	June 18, 2002
/s/ FRANK L. SCHIFF* Frank L. Schiff		Director	June 18, 2002
/s/ TED VIRTUE* Ted Virtue		Director	June 18, 2002
*By:	/s/ DAVID J. SHIMMON David J. Shimmon Attorney-in-fact

II-4

EXHIBIT INDEX

Exhibit
Number		Exhibit Title
	1.01	Form of Underwriting Agreement.*
	2.01	Agreement and Plan of Merger, dated as of April 10, 2002, among the Registrant, Kinetics Acquisition Corporation, Kinetics Fluid Systems, Inc., Poly Concepts, Inc. and the shareholders of Poly Concepts, Inc.**
	2.02	Form of Separation Agreement by and among the Registrant, Kinetic Systems, Inc. and Kinetics Biopharm, Inc.
	2.03	Form of Management Services Agreement by and among the Registrant, Kinetic Systems, Inc. and Kinetics Biopharm, Inc.
	2.04	Form of Confidential Disclosure Agreement by and among the Registrant, Kinetic Systems, Inc. and Kinetics Biopharm, Inc.
	2.05	Form of Tax Sharing Agreement by and among the Registrant, Kinetic Systems, Inc. and Kinetics Biopharm, Inc.
	2.06	Form of Trademark License Agreement by and among the Registrant, Kinetic Systems, Inc. and Kinetics Biopharm, Inc.
	2.07	Form of Employee Matters Agreement by and among the Registrant, Kinetic Systems, Inc. and Kinetics Biopharm, Inc.
	3.01	Restated Certificate of Incorporation of the Registrant, as filed December 14, 2001.**
	3.02	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, as filed May 3, 2002.**
	3.03	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, as filed June 10, 2002.
	3.04	Form of Restated Certificate of Incorporation to be filed upon the closing of the offering.*
	3.05	Bylaws of the Registrant.**
	3.06	Restated Bylaws of the Registrant to be effective upon the closing of the offering.*
	4.01	Specimen Common Stock Certificate.*
	4.02	Amended and Restated Shareholders Agreement, dated as of August 30, 2000 and as amended and restated on December 14, 2001, by and among the Registrant and certain investors.**
	5.01	Opinion of Fenwick & West LLP.*
	10.01	Form of Indemnity Agreement.*
	10.02	2000 Stock Option Plan, and form of stock option award agreement.**
	10.03	2000 Deferred Stock Plan, and form of deferred stock award agreement.**
	10.04	2002 Equity Incentive Plan.*
	10.05	2002 Stock Option Plan.*
	10.06	Promissory Note held by the Registrant of John R. Ferron in the principal amount of $250,000 issued in February 2000.**
	10.07	Promissory Note held by the Registrant of Albert (Hong Chuan) Ooi in the principal amount of $200,000 issued in June 2000.**
	10.08	Promissory Note held by the Registrant of David Shimmon in the principal amount of $4,000,000 issued in June 2001.**
	10.09	Industrial Building Lease Agreement dated September 1, 1990 by and between Pacesetter Business Properties and Unit Instruments, Inc.**
	10.10	Lease Agreement dated April 27, 1995 by and between Prudential Insurance Company of America and Insync Systems, Inc.**

Exhibit
Number		Exhibit Title
	10.11	Lease Agreement dated April 16, 1996 by and between Security Capital Industrial Trust and Insync Systems, Inc.**
	10.12	Lease Agreement dated July 13, 2000 by and between Prologis Trust and Kinetics Fluid Systems, Inc.**
	10.13	Employment Offer Letter dated January 25, 2000 to John R. Ferron.**
	10.14	Employment Offer Letter dated August 1, 2000 to Albert (Hong Chuan) Ooi.**
	10.15	Global Supply Agreement, dated as of June 1, 2002, by and between Applied Materials, Inc. and Kinetics Fluid Systems Inc.†
	10.16	Amended and Restated Intellectual Property Agreement, dated as of June 1, 2002, by and between Applied Materials, Inc. and Kinetics Fluid Systems, Inc.†
	10.17	Stock Purchase Agreement, dated as of February 28, 2001, by and among Kinetics Electronics Management, Inc., Magnolia Tree, LLC and James E. Hawthorne, as Trustee of the James and Robert Hawthorne Family Trust U/T/A dated August 31, 1999.
	21.01	List of Subsidiaries of Registrant.*
	23.01	Consent of Fenwick & West LLP (See Exhibit 5.01).*
	23.02	Consent of Ernst & Young LLP, independent auditors.**
	23.03	Consent of Perkins & Company, P.C., independent auditors.**
	24.01	Power of Attorney.**

  *  To be filed by amendment.

**	Previously filed.
†	Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from this exhibit and have been filed separately with the Commission.

EX-2.02 3 f82015a1exv2w02.txt EXHIBIT 2.02 Exhibit 2.02 SEPARATION AGREEMENT This Separation Agreement ("AGREEMENT") is entered into effective as of _________, 2002 by and between Celerity Group, Inc., a Delaware corporation (the "COMPANY", formerly known as Kinetics Holdings Corporation), Kinetic Systems, Inc., a California corporation ("KSI"), and Kinetics Biopharm, Inc., a Delaware corporation ("KBI"). The Company, KSI and KBI are sometimes referred to herein individually as a "PARTY" and collectively as the "PARTIES." RECITALS WHEREAS, KSI and KBI are direct or indirect wholly owned subsidiaries of the Company; WHEREAS, the Board of Directors of the Company has determined that it is in the best interests of the Company and its stockholders to separate the Company Business, the KSI Business and the KBI Business in connection with the consummation of the Company's Initial Public Offering, by distributing to the holders of the Company's Common Stock on a pro rata basis all of the shares of KSI capital stock and KBI capital stock owned by the Company (the "DISTRIBUTION") (capitalized terms having the meanings set forth below); and WHEREAS, it is appropriate and desirable to set forth the principal corporate transactions and agreements required with respect to the Distribution and the relationship of the parties and their respective subsidiaries following such events. NOW, THEREFORE, in consideration of the foregoing premises and the mutual agreements, provisions and covenants contained in this Agreement, the parties hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 Definitions. As used herein, the following terms have the following meanings: "ACTION" means any claim, action, cause of action, suit, arbitration, proceeding, inquiry or investigation by or before any court, arbitrator, governmental or regulatory or administrative agency or commission, or any other tribunal or other Governmental Authority. "AFFILIATE" of any specified Person means any other Person that, directly or indirectly, controls, is controlled by or is under direct or indirect common control with such specified Person. "AGREEMENT" has the meaning specified in the preamble hereto, as such agreement may be amended from time to time. 1 "ANCILLARY AGREEMENTS" means the Confidential Disclosure Agreement, the Employee Matters Agreement, the Management Services Agreement, the Tax Sharing Agreement, and the Trademark License Agreement. "ASSIGNED ASSET" has the meaning set forth in Section 3.1. "ASSIGNED CONTRACTS" means the following contracts and agreements to which an Assigning Party or its subsidiaries is a party or by which it or any of its subsidiaries or their respective assets is bound, whether or not in writing, except for any such contract or agreement that is to be retained by the Assigning Party or its subsidiaries pursuant to any provision of this Agreement or any Ancillary Agreement: (a) [all contracts or agreements listed or described on Schedule _____ (as such Schedule may be supplemented by mutual agreement of the parties hereto after the date hereof and prior to the Distribution Date);] (b) any contracts or agreements entered into in the name of, or expressly on behalf of, the Receiving Party or any of its subsidiaries; (c) any contract or agreement that relates exclusively to the Receiving Party's Business; (d) any guarantee, indemnity, representation, warranty or other Liability of a party in respect of any other contract, any Liability or the Business of the Receiving Party; and (e) any contract or agreement that is otherwise expressly contemplated pursuant to this Agreement or any of the Ancillary Agreements to be assigned to the Receiving Party. "ASSIGNING PARTY" has the meaning set forth in Section 3.1. "CLOSING" means the initial sale of shares of Common Stock by the Company to the Underwriters pursuant to the Initial Public Offering in accordance with the terms of the Underwriting Agreement between the Company and the Underwriters. "CLOSING DATE" means the time of the Closing. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the common stock, par value $0.01 per share, of the Company. "COMPANY BALANCE SHEET" means the audited balance sheet of the Company, including the notes thereto, as of ____________, 2002. "COMPANY BUSINESS" means the business and operations of the Company and its various divisions and subsidiaries engaged in the design and production of high performance gas and 2 chemical delivery modules for semiconductor fabrication, but excludes the KSI Business and the KBI Business. "COMPANY GROUP" means the Company and each Person (other than KSI, KBI and their respective subsidiaries and the LLC and its subsidiaries) that is an Affiliate of the Company immediately after the Distribution Date. "COMPANY INDEMNITEES" has the meaning specified in Section 4.2. "COMPANY LIABILITIES" has the meaning specified in Section 3.2, but shall exclude the KBI Liabilities and the KSI Liabilities. "CONFIDENTIAL DISCLOSURE AGREEMENT" means the Confidential Disclosure Agreement dated the date hereof between the Company, KSI and KBI providing for the confidential treatment of certain information, as such agreement may be amended from time to time. "CONSENTS" means any consents, waivers or approvals from, or notification requirements to, any third parties. "COVERED CLAIMS" means any claim that is of a type covered by insurance or self insurance of the Company in effect on the Distribution Date and that is a type of claim specified as a covered claim on Schedule 5.4(a). "DISTRIBUTION" has the meaning specified in the Recitals. "DISTRIBUTION DATE" means the date on which the Distribution shall be consummated, which is contemplated to occur concurrent with the Closing. "EFFECTIVE TIME" means the time as of which the Registration Statement is declared effective by the Commission. "EMPLOYEE MATTERS AGREEMENT" means the Employee Matters Agreement dated the date hereof between the Company, KSI and KBI regarding certain employment and benefits matters, as such agreement may be amended from time to time. "ENTITLED PARTY" has the meaning set forth in Section 3.3. "ESCALATION NOTICE" has the meaning set forth in Section 7.2. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXCLUDED ASSETS" has the meaning set forth in Section 3.1(b). "EXCLUDED LIABILITIES" has the meaning set forth in Section 3.2(b). "GOVERNMENTAL APPROVALS" means any notices, reports or other filings to be made, or any consents, registrations, approvals, permits or authorizations to be obtained from, any Governmental Authority. 3 "GOVERNMENTAL AUTHORITY" means any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority. "INDEMNIFIED PARTY" has the meaning set forth in Section 4.5(a). "INDEMNIFYING PARTY" has the meaning set forth in Section 4.5(a). "INITIAL PUBLIC OFFERING" means the Company's issuance of shares of Common Stock to the public in an offering registered under the Securities Act. "INTELLECTUAL PROPERTY" means (a) inventions, whether or not patentable, whether or not reduced to practice or whether or not yet made the subject of a pending patent application or applications, (b) ideas and conceptions of potentially patentable subject matter, including, without limitation, any patent disclosures, whether or not reduced to practice and whether or not yet made the subject of a pending patent application or applications, (c) national (including the United States) and multinational statutory invention registrations, patents, patent registrations and patent applications (including all reissues, divisions, continuations, continuations-in-part, extensions and reexaminations) and all rights therein provided by multinational treaties or conventions and all improvements to the inventions disclosed in each such registration, patent or application, (d) trademarks, service marks, trade dress, logos, trade names and corporate names, whether or not registered, including all common law rights, and registrations and applications for registration thereof, including, but not limited to, all marks registered in the United States Patent and Trademark Office, the Trademark Offices of the States and Territories of the United States of America, and the trademark offices of other nations throughout the world, and all rights therein provided by multinational treaties or conventions, (e) copyrights (registered or otherwise) and registrations and applications for registration thereof, and all rights therein provided by multinational treaties or conventions, (f) moral rights (including, without limitation, rights of paternity and integrity), and waivers of such rights by others, (g) computer software, including, without limitation, source code, operating systems and specifications, data, data bases, files, documentation and other materials related thereto, data and documentation, (h) trade secrets and confidential, technical or business information (including ideas, formulas, compositions, inventions, and conceptions of inventions whether patentable or unpatentable and whether or not reduced to practice), (i) whether or not confidential, technology (including know-how and show-how), manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information, (j) copies and tangible embodiments of all the foregoing, in whatever form or medium, (k) all rights to obtain and rights to apply for patents, and to register trademarks and copyrights, and (1) all rights to sue and recover and retain damages and costs and attorneys' fees for present and past infringement of any of the Intellectual Property rights hereinabove set out. "INVENTORY" means all inventory, merchandise, finished goods, and raw materials, packaging, supplies, works-in-progress and other personal property and any prepaid deposits for any of the same. 4 "KBI BALANCE SHEET" means the audited balance sheet of KBI, including the notes thereto, as of ____________, 2002. "KBI BUSINESS" means the business and operations of KBI and KMS and their respective divisions and subsidiaries engaged in the design, engineering and construction of turnkey and design/build process systems for the biotechnology and pharmaceutical industries. "KBI GROUP" means KBI and each Person (other than the Company and KSI and their respective subsidiaries) that is an Affiliate of KBI immediately after the Distribution Date. "KBI INDEMNITEES" has the meaning specified in Section 4.2. "KBI LIABILITIES" has the meaning set forth in Section 3.2. "KGI" means Kinetics Group, Inc., a Delaware corporation. "KMS" means Kinetics Modular Systems, Inc., a company chartered under the laws of Ontario, Canada. "KSI BALANCE SHEET" means the audited balance sheet of KSI, including the notes thereto, as of ____________, 2002. "KSI BUSINESS" means the business and operations of KSI and KTS and their respective divisions and subsidiaries engaged in the delivery of turnkey high purity process systems, including the construction of high purity installations and after-market operating services to the electronics and other industries, but excluding the KBI Business. "KSI GROUP" means KSI and each Person (other than the Company and KBI and their respective subsidiaries) that is an Affiliate of KSI immediately after the Distribution Date. "KSI INDEMNITEES" has the meaning specified in Section 4.3. "KSI LIABILITIES" has the meaning set forth in Section 3.2. "KTS" means Kinetics Thermal Systems, Inc., a New York corporation. "LIABILITIES" means any and all losses, claims, charges, debts, demands, Actions, causes of action, suits, damages, obligations, payments, costs and expenses, accounts, bonds, indemnities and similar obligations, covenants, contracts, agreements, promises, guarantees and other liabilities, including all contractual obligations, whether absolute or contingent, matured or not matured, liquidated or unliquidated, accrued or not accrued, known or unknown, whenever arising, and including those arising under any law, rule, regulation, Action, threatened or contemplated Action (including the costs and expenses of demands, assessments, judgments, settlements and compromises relating thereto and attorneys' fees and any and all costs and expenses (including allocated costs of in-house counsel and other personnel), whatsoever reasonably incurred in investigating, preparing or defending against any such Actions or threatened or contemplated Actions), order or consent decree of any Governmental Authority or any award of any arbitrator or mediator of any kind, and those arising under any contract, 5 commitment or undertaking, including those arising under this Agreement or any Ancillary Agreement, in each case, whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of any Person. "LICENSED INTELLECTUAL PROPERTY" means all Intellectual Property licensed or sublicensed from a third party. "LLC" means a limited liability corporation created and owned by the Stockholders for the purpose of holding (directly or indirectly) all the outstanding capital stock of KSI and KBI. "MANAGEMENT SERVICES AGREEMENT" means the Management Services Agreement dated the date hereof between the Company, KSI and KBI regarding the provision of certain services among the parties, as such agreement may be amended from time to time. "MEDIATION DEMAND DATE" has the meaning set forth in Section 7.3. "MEDIATION DEMAND NOTICE" has the meaning set forth in Section 7.3. "MERGER" has the meaning set forth in Section 2.1. "NEW KSI CREDIT FACILITY" means the credit facility in the aggregate commitment amount of $210,000,000 to be entered into by KSI and KBI, as co-borrowers, and various lenders including the Bank of Nova Scotia as arranger and administrative agent, the proceeds of which will be used to satisfy KSI's obligations under the KSI Note. "KSI NOTE" means the Promissory Note in the principal amount of $150,000,000 to be executed by KSI, as maker, in favor of KGI, as payee, which shall mature and require the payment by KSI of all outstanding principal and accrued interest on the Closing Date. "OWNER INTELLECTUAL PROPERTY" means all Intellectual Property in and to which a party or its subsidiaries holds, or has a right to hold, right, title and interest. "PERSON" means an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability entity, any other entity and any Governmental Authority. "POLICY" and "POLICIES" have the meanings specified in Section 5.4(a). "PROSPECTUS" means each preliminary, final or supplemental prospectus forming a part of the Registration Statement. "RECEIVABLES" means any and all accounts receivable, notes and other amounts receivable from third parties, including, without limitation, customers and employees, whether or not in the ordinary course, together with any unpaid financing charges accrued thereon. "RECEIVING PARTY" has the meaning specified in Section 3.1. 6 "RECEIVING PARTY'S BUSINESS", "BUSINESS OF THE RECEIVING PARTY" and "BUSINESS" shall mean the Company Business, the KSI Business or the KBI Business, as applicable. "REGISTRATION STATEMENT" means the registration statement on Form S-1 filed by the Company with the Commission to effect the registration of the Common Stock pursuant to the Securities Act, as such registration statement may be amended from time to time. "RETAINING PARTY" has the meaning set forth in Section 3.3. "SECURITIES ACT" means the Securities Act of 1933, as amended. "STOCKHOLDERS" means the holders of the issued and outstanding capital stock of the Company as of __________, 2002 (the "RECORD DATE"). "TANGIBLE PERSONAL PROPERTY" means all machinery, equipment, tools, supplies, furniture, fixtures, personalty, vehicles and other tangible personal property. "TAX" and "TAXES" shall have the meanings given to such terms in the Tax Sharing Agreement. "TAX SHARING AGREEMENT" means the Tax Sharing Agreement dated the date hereof between the Company, KSI and KBI (or in the case of KSI and KBI, their respective shareholders) providing for certain tax related matters, as such agreement may be amended from time to time. "THIRD-PARTY CLAIM" has the meaning set forth in Section 4.6. "TRADEMARK LICENSE AGREEMENT" means the Trademark License Agreement dated the date hereof between the Company, KSI and KBI providing for certain trademark matters, as such agreement may be amended from time to time. Unless otherwise specified, any reference to any "SUBSIDIARY" or "SUBSIDIARIES" of the Company shall not include KSI or KBI or their respective subsidiaries, but shall include Kinetics Japan K.K. ARTICLE II TRANSACTIONS TO EFFECT THE DISTRIBUTION Section 2.1 Restructuring and Separation of Businesses. Subject only to the occurrence of the Closing following the Commission's declaration of effectiveness of the Registration Statement, each of the Company, KSI and KBI (as applicable) shall consummate the following transactions to effect the Distribution on the Distribution Date, to the extent that such transactions have not been consummated prior to the date hereof: (a) KGI shall contribute all of the issued and outstanding capital stock of KMS to KBI. 7 (b) KGI shall distribute all of the issued and outstanding capital stock of KBI to the Company. (c) The Company shall distribute all of the issued and outstanding capital stock of KBI to the Stockholders in accordance with Section 2.5. (d) KGI shall contribute all of the issued and outstanding capital stock of KTS to KSI. (e) KGI shall distribute all of the issued and outstanding capital stock of KSI to the Company. (f) The Company shall distribute all of the issued and outstanding capital stock of KSI to the Stockholders in accordance with Section 2.5. (g) KGI shall merge into the Company in a statutory merger under Section 251 of the Delaware General Corporation Law, with the Company as the surviving corporation of the merger (the "MERGER"). The Merger shall have all of the effects provided under applicable law. (h) KSI shall pay to the Company all amounts due under the KSI Note. The parties anticipate that the Stockholders will either (i) contribute the capital stock of KSI and KBI to certain newly formed holding corporations owned by the Stockholders, and that the Stockholders will exchange the capital stock of such holding corporations for membership interests in the LLC, or (ii) contribute the capital stock of KSI and KBI to the LLC in exchange for membership interests in the LLC, which will form the holding corporations and then contribute the KSI and KBI stock to such holding corporations. Section 2.2 Acknowledgment of Certain Actions and Events. Upon entry into this Agreement, the parties shall acknowledge that the following actions, events and transactions have occurred, and to the extent that one or more of the following actions, events or transactions have not occurred, take all reasonable steps necessary to cause such actions, events or transactions to occur prior to the Effective Time: (a) All necessary Governmental Approvals and Consents shall have been received, subject only to the Registration Statement being declared effective by the Commission (and no stop-order being in effect with respect thereto); (b) The Common Stock shall have been approved for quotation in the Nasdaq National Market, subject to official notice of issuance; (c) All necessary corporate governance actions shall have been taken with respect to KSI and KBI to facilitate the Distribution, including any elections or appointments of directors and officers of KSI and KBI and any amendments to such entities' charters or bylaws; 8 (d) The definitive documentation for the New KSI Credit Facility transaction shall have been executed and placed in escrow and the KSI Note shall have been executed and delivered by KSI to KGI; (e) The Company's Board of Directors shall have formally approved the Distribution and shall not have abandoned, deferred or modified the Distribution; (f) The transactions contemplated by this Agreement to be consummated on or prior to the Effective Time shall have been consummated, each of the Ancillary Agreements, in form and substance satisfactory to the Company, shall have been executed by the parties thereto, and each of the transactions contemplated by the Ancillary Agreements to be consummated on or prior to the Effective Time shall have been consummated; (g) No preliminary or permanent injunction or other order, decree or ruling issued by a Governmental Authority, and no statute, rule, regulation or executive order promulgated or enacted by any Governmental Authority, shall be in effect preventing the consummation of the Distribution or the Initial Public Offering or any of the other transactions contemplated by this Agreement or any Ancillary Agreement; (h) Such other actions shall have been taken as the parties hereto may, based upon the advice of counsel, reasonably request to be taken prior to the Distribution in order to assure the successful completion of the Distribution and the other transactions contemplated by this Agreement; (i) Resignations of each person who is an officer or director of KSI or KBI or their respective subsidiaries who will be an employee of only the Company or its subsidiaries from and after the Distribution Date, shall have been received by the Company; (j) This Agreement shall not have been terminated; and (k) The Company shall have been released from any Liabilities, guarantees or other obligations with respect to any indebtedness or otherwise of KSI or KBI or their respective subsidiaries; provided, however, that the occurrence of all or a portion the foregoing actions, events and transactions shall not create any obligation on the part of the Company to seek to have the Registration Statement declared effective or to effect the Distribution or the Closing, or in any way limit the Company's power of termination set forth in Section 8.2 or alter the consequences of any such termination from those specified in such Section. Section 2.3 Voiding of Transactions. If the Company in its sole discretion elects not to proceed with the Closing, then in the Company's sole discretion and upon written request to KSI and KBI, any transactions and actions that have been consummated under this Agreement prior to the Closing to effect the Distribution (including those under Article II, Article III, and Article V) shall be (in whole or in part) revoked, rescinded, annulled or otherwise voided and caused to be of no further force or effect. 9 Section 2.4 Sole Discretion of Company. The Company's Board of Directors shall, in its sole discretion, establish (i) any appropriate procedures and sequence of transactions and actions in connection with the Distribution, (ii) the Distribution Date and all terms of the Distribution, including, without limitation, the form, structure and terms of any transaction(s) and/or offering(s) to effect the Distribution and (iii) the timing of and conditions to the consummation of the Distribution (including those terms and conditions described in this Article II), and may any time and from time to time until the completion of the Distribution modify or change any of the foregoing; provided, however, that the sole condition to the consummation of the Distribution following the Effective Time shall be the occurrence of the Closing. KSI and KBI shall cooperate with the Company in all respects to accomplish the Distribution and shall, at the Company's direction, promptly take any and all actions necessary or desirable to effect the Distribution. Section 2.5 Distribution of KSI and KBI Stock. Subject to Section 2.2 above, the Company, KSI and KBI shall use their reasonable commercial efforts to consummate the Distribution. Such efforts shall include, but not necessarily be limited to, those specified in this Section 2.5. (a) Blue Sky. The parties shall take all such actions as may be necessary or appropriate under the securities or blue sky laws of the United States (and any comparable laws under any foreign jurisdiction) in connection with the Distribution. (b) Shares Received. Each Stockholder (or such holder's designated transferee or transferees) will be entitled to receive in the Distribution a number of shares of capital stock of KSI and KBI, respectively, equal to the number of shares of Common Stock of the Company held by such Stockholder (on an as-converted basis), multiplied by a fraction the numerator of which is the number of shares of capital stock of KSI and KBI, respectively, beneficially owned by the Company on the Record Date and the denominator of which is the number of shares of Common Stock of the Company outstanding on the Record Date. ARTICLE III TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES Section 3.1 Transfer of Assets. (a) Subject only to the occurrence of the Closing following the Commission's declaration of the effectiveness of the Registration Statement, and effective as of the Distribution Date, each party (the "ASSIGNING PARTY") hereby assigns, transfers, conveys and delivers to another party (the "RECEIVING PARTY"), and agrees to cause each of its subsidiaries to assign, transfer, convey and deliver to the Receiving Party, and the Receiving Party hereby accepts from the Assigning Party and its subsidiaries, all of the Assigning Party's and its subsidiaries' respective right, title and interest in or under the following, in each case as owned or held by the Assigning Party immediately prior to the Distribution Date and (except in the case of clause 10 (xiii) below) used exclusively in the Receiving Party's Business immediately prior to the Distribution Date (each such asset being an "ASSIGNED ASSET"): (i) all Tangible Personal Property; (ii) all Inventory; (iii) all Receivables; (iv) all books of account, general, financial and tax records (except, as to tax records, as may otherwise be provided in the Tax Sharing Agreement), invoices, shipping records, supplier lists, correspondence and other documents, records and files, and all personnel records of persons employed by a party that become employees of another party as of the Distribution Date or thereafter; (v) all goodwill exclusively relating to the Receiving Party's Business; (vi) all of the Owned Intellectual Property and Licensed Intellectual Property that is to be transferred or licensed pursuant to the Trademark License Agreement; (vii) all of the Assigned Contracts; (viii) all claims, causes of action, choses in action, rights of recovery and rights of set-off of any kind (including rights to insurance proceeds and rights under and pursuant to all warranties, representations and guarantees made by suppliers of products, materials or equipment, or components thereof), pertaining to, arising out of, and inuring to the benefit of the Assigning Party; (ix) all sales and promotional literature, customer lists and other sales-related materials owned, used, associated with or employed by the Assigning Party relating exclusively to the Receiving Party's Business; (x) all municipal, state and federal franchises, permits, licenses, agreements, waivers, exemptions, approvals and authorizations, in each case to the extent transferable; (xi) any assets reflected in the Receiving Party's Balance Sheet as "Assets" of the Receiving Party, subject to any dispositions of such assets subsequent to the date of the Receiving Party's Balance Sheet; (xii) any and all other assets, rights and claims of every kind and nature owned or held immediately prior to the Distribution Date by the Assigning Party and used exclusively in the Receiving Party's Business. The intention of this clause (xii) is only to rectify any inadvertent omission of transfer or conveyance of any asset, right or claim that, had the parties hereto given specific consideration to such asset, right or claim as of the date hereof, would have otherwise been classified as an Assigned Asset. No asset, right or claim shall be deemed an Assigned Asset solely as a result of this clause (xii) if such asset, right or claim is within the category or type of asset, right or claim expressly covered by the subject matter of an 11 Ancillary Agreement. In addition, no asset, right or claim shall be deemed an Assigned Asset solely as a result of this clause (xii) unless a claim with respect thereto is made by a Receiving Party on or prior to the first anniversary of the Distribution Date; and (xiii) the assets, rights and claims of the Company listed in Schedule 3.1(a)(xiii) to be assigned, transferred, conveyed and delivered to KBI and KSI as provided in such Schedule. The parties may agree to prepare and attach to this Agreement additional Schedules (having numbers corresponding to the applicable subsections) specifically listing Assigned Assets in one or more categories. Notwithstanding the foregoing, the Assigned Assets shall not include the applicable Excluded Assets referred to in Section 3.1(b) below. (b) For the purposes of this Agreement, "EXCLUDED ASSETS" shall mean: (i) [The assets, rights and claims listed or described on Schedule 3.1(b)(i), if any, with respect to each party]; and (ii) Any and all assets, rights and claims that are expressly contemplated by this Agreement or any Ancillary Agreement (or the Exhibits and Schedules hereto or thereto) as assets, rights or claims to be retained by a party. Section 3.2 Assignment to and Assumption of Liabilities. (a) Except as set forth in an Ancillary Agreement, from and after the Distribution Date, each party hereby assumes and agrees faithfully to pay, perform and fulfill all obligations under the following in accordance with their respective terms (the "COMPANY LIABILITIES" in the case of the Company, the "KSI LIABILITIES" in the case of KSI, and the "KBI LIABILITIES" in the case of KBI): (i) any and all Liabilities that are expressly contemplated by this Agreement or any Ancillary Agreement (or the Exhibits or Schedules hereto or thereto) as Liabilities to be assumed by such party and all Liabilities under this Agreement or any Ancillary Agreement; (ii) all Liabilities, including but not limited to any employee-related, environmental and hazardous waste-related Liabilities, primarily relating to, arising out of or resulting from: (A) the operation of such party's Business, as conducted at any time prior to, on or after the Distribution Date (including any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative of such party (whether or not such act or failure to act is or was within such Person's authority)); (B) the operation of any business conducted by such party or any of its subsidiaries at any time after the Distribution Date (including any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent 12 or representative of such party (whether or not such act or failure to act is or was within such Person's authority)); (C) any Assigned Assets (as assigned to such party hereunder); and (D) in the case of KSI, the New KSI Credit Facility and KSI Note; and (iii) all Liabilities reflected as "Liabilities" or obligations of such party in the Company Balance Sheet, the KSI Balance Sheet or the KBI Balance Sheet, as applicable, subject to any discharge of such Liabilities subsequent to the date of any such Balance Sheet. Notwithstanding the foregoing, the Company Liabilities, the KSI Liabilities and the KBI Liabilities shall not in any event include the applicable Excluded Liabilities referred to in Section 3.2(b) below. (b) For the purposes of this Agreement, "EXCLUDED LIABILITIES" shall mean: (i) [the Liabilities listed or described on Schedule 3.2(b)(i), if any, with respect to each party;] (ii) any and all Liabilities that are expressly contemplated by this Agreement or any Ancillary Agreement (or Exhibits or Schedules hereto or thereto) as Liabilities to be retained or assumed by a party; and (iii) all agreements and obligations of a party under this Agreement or any of the Ancillary Agreements. (c) Each of KSI and KBI shall be responsible for all KSI Liabilities and KBI Liabilities, as the case may be, regardless of when or where such Liabilities arose or arise, or whether the facts on which they are based occurred prior to or subsequent to the date hereof, regardless of where or against whom such Liabilities are asserted or determined (including any KSI Liabilities or KBI Liabilities, as the case may be, arising out of claims made by a party's directors, officers, employees, agents or Affiliates) or whether asserted or determined prior to the date hereof, and regardless of whether arising from or alleged to arise from negligence, recklessness, violation of law, fraud or misrepresentation by KSI or KBI or any of its directors, officers, employees, agents or Affiliates (in the case of Affiliates, other than the Company and its subsidiaries). Section 3.3 Transfers Not Effected On or Prior to the Distribution Date. The parties agree that, as of the Distribution Date, each party hereto shall be deemed to have acquired complete and sole beneficial ownership over all of the assets, together with all of the rights, powers and privileges incidental thereto, that such party is entitled to acquire pursuant to the terms of this Agreement. To the extent any transfers contemplated by this Article III shall not have been fully effected on or prior to the Distribution Date, the parties and their respective subsidiaries shall cooperate to effect such transfers as promptly as possible following the Distribution Date. Nothing herein shall be deemed to require the transfer of any assets or the 13 assignment or assumption of any Liabilities that by their terms or by operation of law cannot be so transferred, assigned or assumed; provided, however, that any such assets shall be deemed an Assigned Asset for purposes of determining whether any Liability is a Company Liability, a KSI Liability or a KBI Liability, as the case may be; and provided, further, that the parties and their respective Affiliates shall cooperate in seeking to obtain any necessary Consents for the transfer of all assets and the assignment or assumption of all Liabilities as contemplated by this Article III. In the event that any transfer of assets or assignment or assumption of Liabilities contemplated by this Article III has not been consummated effective as of the Distribution Date, (i) the party retaining such assets (at the expense of the party entitled thereto); and (ii) the party retaining such Liabilities shall thereafter hold such assets or Liabilities for the account of the party entitled thereto or assuming such Liability or to whom such asset or Liability is to be assigned pursuant hereto, and in each such case shall take such other actions as may be reasonably required in order to place the parties, insofar as reasonably possible, in the same position as would have existed had such asset been transferred, or such Liability been assigned or assumed as contemplated hereby. As and when any such asset or Liability becomes transferable, assignable or assumable, as the case may be, such transfer, assignment or assumption, as the case may be, shall be effected forthwith. If any Consent is not obtained with respect to the transfer, assumption or assignment of any such asset or Liability, then the parties will cooperate to establish an arrangement under which the party entitled to such asset or to assume such Liability (the "ENTITLED PARTY") would obtain, to the extent practicable, the claims, rights and benefits and assume the corresponding Liabilities thereunder in accordance with this Agreement or under which the party retaining such asset or liability (the "RETAINING PARTY") would enforce for the benefit of the Entitled Party, with the Entitled Party assuming and agreeing to pay the Retaining Party's obligations, any and all claims, rights and benefits of the Retaining Party against a third party thereto. In such event (i) the Retaining Party will promptly pay to the Entitled Party when received all moneys received by it under any such asset or any claim, right or benefit arising thereunder and (ii) the Entitled Party will promptly pay, perform or discharge when due any obligation or liability arising thereunder or under any such Liability. Section 3.4 No Representations or Warranties; Consents. (a) Each of the parties hereto understands and agrees that no party hereto is, in this Agreement, any Ancillary Agreement or any other agreement or document contemplated by this Agreement, any Ancillary Agreement or otherwise, representing or warranting in any way as to the value or freedom from encumbrance of, or any other matter concerning, any assets of such party, or as to the legal sufficiency to convey title to an asset transferred pursuant to this Agreement or any Ancillary Agreement, including, without limitation, any conveyancing or assumption instruments. It is also agreed and understood that there are no warranties whatsoever, express or implied, given by any party to this Agreement or any Ancillary Agreement as to the condition, quality, merchantability, fitness or non-infringement of any of the assets, businesses or other rights transferred or retained by the parties, as the case may be, and all such assets, businesses and other rights shall be "as is, where is" and "with all faults" (provided that the absence of warranties given by the parties shall not affect the allocation of Liabilities under this Agreement and shall have no effect on any manufacturers, sellers, or other third party warranties that are intended to be transferred with such assets), and each Receiving Party shall bear the economic and legal risks that any conveyance shall prove to be insufficient to vest in it good and marketable title, free and clear of any security interest, pledge, lien, charge, claim, 14 option, right to acquire, covenant, condition, restriction on transfer or other encumbrance of any nature whatsoever. (b) Each party hereto understands and agrees that no party hereto is, in this Agreement, any Ancillary Agreement or any other agreement or document contemplated by this Agreement, any Ancillary Agreement or otherwise, representing or warranting in any way that the obtaining of any Governmental Approvals or Consents, the execution and delivery of any amendatory agreements and the taking of any filings or applications contemplated by this Agreement will satisfy the provisions of any or all applicable laws or judgments or other instruments or agreements relating to such assets. Notwithstanding the foregoing, the parties shall use their reasonable commercial efforts to obtain all Governmental Approvals and Consents, to enter into all reasonable amendatory agreements and to make all filings and applications contemplated by this Agreement, and shall take all such further actions as shall be deemed reasonably necessary to preserve for each party, to the greatest extent reasonably feasible, consistent with this Agreement, the economic and operational benefits of the allocation of assets and Liabilities provided for in this Agreement. In case at any time after the Distribution Date any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall take all such necessary or desirable action, provided that any financial cost shall be borne by the party receiving the benefit of the action. Section 3.5 Documents Relating to Transfer of Assigned Assets and Assignment and Assumption of Liabilities. In connection with the transfer of the Assigned Assets pursuant to Section 3.1 of this Agreement and the assignment and assumption of Liabilities pursuant to Section 3.2 of this Agreement, simultaneously with the execution and delivery hereof or as promptly as practicable thereafter, (i) the Assigning Party shall execute and deliver such bills of sale, deeds, stock powers, certificates of title, assignments of contracts and other instruments of transfer, conveyance and assignment as and to the extent necessary to evidence the transfer, conveyance and assignment of all of the Assigning Party's right, title and interest in and to the Assigned Assets to the Receiving Party and (ii) the Receiving Party shall execute and deliver to the Assigning Party such bills of sale, certificates of title, assumptions of contracts and other instruments or assumption as may be necessary to evidence the valid and effective assumption of the Company Liabilities, the KSI Liabilities and the KBI Liabilities by the Company, KSI and KBI, respectively. Section 3.6 Termination of Agreements. (a) Except as set forth in Section 3.6(b), in furtherance of the releases and other provisions of Section 4.1, the parties hereby terminate, effective as of the Distribution Date, any and all agreements, arrangements, commitments or understandings, whether or not in writing, between them; provided, however, that to the extent any such agreement, arrangement, commitment or understanding is inconsistent with any Ancillary Agreement, such termination shall be effective as of the date of the effectiveness of the applicable Ancillary Agreement. No such terminated agreement, arrangement, commitment or understanding (including any provision thereof which purports to survive termination) shall be of any further force or effect after the Distribution Date (or, to the extent contemplated by the proviso to the immediately preceding 15 sentence, after the effectiveness of the applicable Ancillary Agreement). Each party shall, at the reasonable request of the other party, take, or cause to be taken, such other actions as may be necessary to effect the foregoing. (b) The provisions of Section 3.6(a) shall not apply to those matters described in Section 4.1(d) or any of the following agreements, arrangements, commitments or understandings (or any of the provisions thereof): (i) this Agreement and the Ancillary Agreements (and each other agreement or instrument expressly contemplated by this Agreement or any Ancillary Agreement, including the KSI Note); (ii) any agreements, arrangements, commitments or understandings to which any Person other than the parties hereto or their respective Affiliates is a party; (iii) any inter-company accounts payable or accounts receivable accrued as of the Distribution Date that are reflected in the books and records of the parties or otherwise documented in writing in accordance with past practices, and any warranty or other Liabilities arising from any purchase and sale transactions for goods or services between the parties entered into on or before the Distribution Date, and (iv) any other agreements, arrangements, commitments or understandings that this Agreement or any Ancillary Agreement expressly contemplates will survive the Distribution Date [, including those listed or described on Schedule 3.6(b)]. Section 3.7 Proceeds of the Initial Public Offering; Costs. The Initial Public Offering will include a primary offering of Common Stock by the Company. Other than certain of the Company's indebtedness that will be repaid concurrent with the Closing, the Company will retain the net proceeds of such offering. ARTICLE IV INDEMNIFICATION Section 4.1 Release of Claims. (a) Except as provided in Section 4.1(d), effective as of the Distribution Date, KSI does hereby, for itself and its Affiliates (other than any member of the Company Group or the KBI Group), and its successors and assigns, and all Persons who at any time prior to the Distribution Date have been shareholders, directors, officers, agents or employees of KSI and its Affiliates (other than any member of the Company Group or the KBI Group) (in each case, in their respective capacities as such), remise, release and forever discharge (i) the Company and each member of the Company Group, their respective successors and assigns, and all Persons who at any time prior to the Distribution Date have been shareholders, directors, officers, agents or employees of the Company or any member of the Company Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, and (ii) KBI and each member of the KBI Group, their respective successors and assigns, and all Persons who at any time prior to the Distribution Date have been shareholders, 16 directors, officers, agents or employees of KBI or any member of the KBI Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any facts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Distribution Date, including in connection with the transactions and all other activities to implement the Distribution and the Initial Public Offering. (b) Except as provided in Section 4.1(d), effective as of the Distribution Date, KBI does hereby, for itself and its Affiliates (other than any member of the Company Group or the KSI Group), and its successors and assigns, and all Persons who at any time prior to the Distribution Date have been shareholders, directors, officers, agents or employees of KBI and its Affiliates (other than any member of the Company Group or the KSI Group) (in each case, in their respective capacities as such), remise, release and forever discharge (i) the Company and each member of the Company Group, their respective successors and assigns, and all Persons who at any time prior to the Distribution Date have been shareholders, directors, officers, agents or employees of the Company or any member of the Company Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, and (ii) KSI and each member of the KSI Group, their respective successors and assigns, and all Persons who at any time prior to the Distribution Date have been shareholders, directors, officers, agents or employees of KSI or any member of the KSI Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any facts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Distribution Date, including in connection with the transactions and all other activities to implement the Distribution and the Initial Public Offering. (c) Except as provided in Section 4.1(d), effective as of the Distribution Date, the Company does hereby, for itself and each member of the Company Group, and its successors and assigns, and all Persons who at any time prior to the Distribution Date have been shareholders, directors, officers, agents or employees of the Company or any member of the Company Group (in each case, in their respective capacities as such), remise, release and forever discharge (i) KSI and its subsidiaries, their respective successors and assigns, and all Persons who at any time prior to the Distribution Date have been shareholders, directors, officers, agents or employees of KSI or any of its subsidiaries (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, and (ii) KBI and its subsidiaries, their respective successors and assigns, and all Persons who at any time prior to the Distribution Date have been shareholders, directors, officers, agents or employees of KBI or any of its subsidiaries (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any facts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Distribution Date, including in 17 connection with the transactions and all other activities to implement the Distribution and the Initial Public Offering. (d) Nothing contained in Section 4.1(a), (b) or (c) shall impair any right of any Person to enforce this Agreement, any Ancillary Agreement or any agreements, arrangements, commitments or understandings that are specified in Section 3.6(b) or the applicable Schedule thereto not to terminate as of the Distribution Date, in each case in accordance with its terms. In addition, nothing contained in Section 4.1(a), (b) or (c) shall release any Person from: (i) Any Liability provided in or resulting from any agreement between the parties that is specified in Section 3.6(b) or the applicable Schedule thereto as not to terminate as of the Distribution Date, or any other Liability specified in Schedule 3.6(b) as not to terminate as of the Distribution Date; (ii) Any Liability, contingent or otherwise, assumed, transferred or assigned to such Person in accordance with, or any other Liability of any Person under, this Agreement or any Ancillary Agreement; (iii) Any Liability for the sale, lease or receipt of goods, property or services purchased, obtained or used in the ordinary course of business between the parties or their respective subsidiaries; (iv) Any Liability that the parties may have with respect to indemnification or contribution pursuant to this Agreement for claims brought against the parties by third Persons, which Liability shall be governed by the provisions of this Article IV and, if applicable, the appropriate provisions of the Ancillary Agreements; or (v) Any Liability the release of which would result in the release of any Person other than a Person released pursuant to this Section 4.1; provided that the parties agree not to bring suit or permit any of their subsidiaries to bring suit against any Person with respect to any Liability to the extent that such Person would be released with respect to such Liability by this Section 4.1 but for the provision of this clause (v). (e) Each party agrees that it shall not make, and shall not permit any of its subsidiaries to make, any claim or demand or commence any Action asserting any claim or demand, including any claim of contribution or indemnification, against another party or any member of such party's Group or any other Person released pursuant to Section 4.1(a), (b) or (c), as applicable, with respect to any Liabilities released pursuant thereto. (f) It is the intention of each of the parties by virtue of the provisions of this Section 4.1 to provide for a full and complete release and discharge of all Liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or failed to occur and all conditions existing or alleged to have existed on or before the Distribution Date, between or among the parties (including any contractual agreements or arrangements existing or alleged to exist between or among such Persons on or before the Distribution Date), except as expressly set forth in Section 4.1(d). At any time, at the request of any other party, each party 18 shall execute and deliver, or shall cause such other appropriate Persons to execute and deliver, releases reflecting the provisions hereof. Section 4.2 Indemnification by KSI. Except as provided in Section 4.6 and except as otherwise expressly provided in any of the Ancillary Agreements, from and after the Distribution Date, KSI shall indemnify, defend and hold harmless (i) the Company, each member of the Company Group and each of their respective directors, officers and employees and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "COMPANY INDEMNITEES") and (ii) KBI, each member of the KBI Group and each of their respective directors, officers and employees and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "KBI INDEMNITEES"), from and against any and all Liabilities of the Company Indemnitees and KBI Indemnitees, respectively, relating to, arising out of or resulting from any of the following items (without duplication): (a) The failure of KSI or any other Person to pay, perform or otherwise promptly discharge any KSI Liability or Assigned Contract (as assigned to KSI) in accordance with their respective terms, whether prior to or after the Distribution Date or the date hereof; (b) The KSI Business, any KSI Liability or any Assigned Contract (as assigned to KSI); and (c) Any breach by KSI or any of its subsidiaries of this Agreement or any of the Ancillary Agreements. Section 4.3 Indemnification by KBI. Except as provided in Section 4.6 and except as otherwise expressly provided in any of the Ancillary Agreements, from and after the Distribution Date, KBI shall indemnify, defend and hold harmless (i) the Company Indemnitees and (ii) KSI, each member of the KSI Group and each of their respective directors, officers and employees and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "KSI INDEMNITEES"), from and against any and all Liabilities of the Company Indemnitees and KSI Indemnitees, respectively, relating to, arising out of or resulting from any of the following items (without duplication): (a) The failure of KBI or any other Person to pay, perform or otherwise promptly discharge any KBI Liability or Assigned Contract (as assigned to KBI) in accordance with their respective terms, whether prior to or after the Distribution Date or the date hereof; (b) The KBI Business, any KBI Liability or any Assigned Contract (as assigned to KBI); and (c) Any breach by KBI or any of its subsidiaries of this Agreement or any of the Ancillary Agreements. Section 4.4 Indemnification by the Company. Except as provided in Section 4.6 and except as otherwise expressly provided in any of the Ancillary Agreements, from and after the Distribution Date, the Company shall indemnify, defend and hold harmless (i) the KSI Indemnitees and (ii) the KBI Indemnitees, from and against any and all Liabilities of the KSI 19 Indemnitees and KBI Indemnitees, respectively, relating to, arising out of or resulting from any of the following items (without duplication): (a) The failure of the Company or any other member of the Company Group or any other Person to pay, perform or otherwise promptly discharge any Company Liability in accordance with its terms, whether prior to or after the Distribution Date or the date hereof; (b) The Company Business, any Company Liability or any Assigned Contract (to the Company); (c) Any breach by the Company or any member of the Company Group of this Agreement or any of the Ancillary Agreements. Section 4.5 Notice and Payment of Claims. If any Company Indemnitee, KSI Indemnitee or KBI Indemnitee (the "INDEMNIFIED PARTY") determines that it is or may be entitled to indemnification under this Article IV (other than in connection with any Action subject to Section 4.6), the Indemnified Party shall deliver to the Person from whom such indemnification is sought (the "INDEMNIFYING PARTY"), a written notice specifying, to the extent reasonably practicable, the basis for its claim for indemnification and the amount for which the Indemnified Party reasonably believes it is entitled to be indemnified. After the Indemnifying Party shall have been notified of the amount for which the Indemnified Party seeks indemnification, the Indemnifying Party shall, within 30 days after receipt of such notice, either (i) pay the Indemnified Party such amount in cash or other immediately available funds (or reach agreement with the Indemnified Party as to a mutually agreeable alternative payment schedule) or (ii) object to the claim for indemnification or the amount thereof by giving the Indemnified Party written notice setting forth the grounds therefor. Any objection shall be resolved in accordance with Article VII. If the Indemnifying Party does not give such notice within such 30-day period, the Indemnifying Party shall be deemed to have acknowledged its liability for such claim and the Indemnified Party may exercise any and all of its rights under applicable law to collect such amount. Section 4.6 Notice and Defense of Third-Party Claims. Promptly following the earlier of (A) receipt of written notice of the commencement by a third party of any Action against or otherwise involving any Indemnified Party or (B) receipt of written information from a third party alleging the existence of a claim against an Indemnified Party, in either case, with respect to which indemnification may be sought pursuant to this Agreement (a "THIRD-PARTY CLAIM"), the Indemnified Party shall give the Indemnifying Party prompt written notice thereof. Failure of the Indemnified Party to give notice as provided in this Section 4.6 shall not relieve the Indemnifying Party of its obligations under this Agreement, except to the extent that the Indemnifying Party is prejudiced by such failure to give notice. Such notice shall describe the Third-Party Claim in reasonable detail. (a) Within 30 days after receipt of such notice, the Indemnifying Party may by giving written notice thereof to the Indemnified Party, (i) elect to assume the defense of such Third-Party Claim at its sole cost and expense or (ii) object to the claim of indemnification for such Third-Party Claim setting forth the grounds therefor. Any objection shall be resolved in accordance with Article VII. If the Indemnifying Party does not within such 30-day period give 20 the Indemnified Party such notice, the Indemnifying Party shall be deemed to have acknowledged its liability for such Third-Party Claim. (b) Any defense of a Third-Party Claim as to which the Indemnifying Party has elected to assume the defense shall be conducted by counsel employed by the Indemnifying Party and reasonably satisfactory to the Company in the case of Company Indemnitees, KSI in the case of KSI Indemnitees, and KBI in the case of KBI Indemnitees. The Indemnified Party shall have the right to participate in such proceedings and to be represented by counsel of its own choosing at the Indemnified Party's sole cost and expense; provided that if the defendants or parties against which relief is sought in any such claim include both the Indemnifying Party and one or more Indemnified Parties and, in the reasonable judgment of the Company in the case of Company Indemnitees, KSI in the case of KSI Indemnitees, or KBI in the case of KBI Indemnitees, a conflict of interest between such Indemnified Parties and such Indemnifying Party exists in respect of such claim, such Indemnified Parties shall have the right to employ one firm of counsel selected by the Company for Company Indemnitees, KSI for KSI Indemnitees, and KBI for KBI Indemnitees, as the case may be, and in that event the reasonable fees and expenses of such separate counsel (but not more than one separate counsel reasonably satisfactory to the Indemnifying Party) shall be paid by such Indemnifying Party. (c) If the Indemnifying Party assumes the defense of a Third-Party Claim, the Indemnifying Party may settle or compromise the claim without the prior written consent of the Indemnified Party; provided that without the prior written consent of the Company in the case of Company Indemnitees, KSI in the case of KSI Indemnitees, and KBI in the case of KBI Indemnitees, the Indemnifying Party may not agree to any such settlement unless as a condition to such settlement the Indemnified Party receives a written release from any and all liability relating to such Third-Party Claim and such settlement or compromise does not include any remedy or relief to be applied to or against the Indemnified Party, other than monetary damages for which the Indemnifying Party shall be responsible hereunder. (d) If the Indemnifying Party does not assume the defense of a Third-Party Claim for which it has acknowledged liability for indemnification under this Article IV, the Company in the case of Company Indemnitees, KSI in the case of KSI Indemnitees, and KBI in the case of KBI Indemnitees, as the case may be, may pursue the defense of such Third-Party Claim and choose one firm of counsel in connection therewith. The Indemnifying Party is required to reimburse the Company, KSI or KBI, as the case may be, on a current basis for its reasonable expenses of investigation, reasonable attorney's fees and reasonable out-of-pocket expenses incurred by the Company in the case of Company Indemnitees, KSI in the case of KSI Indemnitees, and KBI in the case of KBI Indemnitees, in defending against such Third-Party Claim and the Indemnifying Party shall be bound by the result obtained with respect thereto, provided that the Indemnifying Party shall not be liable for any settlement effected without the consent of the Indemnifying Party, which consent shall not be unreasonably withheld. (e) The Indemnifying Party shall pay to the Indemnified Party in cash the amount for which the Indemnified Party is entitled to be indemnified (if any) no later than the later of (i) the date on which the Indemnified Party makes any payment in satisfaction (partial or otherwise) of the Third-Party Claim or (ii) the date on which such Indemnifying Party's objection, if any, to its responsibility for indemnification under this Article IV has been resolved 21 pursuant to Article VII or by settlement or compromise or the final nonappealable judgment of a court of competent jurisdiction. (f) Notwithstanding the foregoing provisions of this Section 4.6, an Indemnified Party shall have the right to defend any Action (or claim or cause of action asserted therein) seeking injunctive or other non-monetary relief affecting the Indemnified Party. Sections 4.6(a), (d) and (e) above shall apply with respect to any such Action (or claim or cause of action asserted therein), except that the Indemnifying Party shall not have the right to elect to assume the defense of such Action (or claim or cause of action asserted therein). Section 4.7 Insurance Proceeds. The amount that any Indemnifying Party is or may be required to pay to any Indemnified Party pursuant to this Article IV shall be reduced (including, without limitation, retroactively) by any insurance proceeds or other amounts actually recovered by or on behalf of such Indemnified Parties in reduction of the related Liability. If an Indemnified Party shall have received the payment required by this Agreement from an Indemnifying Party in respect of a Liability and shall subsequently actually receive insurance proceeds, or other amounts in respect of such Liability as specified above, then such Indemnified Party shall pay to such Indemnifying Party a sum equal to the amount of such insurance proceeds or other amounts actually received after deducting therefrom all of the Indemnifying Party's costs and expenses associated with such Liability. Section 4.8 Contribution. If the indemnification provided for in this Article IV is unavailable to an Indemnified Party in respect of any Liability arising out of or related to information contained in or omitted from the Registration Statement or the Prospectus, then the Indemnifying Party, in lieu of indemnifying the Indemnified Party, shall contribute to the amount paid or payable by the Indemnified Party as a result of such Liability in such proportion as is appropriate to reflect the relative fault of the parties in connection with the statements or omissions which resulted in such Liability. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information concerning the Company, KSI or KBI. Section 4.9 Subrogation. In the event of payment by an Indemnifying Party to any Indemnified Party in connection with any Third-Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the first place of such Indemnified Party as to any events or circumstances in respect of which such Indemnified Party may have any right or claim relating to such Third-Party Claim. Such Indemnified Party shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right or claim. Section 4.10 No Third-Party Beneficiaries. This Article IV shall inure to the benefit of, and be enforceable by the Company, the Company Indemnitees, KSI and the KSI Indemnitees, and KBI and the KBI Indemnitees, and their respective successors and permitted assigns. The indemnification provided for by this Article IV shall not inure to the benefit of any other third party or parties and shall not relieve any insurer who would otherwise by obligated to pay any claim of the responsibility with respect thereto or, solely by virtue of the indemnification 22 provisions hereof, provide any subrogation rights with respect thereto and each party agrees to waive such rights against the other to the fullest extent permitted. Section 4.11 Remedies Cumulative. The remedies provided in this Article IV shall be cumulative and shall not preclude assertion by any Indemnified Party of any other rights or the seeking of any and all other remedies against an Indemnifying Party. The procedures set forth in this Article IV, however, shall be the exclusive procedures governing any indemnity action brought under this Article IV or otherwise relating to Liabilities. Section 4.12 Survival. The rights and obligations of each party and their respective Indemnitees under this Article IV shall survive the sale or other transfer by it of any assets or businesses or the assignment by it of any Liabilities. Section 4.13 After-Tax Indemnification Payments. Except as otherwise expressly provided herein or in an Ancillary Agreement, indemnification payments made by a party under this Article shall give effect to, and be reduced by the value of, any and all applicable deductions, losses, credits, offsets or other items for Federal, state or other tax purposes attributable to the payment of the indemnified liability by the Indemnified Party. ARTICLE V CERTAIN ADDITIONAL MATTERS Section 5.1 Ancillary Agreements. At or prior to the Effective Time, each party shall execute and deliver the Ancillary Agreements. Section 5.2 Corporate Governance Matters. At or prior to the Effective Time, the Company shall take all action necessary to appoint or elect directors and amend the charter documents and bylaws of KSI and KBI as necessary to facilitate the Distribution. Section 5.3 New KSI Credit Facility. (a) At or prior to the Effective Time, the parties shall take all necessary action for KSI to execute and place into escrow definitive documentation for the New KSI Credit Facility. The delivery of such definitive documentation and the consummation of the New KSI Credit Facility transaction may be subject to the occurrence of the Closing. (b) At or prior to the Effective Time, KSI and KBI and their respective subsidiaries shall take all necessary action to release the Company from any Liabilities, guarantees, or other obligations with respect to indebtedness or other obligations of KSI or KBI or their respective subsidiaries (provided that the release of the Company's guarantee and related obligations in respect of certain indebtedness of KSI, KBI and their respective subsidiaries will not be effective until concurrent with the Closing). Section 5.4 Insurance Policies and Claims Administration. (a) Maintenance of Insurance Coverage Prior to Distribution Date. Each party shall use reasonable efforts to maintain in full force and effect at all times up to and 23 including the Distribution Date its current property and casualty programs, including, without limitation, primary and excess general liability, automobile, workers' compensation, property and crime insurance policies (collectively, the "POLICIES" and individually, a "POLICY"). The Company and its subsidiaries shall retain with respect to any Covered Claims as set forth on Schedule 5.4(a) relating to periods prior to the Distribution Date all of their respective rights, benefits and privileges, if any, under such Policies. To the extent not already provided for by the terms of a Policy, the Company shall use reasonable efforts to cause KSI or KBI or their respective subsidiaries, as appropriate, to be named as additional insureds under such Policy in respect of Covered Claims arising or relating to periods prior to the Distribution Date; provided, however, that nothing contained herein shall be construed to require the Company or any of its subsidiaries to pay any additional premium or other charges in respect to, or waive or otherwise limit any of its rights, benefits or privileges under, any such Policy to effect the naming of KSI or KBI or their respective subsidiaries as such additional insureds. (b) Responsibility for Establishing Insurance Coverage On and After Distribution Date. Commencing on and as of the Distribution Date, KSI and KBI and their respective subsidiaries shall be responsible for establishing and maintaining their own separate insurance programs (including, without limitation, primary and excess general liability, automobile, workers, compensation, property, director and officer liability, fire, crime, surety and other similar insurance policies) for activities and claims relating to any period on or after the Distribution Date involving KSI or KBI or their respective subsidiaries. Notwithstanding any other agreement or understanding to the contrary, except as set forth in Section 5.4(c) with respect to claims administration and financial administration of the Policies, neither the Company nor any of its subsidiaries shall have any responsibility for or obligation to KSI or KBI or their respective subsidiaries relating to liability and casualty insurance matters for any period, whether prior to, at or after the Distribution Date. (c) Administration and Procedure. (i) KSI or a subsidiary of KSI, or KBI or a subsidiary of KBI, as appropriate, shall be responsible for the claims administration and financial administration of all Policies for Covered Claims relating to the assets, ownership or operation prior to the Distribution Date of the KSI Business and the KBI Business, as the case may be; provided, however, that such retention by KSI and KBI of the Policies and the responsibility for claims administration and financial administration of the Policies are in no way intended to limit, inhibit or preclude any right to insurance coverage for any Covered Claims under the Policies by the Company. KSI or a subsidiary thereof, or KBI or a subsidiary thereof, as appropriate, shall be responsible for all administrative and financial matters relating to insurance policies established and maintained by KSI and its subsidiaries and KBI and its subsidiaries, as the case may be, for claims relating to any period on or after the Distribution Date involving KSI or any of its subsidiaries, or KBI or its subsidiaries, as the case may be. (ii) KSI and KBI, as appropriate, shall notify the Company of any Covered Claims relating to KSI or KBI or a subsidiary thereof under one or more of the Policies relating to a period prior to the Distribution Date, and KSI and KBI agree to cooperate and coordinate with the Company concerning any strategy the Company may reasonably elect to pursue to secure coverage and payment for such Covered Claim by the appropriate insurance 24 carrier. Notwithstanding anything contained herein, in any other agreement or applicable Policy or any understanding to the contrary, KSI or KBI, as the case may be, or an appropriate subsidiary thereof assumes responsibility for, and shall pay to the appropriate insurance carriers or otherwise, any premiums, retrospectively-rated premiums, defense costs, indemnity payments, deductibles, retentions or other charges, as appropriate (collectively, "INSURANCE CHARGES"), whenever arising, which shall become due and payable under the terms and conditions of any applicable Policy in respect of any liabilities, losses, claims, actions or occurrences, whenever arising or becoming known, involving or relating to any of the assets, businesses, operations or liabilities of KSI or any of its subsidiaries, or KBI or any of its subsidiaries, to the extent set forth in Section 5.4(a) and any such charges that relate to the period after the Distribution Date. To the extent that the terms of any applicable Policy provide that the Company or a subsidiary thereof, as appropriate, shall have an obligation to pay or guarantee the payment of any Insurance Charges, the Company or such subsidiary shall be entitled to demand that KSI or KBI or a subsidiary thereof, as appropriate, make such payment directly to the person or entity entitled thereto. In connection with any such demand, the Company shall submit to such party or its subsidiary a copy of any invoice received by the Company or its subsidiary pertaining to such Insurance Charges, together with appropriate supporting documentation, if available. In the event that KSI or KBI or its subsidiary, as the case may be, fails to pay any Insurance Charges when due and payable, whether at the request of the party entitled to payment or upon demand by the Company or a subsidiary of the Company, the Company or a subsidiary of the Company may (but shall not be required to) pay such Insurance Charges for and on behalf of KSI or KBI or its subsidiary, as appropriate, and, thereafter, KSI or KBI or its subsidiary shall forthwith reimburse the Company or such subsidiary of the Company for such payment. Section 5.5 Non-solicitation of Employees. During the one-year period following the Distribution Date, each party agrees not to solicit or to cause the solicitation of, or to seek or make an offer for, the employment or consulting services of any employee of another party, or to interfere with, disrupt or attempt to disrupt the relationship between another party and any employees thereof; provided, however, that a party shall not be prevented from engaging in general solicitation and public advertising for employment or from hiring or engaging an employee of another party whose employment or consulting services were not solicited or sought in violation of this Section 5.5. In the event of a breach of this Section 5.5, the aggrieved party shall be entitled to an injunction against the soliciting party or its affiliates restraining such breach, in addition to any other remedies provided by law or equity. In the event that any covenant in this Section is held to be invalid, illegal or unenforceable by any court of competent jurisdiction or any other Governmental Authority, it is agreed and understood that such covenant will not be voided but rather shall be construed to impose limitations upon the soliciting party's activities no greater than allowable under then applicable law. ARTICLE VI ACCESS TO INFORMATION Section 6.1 Provision of Corporate Records. Each party shall arrange as soon as practicable following the Distribution Date for the provision to the other of existing corporate 25 governance documents (e.g. minute books, stock registers, stock certificates, documents of title, etc.) in its possession relating to the other or to its business and affairs. Section 6.2 Access to Information. From and after the Distribution Date, each party shall afford the other, including its accountants, counsel and other designated representatives, reasonable access (including using reasonable efforts to give access to persons or firms possessing information) and duplicating rights during normal business hours to all records, books, contracts, instruments, computer data and other data and information in such party's possession relating to the business and affairs of the other (other than data and information subject to an attorney/client or other privilege), insofar as such access is reasonably required by the other party including, without limitation, for audit, accounting and litigation purposes, as well as for purposes of fulfilling disclosure and reporting obligations. Section 6.3 Litigation Cooperation. Each party shall use reasonable efforts to make available to the other, upon written request, its officers, directors, employees and agents as witnesses to the extent that such persons may reasonably be required in connection with any legal, administrative or other proceedings arising out of the business of the other prior to the Distribution Date in which the requesting party may from time to time be involved. Section 6.4 Reimbursement. Each party providing witnesses under Section 6.3 to the other shall be entitled to receive from the party for whom the witness is provided, upon the presentation of invoices therefor, payment for all out-of-pocket costs and expenses as may be reasonably incurred in providing such witnesses. Section 6.5 Retention of Records. Except as otherwise required by law or agreed to in writing, each party shall, and shall cause each of its respective subsidiaries to, retain all information relating to another party's business in accordance with such party's written record retention policy or, if no such policy exists, the past practice of such party. Notwithstanding the foregoing, any party may destroy or otherwise dispose of any such information at any time, provided that, prior to such destruction or disposal, (i) such party shall provide no less than 30 days prior written notice to the other party, specifying the information proposed to be destroyed or disposed of and (ii) if the recipient of such notice shall request in writing prior to the scheduled date for such destruction or disposal that any of the information proposed to be destroyed or disposed of be delivered to such requesting party, the party proposing the destruction or disposal shall promptly arrange for the delivery of such of the information as was requested at the expense of the requesting party. Section 6.6 Internal Accounting Controls, Financial Information; Ownership. Until the fifth anniversary of the Distribution Date, (i) each party shall maintain in effect at its own cost and expense adequate systems and controls for its business to the extent necessary to enable the other party to satisfy its reporting, accounting, audit and other obligations, and (ii) each party shall provide, or cause to be provided, to the other party and its subsidiaries in such form as such requesting party shall request, at no charge to the requesting party, all financial and other data and information as the requesting party determines necessary or advisable in order to prepare its financial statements and reports or filings with any Governmental Authority. Any information owned by a party that is provided to a requesting party to this Section 6.6 shall be deemed to remain the property of the providing party. Unless specifically set forth herein, nothing 26 contained in this Agreement shall be construed as granting or conferring rights of license or otherwise in any such information. No party shall release or disclose any such information to any other person, except its auditors, attorneys, financial advisors, bankers and other consultants and advisors who shall be advised of and agree to comply with the provisions of this Section 6.6; provided, that with respect to the matters identified on Schedule 6.6 hereof, no information may be disclosed by a party under any circumstance without the prior written consent of the other party hereto. No party shall have any liability to any other party in the event that any information exchanged or provided pursuant to this Section 6.6 is found to be inaccurate, in the absence of willful misconduct by the party providing such information, or if any information is destroyed or lost after reasonable commercial efforts by such party to comply with the provisions of this Section 6.6. The rights and obligations granted under this Section 6.6 are subject to any specific limitations, qualifications or additional provisions on the sharing, exchange or confidential treatment of information set forth in this Agreement, the Confidential Disclosure Agreement and any other Ancillary Agreement. Section 6.7 Mail. After the Distribution Date, each party may receive mail, telegrams, facsimiles, packages and other communications property belonging to another party. Accordingly, at all times after the Distribution Date, each party authorizes the other to receive and open all mail, telegrams, facsimiles, packages and other communications received by it and not unambiguously intended for another party or any of such other party's officers or directors specifically in their capacities as such, and to retain the same to the extent that they relate to the business of the receiving party or, to the extent that they do not relate to the business of the receiving party and do relate to the business of such other party, or to the extent that they relate to both businesses, the receiving party shall promptly contact such other party by telephone for delivery instructions and such mail, telegrams, facsimiles, packages or other communications (or, in case the same relate to both businesses, copies thereof) shall promptly be forwarded to the other party in accordance with its delivery instructions. The foregoing provisions of this Section 6.7 shall constitute full authorization to the postal authorities, all telegraph and courier companies and all other persons to make deliveries to the Company, KSI and KBI, as the case may be, addressed to either of them or to any of their officers or directors specifically in their capacities as such. The provisions of this Section 6.7 are not intended to and shall not be deemed to constitute an authorization by any party to permit another party to accept service of process on its behalf, and no party is or shall be deemed to be the agent of another party for services of process purposes or for any other purpose. ARTICLE VII DISPUTE RESOLUTION Section 7.1 Agreement to Mediate. Except as otherwise specifically provided in any Ancillary Agreement, the procedures for discussion, negotiation and mediation set forth in this Article VII shall apply to all disputes, controversies or claims (whether sounding in contract, tort or otherwise) that may arise out of or relate to, or arise under or in connection with this Agreement or any Ancillary Agreement, or the transactions contemplated hereby or thereby (including all actions taken in furtherance of the transactions contemplated hereby or thereby on 27 or prior to the date hereof), or the commercial or economic relationships of the parties relating hereto or thereto, between the Company and its subsidiaries, KSI and its subsidiaries, and KBI and its subsidiaries. Section 7.2 Escalation. It is the intent of the parties to use their respective reasonable best efforts to resolve expeditiously any dispute, controversy or claim between or among them with respect to the matters covered hereby that may arise from time to time on a mutually acceptable negotiated basis. In furtherance of the foregoing, any party involved in a dispute, controversy or claim may deliver a notice (an "ESCALATION NOTICE") demanding an in person meeting involving representatives of the parties at a senior level of management of the parties (or if the parties agree, of the appropriate strategic business unit or division within such entity). A copy of any such Escalation Notice shall be given to the General Counsel, or like officer or official, (or if no General Counsel or like officer or official has been appointed, to the Chief Financial Officer) of each party involved in the dispute, controversy or claim (which copy shall state that it is an Escalation Notice pursuant to this Agreement). Any agenda, location or procedures for such discussions or negotiations between the parties may be established by the parties from time to time; provided, however, that the parties shall use their reasonable best efforts to meet within 30 days of the Escalation Notice. Section 7.3 Demand for Mediation. At any time after the first to occur of (i) the date of the meeting actually held pursuant to the applicable Escalation Notice or (ii) 90 days after the delivery of an Escalation Notice (as applicable, the "MEDIATION DEMAND DATE"), any party involved in the dispute, controversy or claim (regardless of whether such party delivered the Escalation Notice) may make a written demand (the "MEDIATION DEMAND NOTICE") that the dispute be submitted to mediation. Any opinion expressed by the mediator shall not be binding on the parties, nor shall any opinion expressed by the mediator be admissible in any subsequent proceedings. The mediator may be chosen from a list of mediators previously selected by the parties or by other agreement of the parties. Costs of the mediation shall be borne equally by the parties involved in the matter, except that each party shall be responsible for its own attorney's fees and other costs and expenses. The site of the mediation shall be Santa Clara, California, unless otherwise agreed by the parties. No party may assert that the failure to resolve any matter during any discussions or negotiations, the course of conduct during the discussions or negotiations or the failure to agree on a mutually acceptable time, agenda, location or procedures for the meeting, in each case, as contemplated by Section 7.2, is a prerequisite to a demand for mediation under Section 7.3. Section 7.4 Certain Additional Matters. (a) Notwithstanding anything herein to the contrary, either party may apply to any court having jurisdiction and seek injunctive or other non-monetary relief so as to maintain the status quo until such time as any mediation or arbitration is concluded or the dispute, controversy or claim is otherwise resolved. (b) Except as required by law, the parties shall hold, and shall cause their respective officers, directors, employees, agents and other representatives to hold, the existence, content and result of mediation in confidence in accordance with the provisions of the 28 Confidential Disclosure Agreement. Each of the parties shall request that any mediator comply with such agreement. (c) In the event that a dispute, controversy or claim is not settled by the parties within thirty (30) days after the conclusion of the mediation as described in Section 7.3, such dispute, controversy or claim shall be submitted to binding arbitration, to be held in Santa Clara County, California, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, before a single arbitrator selected in accordance with such Commercial Arbitration Rules. After affording the parties a reasonable opportunity to present written and testimonial evidence in support of their respective positions, the arbitrator shall issue his/her decision and award, which shall be (i) in writing, stating the reasons therefor; (ii) based solely on the terms and conditions of this Agreement or the applicable Ancillary Agreement(s) (or other applicable agreements relating to the relevant transaction(s)), as interpreted under the laws of the State of California; and (iii) final and binding upon the parties. The decision and award of the arbitrator in any arbitration proceeding under this Section 7.4(c) may be enforced in any court of competent jurisdiction. The affected parties shall make reasonable good faith efforts to resolve any such dispute, controversy or claim prior to the commencement, and during the pendency of, any such arbitration. (d) Notwithstanding anything herein to the contrary, in the event that any party determines in good faith that the amount in controversy in any dispute, controversy or claim (or any series of related disputes, controversies or claims) under this Agreement or any Ancillary Agreement is, or is reasonably likely to be, in excess of $10 million, the provisions of Section 7.3 and Section 7.4(c) shall not apply and any party may elect, in lieu of mediation and arbitration, to commence an Action with respect to such dispute, controversy or claim (or such series of related disputes, controversies or claims) in any court of competent jurisdiction; provided, however, that the affected parties shall make reasonable good faith efforts to resolve any such dispute, controversy or claim prior to the commencement, and during the pendency of, any such Action. Section 7.5 Continuity of Service and Performance. Unless otherwise agreed in writing, the parties will continue to provide service and honor all other commitments under this Agreement and each Ancillary Agreement during the course of dispute resolution pursuant to the provisions of this Article VII with respect to all matters not subject to such dispute, controversy or claim. ARTICLE VIII MISCELLANEOUS Section 8.1 LIMITATION OF LIABILITY. IN NO EVENT SHALL ANY MEMBER OF THE COMPANY GROUP BE LIABLE TO ANY MEMBER OF THE KSI GROUP OR THE KBI GROUP, NOR SHALL ANY MEMBER OF THE KSI GROUP BE LIABLE TO ANY MEMBER OF THE COMPANY GROUP OR THE KBI GROUP, NOR SHALL ANY MEMBER OF THE KBI GROUP BE LIABLE TO AMY MEMBER OF THE COMPANY GROUP OR THE KSI GROUP, FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER 29 CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT EACH PARTY'S INDEMNIFICATION OBLIGATIONS FOR LIABILITIES TO THIRD PARTIES AS SET FORTH IN ARTICLE IV OR SECTION 5.4 OF THIS AGREEMENT. Section 8.2 Termination. This Agreement may be terminated and the Distribution and/or the Initial Public Offering may be deferred, modified or abandoned at any time prior to Distribution Date or the Closing Date, as applicable, by and in the sole discretion of the Board of Directors of the Company without the approval of KSI or KBI. In the event of such termination, no party hereto (or any of its respective directors or officers) shall have any liability to any other party pursuant to this Agreement. Section 8.3 Expenses. (a) Except as specifically provided in this Agreement or in an Ancillary Agreement, all costs and expenses incurred in connection with the execution, delivery and implementation of this Agreement and with the consummation of the transactions contemplated by this Agreement shall be paid by the party incurring the expense. The determination of who has incurred an expense shall be made by the Chief Financial Officer of the Company, which determination shall be binding and final upon each of the parties hereto and not subject to further review. (b) Underwriting commissions and discounts attributable to the shares of Common Stock sold by the Company in the Initial Public Offering shall be paid by the Company. (c) It is understood and agreed that the Company shall pay the legal, filing, accounting, printing and other out-of-pocket expenditures in connection with (i) the preparation, printing and filing of the Registration Statement and Prospectus and (ii) sale of the shares of Common Stock in the Initial Public Offering, including, without limitation, third party costs, fees and expenses relating to the Initial Public Offering, all of the reimbursable expenses of the Underwriters pursuant to the Underwriting Agreement, and all of the costs of producing, printing, mailing and otherwise distributing the Prospectus. (d) The costs and expenses incurred in connection with obtaining the New KSI Credit Facility, and the KSI Note, shall be paid by such party or parties as determined by the Chief Financial Officer of the Company, which determination shall be binding and final upon each of the parties hereto and not subject to further review. Section 8.4 Notices. Any notice, demand, offer, request or other communication required or permitted to be given by a party pursuant to the terms of this Agreement shall be in writing and shall be deemed effectively given the earlier of (i) when received, (ii) when delivered personally, (iii) one (1) Business Day after being delivered by facsimile (with receipt of appropriate confirmation), (iv) one (1) Business Day after being deposited with a nationally 30 recognized overnight courier service or (v) four (4) days after being deposited in the U.S. mail, First Class with postage prepaid, and addressed to the attention of: (a) If to the Company, to: (b) If to KSI, to: (c) If to KBI, to: Or to such other addresses or telecopy numbers as may be specified by like notice to the other parties. Section 8.5 Amendment and Waiver. This Agreement may not be altered or amended, nor may rights hereunder be waived, except by an instrument in writing executed by the party or parties to be charged with such amendment or waiver. No waiver of any terms, provision or condition of or failure to exercise or delay in exercising any rights or remedies under this Agreement, in any one or more instances shall be deemed to be, or construed as, a further or continuing waiver of any such term, provision, condition, right or remedy or as a waiver of any other term, provision or condition of this Agreement. Section 8.6 Counterparts. This Agreement may be executed in one or more counterparts each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same Agreement. Section 8.7 Governing Law; Jurisdiction; Forum. This Agreement shall be construed in accordance with the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County, California and/or the United States District Court for the Northern District of California, San Jose Division, shall have jurisdiction and venue over all disputes between the parties that are permitted to be brought in a court of law pursuant to Article VII hereof. Section 8.8 Entire Agreement. This Agreement, including the Schedules hereto, together with the Ancillary Agreements and the Exhibits and Schedules thereto, constitute the entire understanding of the parties hereto with respect to the subject matter hereof, superseding all negotiations, prior discussions and prior discussions and prior agreements and understandings relating to such subject matter. To the extent that the provisions of this Agreement are inconsistent with the provisions of any Ancillary Agreements, the provisions of such Ancillary Agreement shall prevail. Section 8.9 Nonassignability; Binding Effect. A party may not assign or transfer this Agreement or any of its rights or obligations hereunder (including, without limitation, in 31 connection with a sale of all or substantially all of such party's assets), without the prior written consent of each of the other parties. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective legal representatives, successors and permitted assigns. Nothing contained in this Agreement, express or implied, is intended to confer any benefits, rights or remedies upon any person or entity other than the Company, KSI and KBI, and their respective Indemnitees under Article IV hereof, or as expressly provided in this Agreement. Section 8.10 Tax Sharing Agreement. Notwithstanding any other provision of this Agreement to the contrary, any and all matters relating to Taxes shall be exclusively governed by the Tax Sharing Agreement. Section 8.11 Further Assurances and Consents. In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto will use its reasonable efforts to (i) execute and deliver such further instruments and documents and take such other actions as any other party may reasonably request in order to effectuate the purposes of this Agreement and to carry out the terms hereof and (ii) take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, using its reasonable efforts to obtain any Governmental Approvals and Consents and to make any filings and applications necessary or desirable in order to consummate the transactions contemplated by this Agreement; provided that no party hereto shall be obligated to pay any consideration therefor (except for filing fees and other similar charges) to any third party from whom such Governmental Approvals, Consents and amendments are requested or to take any action or omit to take any action if the taking of or the omission to take such action would be unreasonably burdensome to the party or its business. Section 8.12 Exhibits and Schedules. The Exhibits and Schedules shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. Section 8.13 Authority. Each of the parties hereto represents to the other that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general equity principles. Section 8.14 Legal Enforceability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without prejudice to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages 32 would be an inadequate remedy for any breach of the provisions of this Agreement and agrees that the obligations of the parties hereunder shall be specifically enforceable. Section 8.15 Gender and Number. Whenever the context of this Agreement requires, the gender of all words herein shall include the masculine, feminine and neuter, and the number of all words herein shall include the singular and plural. Section 8.16 Titles and Headings. Titles and headings to Sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. Section 8.17 Force Majeure. A party shall not be liable or deemed to be in default for any delay or failure in performance under this Agreement or other interruption of service deemed to result, directly or indirectly, from acts of God, civil or military authority, acts of public enemy, war, accidents, explosions, earthquakes, floods, failure of transportation, strikes or other work interruptions by a party's employees, or any other similar cause beyond the reasonable control of a party unless such delay or failure in performance is expressly addressed elsewhere in this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement on the day and year first above written. CELERITY GROUP, INC. (formerly known as Kinetics Holdings Corporation) By: Name: Title: KINETIC SYSTEMS, INC. By: Name: Title: KINETICS BIOPHARM, INC. By: Name: Title: [SIGNATURE PAGE TO SEPARATION AGREEMENT] 33 SCHEDULE 3.1(a)(xiii) CERTAIN ASSETS TO BE TRANSFERRED BY COMPANY The detailed list of Assigned Assets being transferred by the Company will be specifically agreed to by the parties on or before the Distribution Date. 34 SCHEDULE 3.1(b)(i) EXCLUDED ASSETS The detailed list of Excluded Assets will be specifically agreed to by the parties on or before the Distribution Date. 35 SCHEDULE 3.2(b)(i) EXCLUDED LIABILITIES The detailed list of Excluded Liabilities will be specifically agreed to by the parties on or before the Distribution Date. 36 SCHEDULE 3.6(b) AGREEMENTS NOT TO TERMINATE The detailed list of agreements not to terminate will be specifically agreed to by the parties on or before the Distribution Date. 37 SCHEDULE 5.4(a) COVERED CLAIMS The detailed list of Covered Claims will be specifically agreed to by the parties on or before the Distribution Date. 38 SCHEDULE 6.6 NON-DISCLOSURE CONFIDENTIAL INFORMATION The detailed list of non-disclosure confidential information will be agreed to by the parties on or before the Distribution Date. 39 EX-2.03 4 f82015a1exv2w03.txt EXHIBIT 2.03 Exhibit 2.03 MANAGEMENT SERVICES AGREEMENT This Management Services Agreement (this "AGREEMENT") is entered into effective as of _________, 2002 by and between Celerity Group, Inc., a Delaware corporation (the "COMPANY", formerly known as Kinetics Holdings Corporation), Kinetic Systems, Inc., a California corporation ("KSI"), and Kinetics Biopharm, Inc., a Delaware corporation ("KBI"). The Company, KSI and KBI are sometimes referred to herein individually as a "PARTY" and collectively as the "PARTIES." RECITALS WHEREAS, the Company is issuing shares of common stock to the public in an offering (the "INITIAL PUBLIC OFFERING") registered under the Securities Act of 1933, as amended; WHEREAS, in connection with the Initial Public Offering, the Company intends to distribute the capital stock of KSI and KBI to the Company's stockholders and thereby separate the businesses of the Company, KSI and KBI; WHEREAS, the parties have heretofore shared certain administrative, financial, management, supply chain and other services; WHEREAS, on the terms and subject to the conditions set forth herein, the Company, KSI and KBI desire to retain one another as independent contractors to provide, directly or indirectly, certain of those services after the Closing Date (as defined below); and WHEREAS, on the terms and subject to the conditions set forth herein, the parties, as applicable, desire to provide such services. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. As used in this Agreement, the following terms will have the following meanings, applicable both to the singular and the plural forms of the terms described: "ACTIONS" has the meaning ascribed thereto in Section 4.02. "ADDITIONAL SERVICES" has the meaning ascribed thereto in Section 2.02. "AGREEMENT" has the meaning ascribed thereto in the preamble hereto, as such agreement may be amended and supplemented from time to time in accordance with its terms, and includes the Service Schedules. "CLOSING DATE" means the date of the closing of the initial sale of common stock in the Initial Public Offering. "COMPANY" has the meaning ascribed thereto in the preamble hereto. "COMPANY ENTITIES" mean the Company and its Subsidiaries and "COMPANY ENTITY" shall mean any of the Company Entities. "EVENT OF FORCE MAJEURE" has the meaning ascribed thereto in Section 2.06. "EXPIRATION DATE" has the meaning ascribed thereto in Section 5.01. "IMPRACTICABILITY" has the meaning ascribed thereto in Section 2.06. "INITIAL PUBLIC OFFERING" has the meaning ascribed thereto in the recitals to this Agreement. "INITIAL TERM" has the meaning ascribed thereto in Section 5.01. "KBI" has the meaning ascribed thereto in the preamble hereto. "KSI" has the meaning ascribed thereto in the preamble hereto. "KBI ENTITIES" means KBI and its Subsidiaries and "KBI ENTITY" shall mean any of the KBI Entities. "KSI ENTITIES" means KSI and its Subsidiaries and "KSI ENTITY" shall mean any of the KSI Entities. "OUTSOURCED SERVICE" has the meaning ascribed thereto in Section 2.04. "PERSON" means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization, government (and any department or agency thereof) or other entity. "PROVIDER INDEMNIFIED PERSON" has the meaning ascribed thereto in Section 4.01. "RECIPIENT INDEMNIFIED PERSON" has the meaning ascribed thereto in Section 4.03. "SEPARATION AGREEMENT" means the Separation Agreement dated the date hereof between the Company, KSI and KBI pursuant to which, among other things, the business and operations of the Company, KBI and KSI will be separated. "SERVICE CHARGES" has the meaning ascribed thereto in Section 3.01(c). 2 "SERVICE PROVIDER" has the meaning ascribed thereto in Section 2.01. "SERVICE RECIPIENT" has the meaning ascribed thereto in Section 2.01. "SERVICE SCHEDULE" has the meaning ascribed thereto in Section 2.01. "SERVICES" has the meaning ascribed thereto in Section 2.01. "SUBSIDIARY" means, as to any Person, any corporation, limited liability company, association, partnership, joint venture or other business entity of which more than 50% of the voting capital stock or other voting ownership interests is owned or controlled directly or indirectly by such Person or by one or more of the Subsidiaries of such Person or by a combination thereof. The term "Subsidiary" shall, as to the Company, also include Kinetics Japan K.K. ARTICLE II PURCHASE AND SALE OF SERVICES Section 2.01. Purchase and Sale of Services. On the terms and subject to the conditions of this Agreement and in consideration of the Service Charges described in Article III below, the Company, KSI and KBI, as applicable, agree to provide to the other parties the services described in the Service Schedules (each service schedule, a "SERVICE SCHEDULE") attached to this Agreement. Each Service shall be covered by this Agreement upon execution of a Service Schedule in the form attached hereto. Collectively, the services described on all the Service Schedules (including Additional Services) shall be referred to herein as "SERVICES." The party providing a particular Service shall be referred to herein as the "SERVICE PROVIDER," and the party receiving a particular Service shall be referred to herein as the "SERVICE RECIPIENT." The Service Provider with respect to Services to be performed under or in connection with (i) the Tax Sharing Agreement between the parties (or in the case of KSI and KBI, their respective shareholders) dated the date hereof and (ii) the Stock Purchase Agreement between Kinetics Group, Inc. and United States Filter Corporation, dated August 20, 2000, shall be the "Representative of the Affiliated Group and the Combined Group," as such term is defined in the Tax Sharing Agreement. For each Service, the Service Schedule shall set forth, among other things, the names of the Service Provider and Service Recipient; the time period during which the Service will be provided if different from the term of this Agreement determined pursuant to Article 5 hereof; a description of the Service; and the estimated charge, if any, for the Service and any other terms applicable thereto. Obligations regarding each Service Schedule shall be effective upon execution of this Agreement, or, if a particular Service Schedule is amended or a new Service Schedule is executed after the execution of this Agreement, the obligations created by such amendment or new Service Schedule shall be effective upon execution of such amendment or such new Service Schedule. At its option, the Service Provider may cause any Service it is required to provide hereunder to be provided by any of its Subsidiaries. Unless otherwise specifically agreed by the Service Provider and the Service Recipient, the Services to be provided hereunder shall be 3 substantially similar in scope, quality and nature to those provided by the Company prior to the Closing Date, shall be performed by the same or similarly qualified personnel, and shall be provided only at the locations such Services are being provided by the Company prior to the Closing Date; provided, however, that the selection of personnel to perform the Services shall be at the sole discretion of the Service Provider; and provided, further, that, except as expressly provided in this Agreement, the Service Provider shall not be required to increase the volume, scope or quality of the Services provided beyond that which has been provided by the Company prior to the Closing Date. The Service Recipient shall use reasonable efforts, in connection with receiving Services, to follow the policies, procedures and practices in effect before the Closing Date including providing information and documentation sufficient for the Service Provider to perform the Services as they were performed before the Closing Date and making available, as reasonably requested by the Service Provider, adequate personnel and timely decisions, approvals and acceptances in order that the Service Provider may accomplish its obligations hereunder in a timely manner. Section 2.02. Additional Services. From time to time after the Closing Date, the parties may identify Services other than those described on the Service Schedules attached hereto, that a party will provide to another party in accordance with the terms of this Agreement (the "ADDITIONAL SERVICES"). Accordingly, the parties shall execute additional Service Schedules for such Additional Services pursuant to this Article II. Each Service Schedule for an Additional Service shall be signed by a duly authorized representative of the Service Provider and Service Recipient. Section 2.03. Obligations as to Additional Services. Except as set forth in the next sentence, a party shall be obligated to perform, at a charge determined using the principles consistent with those used for determining fees for other Services, any Additional Service that: (a) was provided by such party immediately prior to the Closing Date and that another party reasonably believes was inadvertently or unintentionally omitted from the list of Services described in the Service Schedules attached hereto, or (b) is in the reasonable opinion of the parties necessary or desirable to effectuate an orderly transition of the parties' businesses under the Separation Agreement unless such performance would significantly disrupt a party's operations or materially increase the scope of its responsibility under this Agreement. If a party reasonably believes the performance of an Additional Service required under subparagraphs (a) or (b) would significantly disrupt its operations or materially increase the scope of its responsibility under this Agreement, such party shall negotiate in good faith with the party seeking such Additional Service to establish terms under which such Additional Service may be provided, but such party shall not be obligated to provide such Additional Service if, following good faith negotiation, the affected parties are unable to reach agreement on such terms. Section 2.04. Services Performed by Third Parties. At its option, the Service Provider may cause any Service it is required to provide hereunder to be provided by any third-party that is providing, or may from time to time provide, the same or similar services for Service Provider (an "OUTSOURCED SERVICE"). The Service Provider shall remain responsible, in accordance with the terms of this Agreement, for performance of any Service it causes to be so provided; provided, however, that Service Providers and Service Recipients may, by mutual agreement, seek to effectuate the partial assignment to Service Recipients of any third-party contracts with Service Providers for Outsourced Services; and provided further, that Service Recipients of 4 Outsourced Services may seek to enter into new contracts for, or otherwise obtain from alternate sources, the Outsourced Services. Section 2.05. Additional Resources. Except as provided in a Service Schedule for a specific Service, in providing the Services, the Service Provider shall not be obligated to: (i) hire any additional employees; (ii) maintain the employment of any specific employee; (iii) purchase, lease or license any additional equipment or software; or (iv) pay any costs related to the transfer or conversion of the Service Recipient's data to the Service Recipient or any alternate supplier of Services. Prior to executing a Service Schedule, the parties shall in good faith attempt to determine whether any of actions described in immediately preceding clauses (i), (ii), (iii) of (iv) would be required for the Service Provider to perform the contemplated Services. Section 2.06 Impracticability and Force Majeure. A Service Provider shall not be required to provide any Service to the extent the performance of such Services becomes impracticable as a result of a cause or causes outside the reasonable control of the Service Provider or to the extent the provision of such Service would require the Service Provider to violate any applicable laws, rules or regulations or would result in the breach of any applicable contract or contracts (collectively, "IMPRACTICABILITY"), subject to Section 2.09 below. A Service Provider shall have no obligation to perform or cause a Service to be performed if its failure to do so is caused by or results from any act of God, governmental action, natural disaster, strike, failure of essential equipment or any other cause or circumstance beyond the control of the Service Provider or, if applicable, any third-party provider of services to the Service Provider (an "EVENT OF FORCE MAJEURE"). The Service Provider will notify the Service Recipient of any Event of Force Majeure affecting its Services. The Service Provider agrees that following any Event of Force Majeure, the Service Recipient shall have no obligation to pay for the Services affected thereby and the Service Provider will use its reasonable best efforts to restore such Services. Section 2.07. Responsibility for Errors; Delays. A Service Provider's sole responsibility to a Service Recipient: (a) for errors or omissions in a Service (including an Outsourced Service), other than errors or omissions attributable to the Service Provider's willful misconduct, shall be to furnish correct information, payment and/or adjustment in the Service, at no additional cost or expense to the Service Recipient; provided, the Service Recipient must promptly advise the Service Provider of any such error or omission of which it becomes aware. Without in any way limiting the generality of the preceding sentence, a Service Provider shall have no liability for the negligence, gross negligence or willful misconduct of a third-party providing an Outsourced Service except as provided in the preceding sentence; provided that such Service Provider shall provide reasonable cooperation to the Service Recipient in the exercise of any remedies sought by the Service Recipient against such third-party. (b) for failure to deliver any Service because of Impracticability, shall be to use reasonable efforts to make any portion of the Services which are not Impracticable available and/or to resume performing the Services which are or have become Impracticable as promptly as reasonably practicable. 5 Section 2.08. Good Faith Cooperation; Consents. The parties will use good faith efforts to cooperate with each other in all matters relating to the provision and receipt of Services. Such cooperation shall include exchanging information, performing true-ups and adjustments, and obtaining all third-party consents, licenses, sublicenses or approvals necessary to permit each party to perform its obligations hereunder and under any Service Schedule (including by way of example, not by way of limitation, rights to use third party software needed for the performance of Services). The reasonable and documented costs of obtaining such third party consents, licenses, sublicenses or approvals shall be borne by the Service Recipient, as applicable. The parties will maintain in accordance with their respective standard document retention procedures, documentation supporting the information relevant to cost calculations contained in the Service Schedules and cooperate with each other in making such information available as needed in the event of a tax audit, whether in the United States or any other country. Section 2.09. Alternatives. If a Service Provider reasonably believes it is unable to provide any Service because of a failure to obtain necessary consents, licenses, sublicenses or approvals pursuant to Section 2.08 or because of Impracticability, the Service Provider and Service Recipient shall mutually and reasonably determine the best alternative approach. Until such alternative approach is found or the problem is otherwise resolved to the satisfaction of the affected parties, the Service Provider shall use reasonable efforts to continue providing the Service. To the extent a mutually agreed upon alternative approach requires payment above and beyond that which is included in the charge for the Service in question, the affected parties shall share equally in making any such payment unless they otherwise agree in writing. ARTICLE III SERVICE CHARGES Section 3.01. Service Charges. (a) The charge for each Service provided hereunder directly by a Service Provider or its Subsidiary shall be equal to the amount indicated, or determined as set forth, in the Service Schedule for such Service, as adjusted from time to time in accordance with Section 3.01(c). (b) The charge for each Outsourced Service provided hereunder shall be equal to the third-party costs and expenses incurred by the Service Provider or its Subsidiary on behalf of the Service Recipient, plus all direct costs, if any, incurred by the Service Provider or its Subsidiary in providing such Outsourced Service. If the Service Provider incurs third-party costs or expenses on behalf of the Service Recipient as well as any Subsidiary of such Service Provider, the Service Provider will allocate any such costs or expenses in good faith between the Service Recipient and the Subsidiaries on behalf of which such costs or expenses were incurred as the Service Provider shall determine in the exercise of its reasonable judgment. The Service Provider shall apply usual and accepted accounting conventions in making such allocations and the Service Provider or its agents shall keep and maintain such books and records as may be reasonably necessary to make such allocations. The Service Provider shall make copies of such books and records available to the Service Recipient upon request and with reasonable notice. 6 (c) The parties intend for the Service charges pursuant to paragraphs (a) and (b) above (collectively, the "SERVICE CHARGES") to allow the Service Provider and its Subsidiaries to recover the fully allocated direct costs of providing the Services hereunder (not to exceed commercially reasonable rates) plus all out-of-pocket, third-party costs, charges and expenses. The parties also intend for charges to be easy to administer and justify and, therefore, the parties acknowledge that it may be counterproductive to try to recover every cost, charge or expense, particularly those that are insignificant or de minimis. The parties shall use good faith efforts to discuss any situation in which any charge, or the methodology for determining any charge, set forth in the Service Schedules is insufficient to cover or exceeds, or is reasonably expected to be insufficient to cover or exceed, the actual costs incurred by the Service Provider and its Subsidiaries in providing any Service hereunder, and on the basis of such discussions the parties may from time to time, upon mutual agreement, adjust the charges or methodologies set forth in applicable Service Schedules. Section 3.02. Invoicing and Settlement of Costs. (a) The Service Provider shall invoice the Service Recipient for all Service Charges for each calendar month within thirty (30) days following the end of such month, provided that any failure by the Service Provider to provide an invoice within such time period shall not relieve the Service Recipient of its obligation to pay an invoice received after such date. All invoices shall reflect in reasonable detail a description of the Service performed. (b) The Service Recipient shall pay within thirty (30) days following its receipt of any invoice from the Service Provider pursuant to paragraph (a), by wire transfer of immediately available funds payable to the order of the Company and without set off (except as such parties may agree to set off mutual obligations), all amounts invoiced by the Service Provider during the preceding calendar month. If the Service Recipient fails to pay any monthly payment within 30 days following its receipt of any invoice from the Service Provider pursuant to paragraph (a), the Service Recipient shall pay, in addition to the amount indicated in such invoice, interest on such amount at the prime interest rate announced by [______] plus 2% per annum compounded monthly for the period such amount remains unpaid. (c) In the event of a bona fide dispute as to the propriety of the amount invoiced, the Service Recipient shall pay all undisputed amounts, but shall be entitled to withhold payment of any amount in dispute (and shall not be obligated to pay interest on the amount so withheld) and shall notify the Service Provider within ten (10) business days from receipt of any disputed invoice of the disputed amount and the reasons each such charge its disputed by the Service Recipient. The Service Provider shall provide to the Service Recipient, or shall cause its Subsidiaries to so provide, records relating to the disputed amount so as to enable the parties to resolve the dispute. The parties shall use reasonable efforts to resolve any such dispute promptly. (d) Any invoice or payment not disputed in writing by either party within 90 days of such invoice or payment, as the case may be, shall be considered final and no longer subject to adjustment. 7 Section 3.03. Error Corrections; True-Ups; Accounting. The parties shall reasonably agree in writing on a process and procedure for conducting internal audits and making adjustments to charges as a result of the movement of employees and functions between parties, the discovery of errors or omissions in charges, as well as a true-up of amounts owed. In no event shall such processes and procedures extend beyond one (1) year after completion of a Service. Section 3.04. Pricing Adjustments. In the event of a tax audit adjustment relating to the pricing of any or all Services provided pursuant to this Agreement in which it is determined by a taxing authority that any of the charges, individually or in combination, did not result in an arm's-length payment, as determined under internationally accepted arm's-length standards, then the parties, including any subcontractor providing Outsourced Services hereunder, may agree to make corresponding adjustments to the charges in question for such period to the extent necessary to achieve arm's-length pricing. Any adjustment made pursuant to this Section 3.04 at any time during the term of this Agreement or after termination of this Agreement shall be reflected in the parties' legal books and records, and the resulting underpayment or overpayment shall create, respectively, an obligation to be paid in the manner specified in Section 3.02, or shall create a credit against amounts owed under this Agreement. ARTICLE IV LIMITATION OF LIABILITY; INDEMNIFICATION Section 4.01. Limitation of Liability. Each party (as a Service Recipient) agrees that the other parties (as Service Providers) and their respective Subsidiaries and their respective directors, officers, agents, and employees (each, a "PROVIDER INDEMNIFIED PERSON") shall not have liability, whether direct or indirect, in contract or tort or otherwise, for or in connection with the Services rendered or to be rendered by any Provider Indemnified Person pursuant to this Agreement, the transactions contemplated hereby or any Provider Indemnified Person's actions or inactions in connection with any such Services or transactions, except for damages which have resulted from such Provider Indemnified Person's willful misconduct in connection with any such Services, actions or inactions. Section 4.02. Indemnification by Service Recipients. Each party (as a Service Recipient) agrees to indemnify and hold harmless each other party (as a Service Provider) from and against any damages, and to reimburse each Provider Indemnified Person for all reasonable expenses as they are incurred in investigating, preparing, pursuing, or defending any claim, action, proceeding, or investigation, whether or not in connection with pending or threatened litigation and whether or not any Provider Indemnified Person is a party (collectively, "ACTIONS"), arising out of or in connection with Services rendered or to be rendered by any Provider Indemnified Person pursuant to this Agreement, the transactions contemplated hereby or any Provider Indemnified Person's actions or inactions in connection with any such Services or transactions; provided that a party will not be responsible for any damages of any Provider Indemnified Person that have resulted from such Provider Indemnified Person's willful misconduct in connection with any of the actions, inactions, or Services referred to above. Section 4.03. Indemnification by Service Providers. Each party (as a Service Provider) agrees to indemnify and hold harmless each other party (as a Service Recipient) and its 8 Subsidiaries and their respective directors, officers, agents, and employees (each, a "RECIPIENT INDEMNIFIED PERSON") from and against any damages, and will reimburse each Recipient Indemnified Person for all reasonable expenses as they are incurred in investigating, preparing, or defending any Action, arising out of the willful misconduct of any Provider Indemnified Person in connection with the Services rendered or to be rendered pursuant to this Agreement. Section 4.04. Further Indemnification. To the extent that any other Person has agreed to indemnify any Provider Indemnified Person or to hold a Provider Indemnified Person harmless and such Person provides service to the Service Provider or any affiliate of the Service Provider relating directly or indirectly to any employee plan or benefit arrangement for which Services are provided under this Agreement, the Service provider will exercise reasonable efforts (x) to make such agreement applicable to any Recipient Indemnified Person so that each Recipient Indemnified Person is held harmless or indemnified to the same extent as any Provider Indemnified Person or (y) otherwise make available to each Recipient Indemnified Person the benefits of such agreement. Section 4.05. Disclaimer of Warranties. EACH SERVICE PROVIDER DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SERVICES. EACH SERVICE PROVIDER MAKES NO REPRESENTATIONS OR WARRANTIES AS TO THE QUALITY, SUITABILITY OR ADEQUACY OF THE SERVICES FOR ANY PURPOSE OR USE. Section 4.06 Limitation of Liability. IN NO EVENT SHALL A PARTY OR ITS SUBSIDIARIES BE LIABLE TO ANOTHER PARTY OR ITS SUBSIDIARIES FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. ARTICLE V TERM AND TERMINATION Section 5.01. Term. Except as otherwise provided in this Article V or as otherwise agreed in writing by the parties, this Agreement shall have an initial term (the "INITIAL TERM") of one year from the Closing Date (the last day of the Initial Term being the "EXPIRATION DATE"). This Agreement may be extended beyond the Expiration Date by the parties in writing, either in whole or with respect to one or more of the Services; provided, however, that such extension shall only apply to the Services and the parties for which the Agreement was extended. The parties shall be deemed to have extended this Agreement with respect to a specific Service if the Service Schedule for such Service specifies a completion date beyond the Expiration Date. The parties may agree on an earlier expiration date respecting a specific Service by specifying such date on the Service Schedule for that Service. Section 5.02. Termination. 9 (a) Notwithstanding the Initial Term or any extension of this Agreement, a Service Recipient may at any time terminate this Agreement with respect to one or more of the Services, in whole or in part, upon giving at least 30 days prior written notice to the Service Provider. (b) After the Initial Term of this Agreement, a Service Provider may from time to time terminate this Agreement with respect to one or more of the Services, in whole or in part, upon giving at least 60 days prior written notice to a Service Recipient. (c) This Agreement will be subject to early termination by a Service Provider on 30 days prior written notice to a Service Recipient if there is a change in the person or persons with power to direct, or to cause the direction of, management or policies of such Service Recipient, or such Service Recipient is a party to a merger, consolidation or business combination in which it is not the surviving entity, or such Service Recipient sells or otherwise disposes of all or a substantial portion of its assets. (d) A Service Provider may terminate any affected Service at any time if (i) a Service Recipient shall have failed to perform any of its material obligations under this Agreement relating to any such Service, the Service Provider has notified the Service Recipient in writing of such failure, and such failure shall have continued for a period of 30 days after receipt by the Service Recipient of notice of such failure or (ii) a Service Recipient shall become a debtor in a bankruptcy or insolvency proceeding, shall make an assignment for the benefit of creditors, shall have a receiver or trustee appointed with respect to any of its assets, or shall become the subject of a voluntary or involuntary liquidation or dissolution. (e) Each party agrees that prior to exercising its rights under this Section 5.02 it will consult for a reasonable period with the other affected party or parties in advance of such termination as to its implementation. (f) In the event of termination of an Outsourced Service under subsections (a) or (d) above, the Service Recipient shall reimburse, and indemnify and hold harmless, the Service Provider for any claims, damages, losses or other amounts incurred by the Service Provider due to the failure to meet minimum purchase commitments as a result of the Service Recipient's termination of the Outsourced Service. 5.03. Effect of Termination. (a) Other than as required by law, upon termination of any Service pursuant to Section 5.01 or Section 5.02, and upon termination of this Agreement in accordance with its terms, a Service Provider will have no further obligation to provide the terminated Service (or any Service, in the case of termination of this Agreement) and the Service Recipient will have no obligation to pay any fees relating to such Service or make any other payments hereunder; provided that notwithstanding such termination, (i) the Service Recipient shall remain liable to the Service Provider for fees owed and payable in respect of Services provided prior to the effective date of the termination; (ii) the Service Provider shall continue to charge the Service Recipient for administrative and program costs relating to benefits paid after but incurred prior to the termination of any Services and other services required to be provided after the termination 10 of such Services and the Service Recipient shall be obligated to pay such expenses in accordance with the terms of this Agreement; and (iii) the provisions of Articles III, IV, V and VI shall survive any such termination. All program and administrative costs attributable to associates of a Service Recipient for Service Provider plans that relate to any period after the effective date of any such termination shall be for the account of the Service Recipient. (b) Following termination of this Agreement with respect to any Service, the affected parties agree to cooperate in providing for an orderly transition of such Service to the Service Recipient or to a successor service provider. Without limiting the foregoing, the Service Provider agrees to (i) provide, within 90 days of the termination, copies in a format designated by the Service Provider, of all records relating directly or indirectly to benefit determinations of Service Recipient associates, including but not limited to compensation and service records, correspondence, plan interpretive policies, plan procedures, administration guidelines, minutes, or any data or records required to be maintained by law, and (ii) work with the Service Recipient in developing a transition schedule. Each of the parties shall use good faith efforts at the termination or expiration of this Agreement, any specific Service hereunder or any Service Schedule to ensure that all applicable user IDs and passwords issued to such party by another party are canceled or returned, as applicable. ARTICLE VI MISCELLANEOUS Section 6.01. Performance under Ancillary Agreements. Notwithstanding anything to the contrary contained herein, a Service Recipient shall not be charged anything under this Agreement for any Services that are specifically required to be performed under the Separation Agreement or any other Ancillary Agreement (as defined in the Separation Agreement) and any such other Services shall be performed and charged for in accordance with the terms of the Separation Agreement or such other Ancillary Agreement. Section 6.02. Relationship Between the Parties. It is expressly acknowledged that the parties are "independent contractors," and nothing in this Agreement is intended and nothing shall be construed to allow one party to exercise control or direction over the manner or method by which the another party performs the Services that are the subject matter of this Agreement; provided, that the Services to be provided hereunder shall be furnished in a manner consistent with the standards governing such Services and the provisions of this Agreement. Each party understands and agrees that (i) a party will not withhold on behalf of another party any sums for income tax, unemployment insurance, social security or any other withholding pursuant to any law or requirement of any governmental body or make available any of the benefits afforded to its employees, (ii) all of such payments, withholdings and benefits, if any, are the sole responsibility of the party incurring the liability, and (iii) each party will indemnify and hold the other harmless from any and all loss or liability arising with respect to such payments, withholdings and benefits, if any. Nothing in this Agreement shall constitute or be deemed to constitute a partnership or joint venture between the parties hereto or constitute or be deemed to constitute any party the agent or employee of another party for any purpose whatsoever and a party shall not have authority or power to bind another party or to contract in the name of, or create a liability against, another party in any way or for any purpose. 11 Section 6.03. Sole Beneficiary. Each party acknowledges that the Services shall be provided only with respect to its (and its Subsidiaries') business as currently operated or as mutually agreed by the parties hereto. A party shall not request performance of any Service for the benefit of any entity other than itself and its Subsidiaries. Each party represents and agrees that it will use the Services only in accordance with all applicable federal, state and local laws and regulations, and in accordance with the reasonable conditions, rules, regulations and specifications which may be set forth in any manuals, materials, documents and instructions furnished from time to time by a Service Provider to a Service Recipient. Each party reserves the right to take all actions, including termination of any particular Service, that it reasonably believes to be necessary to assure compliance with applicable laws and regulations. A Service Provider will notify a Service Recipient of the reasons for any such termination of Services. Section 6.04. Entire Agreement. This Agreement (including the Service Schedules constituting a part of this Agreement) and any other writing signed by the parties that specifically references this Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the parties with respect to the subject matter hereof. This Agreement is not intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. Section 6.05. Information. Subject to applicable law and privileges, each party hereto covenants and agrees to provide the other parties with all information regarding itself and transactions under this Agreement that the other party reasonably believes are required to comply with all applicable federal, state, county and local laws, ordinances, regulations and codes, including, but not limited to, securities laws and regulations. Section 6.06. Confidential Information. Each party hereby covenants and agrees to hold in trust and maintain confidential all confidential information relating to the other parties, including all information disclosed by one party to the other(s) in connection with this Agreement, in accordance with the Confidential Disclosure Agreement entered into by the parties of even date herewith. A Service Provider shall require that any third-party performing an Outsourced Service agree in writing to be bound by confidentiality obligations at least as protective as the confidentiality terms applicable to the Service Provider. Section 6.07. Dispute Resolution. Article VII of the Separation Agreement shall be applicable with respect to any claims, controversies or disputes arising under or related to this Agreement; provided, however, that any dispute regarding the following is not required to be negotiated prior to seeking relief from a court of competent jurisdiction: breach of any obligation of confidentiality; infringement, misappropriation, or misuse of any intellectual property right; or any other claim where interim relief from the court is sought to prevent serious and irreparable injury to a party. Section 6.08. Notices. Any notice, demand, offer, request or other communication required or permitted to be given by a party pursuant to the terms of this Agreement shall be in writing and shall be deemed effectively given the earlier of (i) when received, (ii) when delivered personally, (iii) one (1) Business Day after being delivered by facsimile (with receipt of appropriate confirmation), (iv) one (1) Business Day after being deposited with a nationally 12 recognized overnight courier service or (v) four (4) days after being deposited in the U.S. mail, First Class with postage prepaid, and addressed to the attention of: (a) If to the Company, to: ----------------------------------- (b) If to KSI, to: ----------------------------------- (c) If to KBI, to: ----------------------------------- Or to such other addresses or telecopy numbers as may be specified by like notice to the other parties. Section 6.09. Governing Law. This Agreement shall be construed in accordance with the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County, California and/or the United States District Court for the Northern District of California, San Jose Division, shall have jurisdiction and venue over all disputes between the parties that are permitted to be brought in a court of law pursuant to Section 6.07 hereof. Section 6.10. Severability. The parties hereto have negotiated and prepared the terms of this Agreement in good faith with the intent that each and every one of the terms, covenants and conditions herein be binding upon and inure to the benefit of the respective parties. Accordingly, if any one or more of the terms, provisions, promises, covenants or conditions of this Agreement or the application thereof to any person or circumstance shall be adjudged to any extent invalid, unenforceable, void or voidable for any reason whatsoever by a court of competent jurisdiction, such provision shall be as narrowly construed as possible, and each and all of the remaining terms, provisions, promises, covenants and conditions of this Agreement or their application to other persons or circumstances shall not be affected thereby and shall be valid and enforceable to the fullest extent permitted by law. To the extent this Agreement is in violation of applicable law, then the parties agree to negotiate in good faith to amend the Agreement, to the extent possible consistent with its purposes, to conform to law. Section 6.11. Amendment. Except as expressly provided herein, this Agreement may only be amended by a written agreement executed by all parties hereto. Section 6.12 Binding Effect; Nonassignability. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and permitted assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. This Agreement may be enforced separately by each Company Entity, each KSI Entity, and each KBI Entity. Except as herein specifically provided to the contrary, a party may not assign this Agreement or any rights or obligations hereunder (including, without 13 limitation, in connection with a sale of all or substantially all of such party's assets), without the prior written consent of each of the other parties. Section 6.13. Waiver of Breach. The waiver by a party hereto of a breach or violation of any provision of this Agreement shall not operate as, or be construed to constitute, a waiver of any subsequent breach of the same or another provision hereof. Section 6.14. Authority. Each party hereto represents to the others that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it has been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general equity principles. Section 6.15. Descriptive Headings. The headings contained in this Agreement or in any Schedule hereto are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Schedule but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section, or Schedule, such reference shall be to an Article or Section of, or a Schedule to, this Agreement unless otherwise indicated. Section 6.16. Gender and Number. Whenever the context of this Agreement requires, the gender of all words herein shall include the masculine, feminine and neuter, and the number of all words herein shall include the singular and plural. Section 6.17. Additional Assurances. Except as may be specifically provided herein to the contrary, the provisions of this Agreement shall be self-operative and shall not require further agreement by the parties; provided, however, at the request of a party, another party shall execute such additional instruments and take such additional acts as are reasonable, and as the requesting party may reasonably deem necessary, to effectuate this Agreement. 14 Section 6.18. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed an original and all of which, when taken together, shall constitute one agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their duly authorized representatives. CELERITY GROUP, INC. (formerly known as Kinetics Holdings Corporation) By:__________________________________________________ Name: Title: KINETIC SYSTEMS, INC. By:__________________________________________________ Name: Title: KINETICS BIOPHARM, INC. By: __________________________________ Name: Title: [SIGNATURE PAGE TO MANAGEMENT SERVICES AGREEMENT] 15 [SERVICES, SERVICE CHARGES AND SERVICE SCHEDULES TO BE DETERMINED AND COMPLETED BY THE CLOSING DATE] EX-2.04 5 f82015a1exv2w04.txt EXHIBIT 2.04 Exhibit 2.04 CONFIDENTIAL DISCLOSURE AGREEMENT This Confidential Disclosure Agreement (the "AGREEMENT") is effective as of _________, 2002 (the "EFFECTIVE DATE"), between Celerity Group, Inc., a Delaware corporation (the "COMPANY", formerly known as Kinetics Holdings Corporation), Kinetic Systems, Inc., a California corporation ("KSI"), and Kinetics Biopharm, Inc., a Delaware corporation ("KBI"). The Company, KSI and KBI are sometimes referred to herein individually as a "PARTY" or collectively as the "PARTIES." WHEREAS, the Board of Directors of each of the Company, KSI and KBI have determined that it is in the best interests of the Company and its stockholders to separate the Company's existing businesses into three independent businesses by distributing the capital stock in KSI and KBI to the Company's stockholders; WHEREAS, as part of the foregoing, the Company, KSI and KBI have entered into a Separation Agreement (as defined below), which provides, among other things, for the separation of the three businesses and the execution and delivery of certain other agreements in order to facilitate and provide for the foregoing; and WHEREAS, also as part of the foregoing, the parties further desire to enter into this Agreement to provide for the protection of their Confidential Information (as defined below). NOW, THEREFORE, in consideration of the mutual promises of the parties, and of good and valuable consideration, it is agreed by and between the parties as follows: ARTICLE I DEFINITIONS For the purpose of this Agreement the following capitalized terms are defined in this Article I. 1.1 "ANCILLARY AGREEMENTS" has the meaning set forth in the Separation Agreement. 1.2 "CONFIDENTIAL INFORMATION" means any and all financial, technical, commercial or other information of the Company, KSI or KBI, as appropriate (whether written or oral), including, without limitation, all information, notes, client lists and records, reports, analyses, financial statements, compilations, studies, forms, business or management methods, marketing data, product designs, inventions, software, processes, manufacturing methods, manufacturing line design or procedures, engineering design tools, test hardware or software, supply base information, fee schedules, information technology systems and programs, projections, forecasts or trade secrets of the Company, KSI or KBI, as applicable, in each case whether or not such Confidential Information is disclosed or otherwise made available to one party by another party pursuant to this Agreement, as well as information disclosed by one party to another party in connection with the Management Services Agreement of even date herewith. Confidential Information does not include any information that (i) is or becomes generally available to and known by the public (other than as a result of an unpermitted disclosure directly or indirectly by the Receiving Party or its affiliates, advisors or representatives); (ii) is or becomes available to the Receiving Party on a nonconfidential basis from a source other than the Disclosing Party or its affiliates, advisors or representatives, provided that such source is not and was not bound by a confidentiality agreement with or other obligation of secrecy to the Disclosing Party; or (iii) has already been developed, or is hereafter independently acquired or developed, by the Receiving Party without violating any confidentiality agreement with or other obligation of secrecy to the Disclosing Party. 1.3 "CONFIDENTIALITY PERIOD" means, (i) with respect to Confidential Information that is not Highly Confidential Information, three (3) years after either (A) the Closing Date with respect to Confidential Information of the Disclosing Party that is known to or in the possession of the Receiving Party as of the Closing Date or (B) the date of disclosure with respect to Confidential Information that is disclosed by the Disclosing Party to the Receiving Party after the Closing Date, and (ii) with respect to Highly Confidential Information, in perpetuity. 1.4 "DISCLOSING PARTY" means the party owning or disclosing the relevant Confidential Information. 1.5 "CLOSING DATE" has the meaning set forth in the Separation Agreement. 1.6 "HIGHLY CONFIDENTIAL INFORMATION" means Confidential Information that is product designs, inventions, software, processes, manufacturing methods, manufacturing line design or procedures, engineering design tools, test hardware or software, and trade secrets. 1.7 "SEPARATION AGREEMENT" means the Separation Agreement dated of even date herewith between the parties. 1.8 "PERSON" has the meaning set forth in the Separation Agreement. 1.9 "RECEIVING PARTY" means the non-owning party or recipient of the relevant Confidential Information. 1.10 "SUBSIDIARY" means, as to any Person, any corporation, limited liability company, association, partnership, joint venture or other business entity of which more than 50% of the voting capital stock or other voting ownership interests is owned or controlled directly or indirectly by such Person or by one or more of the Subsidiaries of such Person or by a combination thereof. The term "Subsidiary" shall, as to the Company, also include Kinetics Japan K.K. 1.11 "THIRD PARTY" means a Person other than (i) the Company, its Subsidiaries and their respective employees, (ii) KSI, its Subsidiaries and their respective employees, and (iii) KBI, its Subsidiaries and their respective employees. 1.12 "TRANSACTION AGREEMENTS" means the Separation Agreement and the Ancillary Agreements. 2 ARTICLE II CONFIDENTIALITY 2.1 CONFIDENTIALITY AND NON-USE OBLIGATIONS. During the Confidentiality Period, the Receiving Party shall (i) protect the Confidential Information of the Disclosing Party by using the same degree of care, but no less than a reasonable degree of care, to prevent the unauthorized use, dissemination, or publication of the Confidential Information as the Receiving Party uses to protect its own Confidential Information of a like nature, (ii) not use such Confidential Information in violation of any use restriction in any Transaction Agreement, and (iii) not disclose or publish such Confidential Information to any Third Party, except as expressly permitted under this Agreement, in the Transaction Agreements or in any other agreements entered into between the parties in writing, without the prior written consent of the Disclosing Party. 2.2 COMPELLED DISCLOSURE. If the Receiving Party or any of its respective Subsidiaries believes that it will be compelled by a court or other governmental authority to disclose Confidential Information of the Disclosing Party, it shall (i) give the Disclosing Party prompt and timely written notice so that the Disclosing Party may take steps to oppose such disclosure, but in any event the Receiving Party shall not be prohibited from complying with such requirement and (ii) cooperate with the Disclosing Party in the Disclosing Party's attempts to oppose such disclosure, provided that such opposition is reasonable in light of applicable law or regulation. If the Receiving Party complies with the above, it shall not be prohibited from complying with such requirement to disclose, but shall cooperate with the Disclosing Party to take all reasonable steps to make such disclosure subject to a suitable protective order or otherwise prevent unrestricted or public disclosure. 2.3 NO RESTRICTION ON DISCLOSING PARTY. Nothing in this Agreement shall restrict the Disclosing Party from using, disclosing, or disseminating its own Confidential Information in any way provided that, in so doing, it does not use, disclose or disseminate any Confidential Information of the Receiving Party. 2.4 NO RESTRICTION ON REASSIGNMENT. This Agreement shall not restrict reassignment of the Receiving Party's employees. 2.5 THIRD PARTY RESTRICTIONS. Nothing in the Agreement supersedes any restriction imposed by Third Parties on their Confidential Information, and there is no obligation on the Disclosing Party to conform Third Party agreements to the terms of this Agreement. ARTICLE III WARRANTY DISCLAIMER EACH PARTY ACKNOWLEDGES AND AGREES THAT ALL CONFIDENTIAL INFORMATION IS PROVIDED ON AN "AS IS, WHERE IS" BASIS AND THAT NO PARTY OR ANY OF ITS SUBSIDIARIES HAS MADE OR WILL MAKE ANY WARRANTY WHATSOEVER WITH RESPECT TO CONFIDENTIAL INFORMATION, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY 3 IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, ENFORCEABILITY OR NON-INFRINGEMENT. ARTICLE IV TERM AND TERMINATION 4.1 TERM. This Agreement shall remain in full force and effect unless and until terminated by the mutual written agreement of the parties. 4.2 SURVIVAL. Articles II (with respect to Confidential Information acquired or disclosed prior to the date of termination), III, V, and VI shall survive any termination of this Agreement. ARTICLE V DISPUTE RESOLUTION Resolution of any and all claims, controversies and disputes arising from or in connection with this Agreement shall be exclusively governed by and settled in accordance with the provisions of Article VII of the Separation Agreement; provided, however, that any such claim, controversy or dispute regarding the following is not required to be negotiated prior to seeking relief from a court of competent jurisdiction: breach of any obligation of confidentiality; infringement, misappropriation, or misuse of any intellectual property right; or any other claim where interim relief from the court is sought to prevent serious and irreparable injury to a party. ARTICLE VI MISCELLANEOUS PROVISIONS 6.1 LIMITATION OF LIABILITY. IN NO EVENT SHALL A PARTY OR ITS SUBSIDIARIES BE LIABLE TO ANOTHER PARTY OR ITS SUBSIDIARIES FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES, LOST DATA OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 6.2 EXPORT RESTRICTIONS. The parties shall adhere to all applicable laws, regulations and rules relating to the export of technical data, and shall not export or reexport any technical data, any products received from Disclosing Party, or the direct product of such technical data, to any proscribed country listed in such applicable laws, regulations and rules unless properly authorized. 6.3 NO IMPLIED LICENSES. Nothing contained in this Agreement shall be construed as conferring any rights by implication, estoppel or otherwise, under any intellectual property right, other than the rights expressly granted in this Agreement with respect to 4 Confidential Information. The parties are not required hereunder to furnish or disclose to the other any technical or other information. 6.4 INFRINGEMENT SUITS. A party shall not have any obligation hereunder to institute any action or suit against a Third Party for misappropriation of any of such party's Confidential Information or to defend any action or suit brought by a Third Party that alleges infringement of any intellectual property rights by the Receiving Party's authorized use of the Disclosing Party's Confidential Information. 6.5 ENTIRE AGREEMENT. This Agreement, the Transaction Agreements, and the Exhibits and Schedules referenced or attached hereto and thereto constitute the entire agreement between the parties with respect to the subject matter hereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. 6.6 GOVERNING LAW. This Agreement shall be construed in accordance with, and all claims, controversies and disputes hereunder shall be governed by, the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County, California and/or the United States District Court for the Northern District of California, San Jose Division, shall have jurisdiction and venue over all claims, controversies and disputes between the parties that are permitted to be brought in a court of law pursuant to Article V above. 6.7 NOTICES. Any notice, demand, offer, request or other communication required or permitted to be given by a party pursuant to the terms of this Agreement shall be in writing and shall be deemed effectively given the earlier of (i) when received, (ii) when delivered personally, (iii) one (1) Business Day after being delivered by facsimile (with electronic receipt of appropriate confirmation), (iv) one (1) Business Day after being deposited with a nationally recognized overnight courier service or (v) four (4) days after being deposited in the U.S. mail, First Class with postage prepaid, and addressed to the attention of: IF TO THE COMPANY: [Name] [Address] [Address] Attention: Facsimile No.: (___) ___-____ with a copy to: [Name] [Address] [Address] Attention: Facsimile No.: (___) ___-____ 5 IF TO KSI: Kinetic Systems, Inc. [Address] [Address] Attention: Facsimile No.: (___) ___-____ with a copy to: [Name] [Address] [Address] Attention: Facsimile No.: (___) ___-____ IF TO KBI: [Name] [Address] [Address] Attention: Facsimile No.: (___) ___-_____ with a copy to: [Name] [Address] [Address] Attention: Facsimile No.: (___) ___-_____ The parties may substitute a different address or facsimile number, from time to time, if such substitute is provided to the intended notice recipient in writing by notice given in the manner provided in this Section 6.7. 6.8 COUNTERPARTS. This Agreement, including other documents referred to herein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. 6.9 BINDING EFFECT; ASSIGNMENT. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and permitted assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. This Agreement may be enforced separately by the Company and each of its Subsidiaries, by KSI and each of its Subsidiaries, and by KBI and each of its Subsidiaries. Except as herein specifically provided to the contrary, a party may not assign this Agreement or any rights or obligations hereunder (including, without limitation, in connection with a sale of all 6 or substantially all of such party's assets) without the prior written consent of each of the other parties. 6.10 SEVERABILITY. The parties hereto have negotiated and prepared the terms of this Agreement in good faith with the intent that each and every one of the terms, covenants and conditions herein be binding upon and inure to the benefit of the respective parties. Accordingly, if any one or more of the terms, provisions, promises, covenants or conditions of this Agreement or the application thereof to any Person or circumstance shall be adjudged to any extent invalid, unenforceable, void or voidable for any reason whatsoever by a court of competent jurisdiction, such provision shall be as narrowly construed as possible, and each and all of the remaining terms, provisions, promises, covenants and conditions of this Agreement or their application to other persons or circumstances shall not be affected thereby and shall be valid and enforceable to the fullest extent permitted by law. To the extent this Agreement is in violation of applicable law, then the parties agree to negotiate in good faith to amend the Agreement, to the extent possible consistent with its purposes, to conform to law. 6.11 WAIVER OF BREACH. The waiver by a party hereto of a breach or violation of any provision of this Agreement shall not operate as, or be construed to constitute, a waiver of any subsequent breach of the same or another provision hereof. 6.12 AMENDMENT AND EXECUTION. This Agreement and amendments hereto shall be in writing and executed in multiple copies via facsimile or otherwise on behalf of the Company, KSI and KBI by their respective duly authorized officers and representatives. Each multiple copy shall be deemed an original, but all multiple copies together shall constitute one and the same instrument. 6.13 AUTHORITY. Each of the parties hereto represents to the other that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general equity principles. 6.14 DESCRIPTIVE HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When a reference is made in this Agreement to an Article or a Section, such reference shall be to an Article or Section of this Agreement unless otherwise indicated. 6.15 GENDER AND NUMBER. Whenever the context of this Agreement requires, the gender of all words herein shall include the masculine, feminine and neuter, and the number of all words herein shall include the singular and plural. 6.16 ADDITIONAL ASSURANCES. Except as may be specifically provided herein to the contrary, the provisions of this Agreement shall be self-operative and shall not require further agreement by the parties; provided, however, at the request of a party, another party shall 7 execute such additional instruments and take such additional acts as are reasonable, and as the requesting party may reasonably deem necessary, to effectuate this Agreement. 6.17 FORCE MAJEURE. A party shall not be liable or deemed to be in default for any delay or failure in performance, other than of confidentiality and use restrictions, under this Agreement or other interruption of service deemed to result, directly or indirectly, from acts of God, civil or military authority, acts of public enemy, war, accidents, explosions, earthquakes, floods, failure of transportation, strikes or other work interruptions by a party's employees, or any other similar cause beyond the reasonable control of a party unless such delay or failure in performance is expressly addressed elsewhere in this Agreement. WHEREFORE, the parties have signed this Confidential Disclosure Agreement effective as of the date first set forth above. CELERITY GROUP, INC. (formerly KINETIC SYSTEMS, INC. known as Kinetics Holdings Corporation) By: By: --------------------------------------- -------------------------- Name: Name: ------------------------------------- -------------------------- Title: Title: ------------------------------------ ------------------------- KINETICS BIOPHARM, INC. By: ___________________________ Name: _________________________ Title:__________________________ [SIGNATURE PAGE TO CONFIDENTIAL DISCLOSURE AGREEMENT] 8 EX-2.05 6 f82015a1exv2w05.txt EXHIBIT 2.05 EXHIBIT 2.05 TAX SHARING AGREEMENT BETWEEN KINETIC SYSTEMS, INC., KINETICS BIOPHARM, INC., AND CELERITY GROUP, INC. (FORMERLY KNOWN AS KINETICS HOLDINGS CORPORATION) --------------------------- TAX SHARING AGREEMENT This Tax Sharing Agreement (the "AGREEMENT"), effective as of ___________, 2002 (the "EFFECTIVE DATE"), is made and entered into by and among Celerity Group, Inc., a Delaware corporation ("CELERITY," formerly known as Kinetics Holdings Corporation), Kinetic Systems, Inc., a California corporation ("KSI"), and Kinetics Biopharm, Inc., a Delaware corporation ("KBI"). Celerity, KSI and KBI are sometimes referred to herein individually as a "PARTY" or collectively as the "PARTIES." Such references to a "party" shall include a reference to the present and future subsidiaries of the parties, as the context of the reference may require. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in that certain Separation Agreement (the "SEPARATION AGREEMENT") between the parties hereto, dated effective as of _________, 2002. RECITALS A. WHEREAS, Pursuant to the Separation Agreement and related Ancillary Agreements, the parties desire that the following events occur: 1. Prior to or simultaneous with the Distribution as defined below, the current shareholders of Celerity (the "EXISTING SHAREHOLDERS") may form HLLC, a Limited Liability Company in the State of Delaware ("HLLC"), as an entity that would be treated as a partnership for US Federal income tax purposes. 2. Prior to or simultaneous with the Distribution, HLLC may form Kinetics Biopharm, Inc. Holding Corporation, a Delaware corporation ("KBIHC"), and Kinetic Systems, Inc. Holding Corporation, a Delaware corporation ("KSIHC"), both with minimum capitalization. 3. Prior to or simultaneous with the Distribution, KGI will contribute the stock of Kinetics Modular Systems, Inc. ("KMS") to KBI as a capital contribution. 4. Prior to or simultaneous with the Distribution, KGI will contribute the stock of Kinetics Thermal Systems, Inc ("KTS") to KSI as a capital contribution. 5. Prior to or simultaneous with the Distribution, KGI will contribute to KSI an intercompany receivable owing from KSI to KGI as a capital contribution. 6. As part of the "DISTRIBUTION" KGI will distribute 100% of the stock of KBI and 100% of the stock of KSI to Celerity, and Celerity will immediately thereafter distribute the stock of KBI and KSI to the Existing Shareholders on a pro rata basis all on the "DISTRIBUTION DATE" as defined in the Separation Agreement. 7. After or simultaneous with the Distribution, the Existing Shareholders may contribute the stock of KBI and KSI to HLLC. Page 1 of 18 TAX SHARING AGREEMENT 8. After or simultaneous with the Distribution, HLLC may contribute the stock of KBI to KBIHC in exchange for stock in KBIHC or as a capital contribution. 9. After or simultaneous with the Distribution, HLLC may contribute the stock of KSI to KSIHC in exchange for stock in KSIHC or as a capital contribution. 10. After or simultaneous with the Distribution, Celerity may cause KGI to be liquidated into Celerity. 11. At the time of registration or simultaneous with the transactions described above, Celerity will issue stock for cash in an initial public offering. B. WHEREAS, the parties intend that the Distribution will result in the separation of KSI and KBI from the Affiliated Group or Combined Group of which Celerity is the common or group parent. C. WHEREAS, KBI, KSI and Celerity have determined that it is necessary and desirable to provide for allocations between and among KBI, KSI and Celerity of the responsibilities, liabilities and benefits relating to Taxes paid or payable by the parties determined on a consolidated, combined, unitary or other group basis, with respect to any period beginning before the Distribution Date. D. WHEREAS, KBI, KSI and Celerity would like to officially designate and authorize the Representative of the Affiliated Group and Combined Group to handle the responsibilities for certain administrative matters, such as: 1. the preparation and filing of Tax Returns for Pre-Distribution Periods, Straddle Periods, and Post-Distribution Periods. 2. the allocation and payment of Taxes shown to be due and payable on any Pre-Distribution Period Tax Return or Straddle Period Tax Return (as well as any estimated or advance payments required to be paid before the filing of those Tax Returns); 3. the allocation and payment of any additional Taxes determined to be due and payable with respect to any Pre-Distribution Period or Straddle Period; 4. the allocation and disbursement of any Tax refunds received with respect to any Pre-Distribution Period or Straddle Period; 5. the retention, maintenance and provision of access to all records necessary to prepare and file appropriate Pre-Distribution Period Tax Returns or Straddle Period Tax Returns; 6. the conduct of audits, examinations, and proceedings that could result in a redetermination of Tax liabilities for any Pre-Distribution Period or Straddle Period; 7. the exclusion of Celerity (or its predecessor and/or successors in interest) from any excess section 338(h)(10) tax liability as defined in section 6.2(j) of that certain Stock Page 2 of 18 TAX SHARING AGREEMENT Purchase Agreement between KGI (as successor in interest to Kinetics Acquisition Corporation) and United States Filter Corporation ("USF") dated as of July 18, 2000 (the "USF AGREEMENT"); and 8. the exclusion of Celerity (or its predecessor and/or successors in interest) from any Tax liability associated with the restructuring transactions described above. NOW, THEREFORE, in consideration of the mutual agreements, provisions, and covenants contained in this Agreement (the adequacy of which is hereby acknowledged by the parties), the parties hereby agree as follows: AGREEMENT 1. DEFINITIONS. As used in this Agreement the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined). 1.1. "ADJUSTMENT" means an adjustment determined on an issue-by-issue or transaction-by-transaction basis, as appropriate, made or proposed by a Taxing Authority with respect to any amount reflected or required to be reflected on any Return relating to such Tax. 1.2. "AFFILIATED GROUP" means Celerity and all other corporations which prior to the Distribution were required to be included in a US consolidated Federal income Tax return with Celerity as the common parent corporation. 1.3. "AFTER TAX BASIS" means a basis such that any payment received or deemed to have been received by a party (the "ORIGINAL PAYMENT") shall be supplemented by a further payment to such party so that the sum of the two payments shall equal the Original Payment, after taking into account all Taxes that would result from the receipt or accrual of such payments, if legally required. All payments hereunder shall be calculated on the assumptions that the payee is subject to tax at the highest marginal rates of Tax applicable to such class of taxpayer. 1.4. "CODE" shall mean the United Stated Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder. All section references are to the Code unless otherwise indicated. 1.5. "COMBINED GROUP" means Celerity and all other corporations which prior to the Distribution were required to be included in a Return of state income or franchise Tax filed on a combined, group or unitary basis (a "COMBINED RETURN"), as opposed to a separate company basis. 1.6. "ESTIMATED PAYMENT DATE" means each date occurring during any period upon which the Affiliated Group or Combined Group is required to make a payment of estimated Tax whether or not such a payment is due. 1.7. "EXTENSION PAYMENT DATE" means, with respect to any period any date upon which the Affiliated Group or the Combined Group shall be required to make a payment of Page 3 of 18 TAX SHARING AGREEMENT Taxes in connection with any request by Celerity on behalf of the Affiliated Group or Combined Group for an extension of the date upon which it would have been required, absent such extension, to file its Tax Return. 1.8. "FINAL DETERMINATION" means (a) a decision, judgment, decree or other order by any court of competent jurisdiction, which has become final and is either no longer subject to appeal or for which a determination not to appeal has been made; (b) a closing agreement made under Section 7121 of the Code or any comparable foreign, state, local, municipal or other Taxing statute; (c) a final disposition by any Taxing Authority of a claim for refund; or (d) any other written agreement relating to an Adjustment to which any Taxing Authority is a party to the execution of which is final and prohibits such Taxing Authority from seeking any further legal or administrative remedies with respect to such Adjustment. 1.9. "IRS" means the United States Internal Revenue Service. 1.10. "POST-DISTRIBUTION PERIOD" means any period of time beginning after the Distribution Date. 1.11. "PRE-DISTRIBUTION PERIOD" means any period of time beginning before and ending on or before the Distribution Date. 1.12. "REGULATIONS" means the Regulations issued by the Secretary of the Treasury interpreting the Code. 1.13. "REPRESENTATIVE OF THE AFFILIATED GROUP AND COMBINED GROUP" means KSI or any successor in interest, and the person(s) within KSI responsible for performing the functions to be performed by the Representative of the Affiliated Group and Combined Group shall be the highest ranking tax officer of KSI (most likely the VP of Taxes, or Director of Tax). 1.14. "RETURN" means any return, report, form or similar statement or document (including, without limitation, any related or supporting information or schedule attached thereto and any information return, claim for, amended return and declaration of estimated Tax) that has been or is required to be filed with any Taxing Authority or that has been or is required to be furnished to any Taxing Authority in connection with the determination, assessment or collection of any Taxes or the administration of any laws, regulations or administrative requirements relating to any Taxes. 1.15. "STRADDLE PERIOD" means any period of time beginning before but ending after the Distribution Date. Straddle periods may exist in any situations involving any Tax computed on a basis which does not and cannot be closed on the Distribution Date including, but not limited to, payroll taxes, property taxes, sales taxes, and the like. 1.16. "TAX" (and, with correlative meanings, "TAXES" and "TAXABLE") means, without limitation, and as determined on a jurisdiction-by-jurisdiction basis, each foreign or US Federal, state, local or municipal income, alternative or add-on minimum, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property or any other tax, custom, tariff, impost, levy, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with Page 4 of 18 TAX SHARING AGREEMENT any interest or penalty, addition to tax or additional amount related thereto, imposed by any Taxing Authority. 1.17. "TAX BENEFIT" means with respect to any Taxable period or portion of a Taxable period, and as computed separately with respect to each Tax, the net decrease in each such Tax resulting from all Adjustments made pursuant to a Final Determination with respect to each such Tax. 1.18. "TAX CONTEST" means, without limitation, any audit, examination, claim, suit, action or other proceeding relating to Taxes in which an Adjustment to Taxes may be proposed, collected or assessed and in respect of which an indemnity payment, reimbursement or other payment may be sought under this Agreement. 1.19. "TAX DETRIMENT" means with respect to any Taxable period or portion of a Taxable period, as computed separately with respect to each Tax, the net increase in each such Tax resulting from all Adjustments made pursuant to a Final Determination with respect to each such Tax. 1.20. "TAXING AUTHORITY" means any governmental authority or any subdivision, agency, commission or authority thereof, or any quasi-governmental or private body having jurisdiction over the assessment, determination, collection or other imposition of Taxes. 2. ALLOCATION OF TAX LIABILITY. 2.1. REGULAR US FEDERAL INCOME TAX. If the US Federal income Tax liability of the Affiliated Group for any Pre-Distribution Period or Straddle Period during which a party or any subsidiary thereof is a member of the Affiliated Group (an "AFFILIATED GROUP MEMBER"), is determined on a regular US Federal income Tax basis, then the amount of US Federal income Tax liability allocable to each Affiliated Group Member and for which each Affiliated Group Member shall be responsible for such periods, shall be determined using the basic Tax allocation method described in Section 1552(a)(1) of the Code (the separate taxable income method), without taking into account the complementary methods of allocating Tax liabilities described in Treas. Reg. Section 1.1502-33(d) or Treas. Reg. Section 1.1502-32(b)(3)(iv)(D). The Representative of the Affiliated Group and Combined Group shall be responsible for preparing such Tax allocations and computations, including, but not limited to, the determination of how any Affiliated Group US Federal regular income Tax attributes are to be apportioned among the members of the Affiliated Group. 2.2. US FEDERAL ALTERNATIVE MINIMUM TAX. If the Affiliated Group pays US Federal consolidated alternative minimum Tax ("AMT") for any Pre-Distribution Period or Straddle Period during which a party or any subsidiary thereof is an Affiliated Group Member, then the amount of the Affiliated Group's AMT allocable to each Affiliated Group Member and for which each Affiliated Group Member shall be responsible for such periods shall equal the excess, if any, of (A) the total AMT of the Affiliated Group for the period, over (B) the AMT of the Affiliated Group for the period computed by excluding that Affiliated Group Member's items of income, gain, deduction and loss, and that party's credits. The Representative of the Affiliated Group and Combined Group shall be responsible for preparing such Tax allocations and Page 5 of 18 TAX SHARING AGREEMENT computations, including, but not limited to, the determination of how any Affiliated Group AMT Tax attributes are to be apportioned among the members of the Affiliated Group. 2.3. OTHER CONSOLIDATED, COMBINED, UNITARY OR GROUP TAXES. With respect to all Taxes other than the US consolidated Federal income Taxes and AMT addressed in Sections 2.1 and 2.2 of this Agreement, that are determined on a consolidated, combined, unitary or group basis for any Pre-Distribution Period or Straddle Period during which a party or any subsidiary thereof is a member of such a consolidated, combined, unitary or group (a "COMBINED GROUP MEMBER"), the amount of such other Taxes allocable to each Combined Group Member and for which each Combined Group Member shall be responsible for such periods shall be determined by applying the principles underlying the allocation method described in Section 1552(a)(1) of the Code, without taking into account the complementary methods of allocating Tax liabilities described in Treas. Reg. Section 1.1502-33(d) or Treas. Reg. Section 1.1502-32(b)(3)(iv)(D). The Representative of the Affiliated Group and Combined Group shall be responsible for preparing such Tax allocations and computations, including, but not limited to, the determination of how any Affiliated Group non-US Federal regular income and non-AMT Tax attributes are to be apportioned among the members of the Affiliated Group. 2.4. SEPARATE COMPANY TAXES. With respect to all Taxes computed on a separate company basis for any Pre-Distribution Period, Straddle Period or Post-Distribution Period, each party or subsidiary thereof shall be separately responsible for their respective separate company Taxes for such periods (including, without limitation, the payment of such separate company Taxes and the preparation and filing of any Tax Return related to such Taxes). 2.5. POST-DISTRIBUTION PERIOD CONSOLIDATED, COMBINED, UNITARY OR GROUP TAXES. Any Taxes attributable to any Post-Distribution Period (including, without limitation, the payment of such Taxes and the preparation and filing of any Tax Return related to such Taxes) of any party(ies) or subsidiary(ies) thereof, determined on a consolidated, combined, unitary or group basis, shall be the sole responsibility of each party or subsidiary thereof as members of such consolidated, combined, unitary or group for such periods and shall be allocated and apportioned among such group members in accordance with applicable Tax law. In addition, any Tax attributes attributable to any Post-Distribution Period determined on a consolidated, combined, unitary or group basis, shall be allocated and apportioned among such group members in accordance with applicable Tax law, or some other reasonable basis if applicable Tax law does not provide any allocation or apportionment rules. The Representative of the Affiliated Group and Combined Group shall be responsible for preparing such Tax allocations and computations. This section 2.5 shall not create any obligations or liabilities on the part of any party to this Agreement which is not a member of such consolidated, combined, unitary or group, except to the extent otherwise provided in this Agreement. 2.6. ALLOCATION OF TAXES WITHIN A STRADDLE PERIOD. Taxes attributable to any Straddle Periods as determined in this Agreement shall be allocable to each party or a subsidiary thereof within such Straddle Periods to the portions of such Straddle Periods before and after the Distribution Date by applying the provisions of and / or principles underlying the allocation method described in Treas. Reg. Section 1.1502-76(b)(2) as if each of the parties or subsidiaries thereof had closed their books as of the end of the Distribution Date. The Representative of the Page 6 of 18 TAX SHARING AGREEMENT Affiliated Group and Combined Group shall be responsible for preparing such Tax allocations and computations. 2.7. DISPUTE RESOLUTION. The Representative of the Affiliated Group and Combined Group shall use commercially reasonable efforts in preparing all required Tax allocations and computations. Should a dispute arise concerning any Tax allocations or computations, the dispute shall be resolved by hiring a third party independent accounting firm to perform the disputed Tax allocations or computations. The cost of hiring such third party independent accounting firm shall be born by the party disputing the Tax allocations or computations prepared by the Representative of the Affiliated Group and Combined Group. Should the results of the third party independent accounting firm be inconclusive, the disputed tax allocations shall be resolved pursuant to section 9 of this Agreement. 2.8. ALLOCATION OF TAXES ARISING OUT OF USF AGREEMENT. Notwithstanding the other provisions of this Section 2 and consistent with Section 7.2 of this Agreement, Celerity and its predecessor and/or successors in interest shall not be responsible for any excess section 338(h)(10) tax liability as defined in section 6.2(j) of the USF Agreement. Thus, no such excess section 338(h)(10) tax liability can be allocated under Section 2 of this Agreement to Celerity or its predecessor and/or successors in interest. All such excess section 338(h)(10) tax liability, if any, arising out of section 6.2(j) of the USF Agreement shall be allocable only to KSI and/or KBI in accordance with the other rules of Section 2 of this Agreement as if Celerity or its predecessor and/or successors in interest did not exist, and KSI and KBI shall be jointly and severally liable for such amounts. 2.9. ALLOCATION OF TAXES ATTRIBUTABLE TO THE RESTRUCTURING TRANSACTIONS. Notwithstanding the other provisions of this Section 2 and consistent with Section 7.3 of this Agreement, Celerity and its predecessor and/or successors in interest shall not be responsible for any Tax liabilities stemming from any taxable gain or any taxable income recognized by Celerity or its predecessor and/or successors in interest as a result of the restructuring transactions described in Recital A of this Agreement. Thus, no such Tax liabilities can be allocated under Section 2 of this Agreement to Celerity and its predecessor and/or successors in interest. All such Tax liabilities, if any, shall be allocable only to KSI and/or KBI in accordance with the other rules of Section 2 of this Agreement as if Celerity or its predecessor and/or successors in interest did not exist, and KSI and KBI shall be jointly and severally liable for such amounts. 3. PAYMENTS OF TAX; DISTRIBUTION OF TAX REFUNDS ON ORIGINAL OR AMENDED TAX RETURNS. 3.1. PAYMENT OF ALLOCATED TAX AMOUNTS. Each party on behalf of and for itself and each of its subsidiaries shall pay their combined allocable share of any Taxes as determined in this Agreement and as reflected on any original or amended Tax Return for any Pre-Distribution or Straddle Period filed after the Distribution Date to the Representative of the Affiliated Group and Combined Group filing such Tax Returns on or before the date such Tax Returns are filed with the appropriate Taxing Authority. The Representative of the Affiliated Group and Combined Group shall forward any such payments to the appropriate Taxing Authority in conjunction with the filing of any such Tax Returns. Page 7 of 18 TAX SHARING AGREEMENT 3.1.1. NOTICE; AVAILABILITY OF FUNDS. The Representative of the Affiliated Group and Combined Group filing such original or amended Tax Returns shall provide the other parties with as much notice as is practicable concerning the date on which the Tax payment required under Section 3.1 hereof shall be paid. Each paying party shall ensure that each such Tax payment required under Section 3.1 hereof is made to the Representative of the Affiliated Group and Combined Group in readily available same day funds such that such funds may be combined with all other Taxes allocated by the Representative of the Affiliated Group and Combined Group filing such Tax Returns and paid to the appropriate Taxing Authorities on the date such Tax Returns are filed. 3.1.2. ESTIMATED TAX CONSIDERATIONS. For these purposes, estimated Tax payments made by a party or its subsidiaries directly to any relevant Taxing Authority shall be taken into account in determining the payments required to be made under Section 3.1 hereof. 3.2. CONSOLIDATED, COMBINED, UNITARY, OR GROUP REFUNDS. If the Affiliated Group or Combined Group receives a Tax refund as a result of an overpayment of Taxes shown on any original or amended Tax Return filed by or for the Affiliated Group or Combined Group with respect to any Pre-Distribution Period or Straddle Period, then the Representative of the Affiliated Group and Combined Group receiving any such Tax refund shall pay to the other parties that portion of the Tax refund, if any, allocable to them or their subsidiaries. The portion of the Tax refund allocable to the other parties or their subsidiaries shall be equal to the excess, if any, of (i) the estimated Tax payments made by that party or its subsidiaries to the Representative of the Affiliated Group and Combined Group filing the relevant Tax Return, over (ii) that party's or its subsidiaries' share of the Tax liability reported on the original or amended Tax Return, allocated as provided in Section 2 of this Agreement. 4. MINIMUM TAX CREDITS, CARRYBACK OF TAX ATTRIBUTES. 4.1. ALLOCATION OF MINIMUM TAX CREDITS. Any US consolidated Federal minimum tax credit of the Affiliated Group for any Pre-Distribution Period or Straddle Period shall be allocated to the extent possible to each Affiliated Group Member in proportion to its allocable share of any AMT determined under Section 2.2 of this Agreement. If it is determined that such an allocation is not possible, or if the Treasury Department issues Regulations that prohibit or require a different allocation, then the parties shall use commercially reasonable efforts to comply with such other required allocation methodology and take into account any differences in determining the amount one party may need to pay to another party for the loss of any US consolidated Federal minimum tax credit. The Representative of the Affiliated Group and Combined Group shall be responsible for preparing such credit allocations and computations. 4.2 ALLOCATION OF OTHER TAX ATTRIBUTES. All other Tax attributes of the Affiliated Group or Combined Group for any Pre-Distribution Period or Straddle Period shall be allocated or apportioned to the members of such groups in accordance with the rules prescribed by the Code or other applicable Tax law for the allocation or apportionment of such Tax attributes. If the Code or other applicable Tax law provides no rules for allocating or apportioning any such Tax attribute, then such Tax attribute shall be allocated and/or apportioned on a reasonable basis determined by and in the sole discretion of the Representative of the Affiliated Group and Combined Group. Page 8 of 18 TAX SHARING AGREEMENT 4.3. ELECTIVE CARRYBACK OF POST-DISTRIBUTION TAX ATTRIBUTES. If, for any Post-Distribution Period, a party recognizes a loss, credit, or similar Tax attribute that, under applicable Tax law, may be carried back at the party's election to a Pre-Distribution Period or a Straddle Period of the Affiliated Group or Combined Group during which the party was a member of the Affiliated Group or Combined Group filing consolidated, combined, unitary or group Tax Returns, then the party shall forego the ability to carry back such loss, credit, or similar tax attribute to such period. 4.4. MANDATORY CARRYBACK OF POST-DISTRIBUTION TAX ATTRIBUTES. If, for any Post-Distribution Period, a party recognizes a loss, credit, or similar Tax attribute that, under applicable law, must be carried back to a Pre-Distribution Period or a Straddle Period of the Affiliated Group or Combined Group during which the party was a member of the Affiliated Group or Combined Group filing consolidated, combined, unitary or group Tax Returns, then the Representative of the Affiliated Group and Combined Group for such periods shall, at the party's expense, file appropriate Tax refund claims within a reasonable period of time after receiving notice from the party that such Tax attribute must be carried back to such periods. The Representative of the Affiliated Group and Combined Group for such periods shall remit to the party any Tax refunds received, less any applicable costs, with respect to any Tax attribute so carried back upon receipt of such Tax refund. The Representative of the Affiliated Group and Combined Group shall be responsible for preparing such Tax allocations and computations. 5. CONDUCT OF TAX CONTESTS; REDETERMINATION OF TAX LIABILITIES; COOPERATION. 5.1. SEPARATE PARTY CLAIMS. Each party or its subsidiaries shall have sole and complete authority to contest any claim by a Taxing Authority arising from an examination of a Tax Return for any Taxable period with respect to any Tax Return which includes only that party or its subsidiaries (a "SEPARATE PARTY CLAIM"). The Representative of the Affiliated Group and Combined Group shall use its commercially reasonable efforts (at the cost of the requesting party) to assist the party in assisting with the resolution of the Separate Party Claim as set forth in that certain Management Services Agreement ("MANAGEMENT SERVICES AGREEMENT") between and among the parties, dated effective as of ________, 2002. 5.2. GROUP CLAIMS. Except as otherwise provided in Section 5.1 hereof, the Representative of the Affiliated Group and Combined Group shall have sole and complete authority to control and resolve the contest of any claim by any Taxing Authority arising from an examination of any Tax Return for any Pre-Distribution or Straddle Period relating to the Affiliated Group or Combined Group (a "GROUP CLAIM"), provided that other parties ultimately affected by the resolution of the Group Claim shall be allowed the opportunity to provide constructive and useful input to the Representative of the Affiliated Group and Combined Group within the time and procedural constraints established by the Representative of the Affiliated Group and Combined Group in the handling of any Group Claim at the sole discretion of the Representative of the Affiliated Group and Combined Group. No other party shall have any other right to participate in the contest of a Group Claim. The Representative of the Affiliated Group and Combined Group shall be entitled to incur reasonable costs in handling any Group Claim. The other parties affected by a Group Claim shall be responsible for and shall pay to the Page 9 of 18 TAX SHARING AGREEMENT Representative of the Affiliated Group and Combined Group their reasonable share of such costs as determined by the Representative of the Affiliated Group and Combined Group. 5.3. REDETERMINED TAX LIABILITIES 5.3.1. SEPARATE PARTY CLAIMS. If a Final Determination of Taxes results from a Separate Party Claim, the relevant party shall pay any resulting increase in Tax liability and shall be entitled to receive any refunds related to a decrease in Tax liability attributable to the Separate Party Claim. 5.3.2 GROUP CLAIMS: TAX INCREASE. If a Final Determination of a Group Claim results in an increase in Tax liability for the Affiliated Group or Combined Group with respect to the Group Claim, then such Tax increase shall be allocated to the parties in accordance with the allocation methodology provided in Section 2 of this Agreement. The Representative of the Affiliated Group and Combined Group shall notify each party of their share of any such Tax increase and each party shall pay to the Representative of the Affiliated Group and Combined Group such share on or before such Tax amount is paid to the relevant Taxing Authority. The Representative of the Affiliated Group and Combined Group shall be responsible for preparing such Tax allocations and computations. 5.3.3 GROUP CLAIMS: TAX REFUND. If a Final Determination of a Group Claim results in a decrease in Tax liability for the Affiliated Group or Combined Group with respect to the Group Claim, then such Tax decrease shall be allocated to the parties in accordance with the allocation methodology provided in Section 2 of this Agreement. The Representative or the Affiliated Group and Combined Group shall notify each party of their share of any such Tax decrease and shall make arrangements to disburse any Tax Refunds resulting from such Tax decrease (net of any costs) to the other parties when such Tax Refunds are received from the relevant Taxing Authority. The Representative of the Affiliated Group and Combined Group shall be responsible for preparing such Tax allocations and computations. 5.4. RETENTION OF AND ACCESS TO RECORDS; COOPERATION AND ASSISTANCE 5.4.1. RETENTION OF AND ACCESS TO RECORDS. The Representative of the Affiliated Group and Combined Group shall retain all Tax Returns for Pre-Distribution and Straddle Periods, together with all related reports, work papers, schedules or other documents or files (whether in paper or electronic form), in accordance with the record retention policies established by the Representative of the Affiliated Group and Combined Group for the Affiliated Group and Combined Group, and with the requirements of any relevant Taxing Authority. Subject to the confidentiality provisions of Section 8 hereof, the Representative of the Affiliated Group and Combined Group shall make these documents or files available to each party on a reasonable basis and each party may make copies of such documents or files at their own expense. A party shall not dispose of any of these documents or files without the written permission of the Representative of the Affiliated Group and Combined Group. 5.4.2. COOPERATION. Each party and their subsidiaries shall provide any assistance reasonably requested by the Representative of the Affiliated Group and Combined Group in conducting any Tax Contest of a Group Claim, subject to the confidentiality provisions Page 10 of 18 TAX SHARING AGREEMENT of Section 8 hereof. Such assistance shall include (without limitation) the execution of any powers of attorney, the execution of any statute of limitation extensions, the execution of other appropriate documentation, the attendance at any administrative or judicial proceedings as requested, the performance of necessary computations, and, subject to the confidentiality provisions of Section 8 hereof, provision of access to or furnishing books, records, tax returns, and supporting work papers relevant to any Group Claim. 5.4.3. ADDITIONAL COOPERATION AND ASSISTANCE. Subject to the confidentiality provisions of Section 8 hereof, each party shall provide each other with such cooperation, assistance, and information as the other parties may reasonably request with respect to the filing with any Taxing Authority of any Tax Return, amended Tax Return, claim for Tax Refund, or other document relating to any Pre-Distribution Period or Straddle Period. With respect to any Tax Return for any Pre-Distribution Period or Straddle Period that includes more than one party, such assistance shall include the timely submission by the party to the Representative of the Affiliated Group and Combined Group of pro forma Tax Returns for the party. A party's obligations under this Section 5.4.3 shall include, but is not limited to, the submission of a pro forma Tax Return for the Pre-Distribution Period that will end on the Distribution Date, and the provision of information and assistance in dealing with any administrative matter pertaining to the USF Agreement, if any. 6. PREPARATION OF TAX RETURNS; ESTIMATED PAYMENTS. 6.1. FILING OF AFFILIATED GROUP AND COMBINED GROUP TAX RETURNS FOR PRE-DISTRIBUTION PERIODS AND STRADDLE PERIODS. The Representative of the Affiliated Group and Combined Group shall have the sole and complete authority and responsibility to prepare and timely file (for a fee) all Tax Returns of the Affiliated Group and Combined Group on behalf of the members of those groups for any Pre-Distribution Periods and Straddle Periods. Any fees or costs incurred by the Representative of the Affiliated Group and Combined Group in preparing such Tax Returns shall be shared by the parties on a reasonable basis determined by the Representative of the Affiliated Group and Combined Group. Such reasonable basis may include, but is not limited to, the proportion of Taxes allocated to each party under Section 2 hereof. 6.2. FILING OF TAX RETURNS FOR POST-DISTRIBUTION PERIODS. The parties shall be separately responsible for the preparation and timely filing of all Tax Returns of their own Post-Distribution Periods. The parties may request the assistance of the Representative of the Affiliated Group and Combined Group (for an appropriate fee) in the preparation of such Tax Returns as established and described in the Management Services Agreement. The Representative of the Affiliated Group will use its commercially reasonable efforts to provide such requested assistance. 6.3. ESTIMATED PAYMENTS: EXTENSION PAYMENTS. Except for estimated Tax payments which have already been made by any party for or on behalf of the Affiliated Group or Combined Group with respect to any Pre-Distribution Period or Straddle Period, the Representative of the Affiliated Group and Combined Group shall be responsible for making all estimated Tax payments to any relevant Taxing Authorities required to be paid on or before the Estimated Payment Date in connection with any Tax Return of the Affiliated Group or Page 11 of 18 TAX SHARING AGREEMENT Combined Group for any Pre-Distribution Period and Straddle Period. The Representative of the Affiliated Group and Combined Group shall be responsible for making all payments required in connection with requests for extensions of time to file such Tax Returns to any relevant Taxing Authorities required to be paid on or before the Extension Payment Date. The Representative of the Affiliated Group and Combined Group shall determine each party's share of such estimated Tax payments and Tax Return extension payments in accordance with the provisions of and principles described in Section 2 of this Agreement, and shall notify each party in writing of their allocable share of such estimated Tax payments and Tax Return extension payments and when such amounts must be paid to the Representative of the Affiliated Group and Combined Group. Each party shall be required to pay to the Representative of the Affiliated Group and Combined Group their share of such amounts on or before the date such payments are paid to the relevant Taxing Authority as specified in the notice to the parties. 7. INDEMNIFICATION. 7.1. INDEMNITY OBLIGATIONS. Each party shall indemnify each other and hold each other harmless from and against: 7.1.1. any Tax liability, penalty, interest, cost, or expense arising out of the fraudulent or negligent preparation by such party of any information, workpapers, documents, or other items used in the preparation of, or presented in, any Tax Return, amended Tax Return, or claims for Tax Refund; and 7.1.2. any Tax liability, and related cost, penalties, interest, or related expense allocated to the party under this Agreement. 7.2. OBLIGATIONS AND RESPONSIBILITIES ASSOCIATED WITH USF AGREEMENT. Notwithstanding any other provision in this Agreement (including without limitation the Tax allocation provisions of Section 2 of this Agreement and the other indemnification provisions of Section 7 of this Agreement), Celerity and its predecessor and/or successors in interest shall have no responsibility for and no obligations to pay and shall be jointly and severally indemnified by KSI and KBI against any excess section 338(h)(10) tax liability (and related costs, fees, damages or expenses) as defined in section 6.2(j) of the USF Agreement. Accordingly, Celerity and its predecessor and/or successors in interest do not provide any indemnity for any excess section 338(h)(10) tax liability as defined in section 6.2(j) of the USF Agreement. 7.3. INDEMNIFICATION FOR RESTRUCTURING TRANSACTIONS. Notwithstanding any other provision of this Agreement (including without limitation the Tax allocation provisions of Section 2 of this Agreement and the other indemnification provisions of Section 7 of this Agreement), Celerity and its predecessor and/or successors in interest shall have no responsibility for and shall be jointly and severally indemnified by KSI and KBI against any Tax liabilities (and related costs, fees, damages or expenses) stemming from any taxable gain or any taxable income recognized by Celerity or its predecessor and/or successors in interest as a result of the restructuring transactions described in Recital A of this Agreement, pursuant to which KSI and KBI stock will be distributed to Celerity, and thereafter distributed to the Existing Shareholders. Accordingly, Celerity and its predecessor and/or successors in interest do not Page 12 of 18 TAX SHARING AGREEMENT provide any indemnity for any amounts arising out of the restructuring transactions described in Recital A of this Agreement. 7.4. PERFORMANCE OF INDEMNITY OBLIGATIONS. Each party's indemnity obligations under Section 7.1 hereof shall continue for the entire applicable statute of limitations period applicable to the Tax involved until such obligation is satisfied by the party. Each party shall satisfy its indemnity obligations under Section 7.1 hereof in a manner consistent with the provisions of Article IV of the Separation Agreement. 7.5. AFTER TAX BASIS. All such indemnification payments required under this Agreement shall be paid on an After Tax Basis. 7.6. RIGHT OF SET OFF. Each party (a "PAYOR") may reduce the amount of its indemnification obligation owing to another party (a "PAYEE") to the extent that the payor has a legitimate indemnification claim against the payee. 7.7. INDEMNIFICATION OF REPRESENTATIVE OF THE AFFILIATED GROUP AND COMBINED GROUP. The parties hereby indemnify and hold harmless the Representative of the Affiliated Group and Combined Group for any amounts determined to be solely related to the performance of its functions under and within the scope of this Agreement. 8. CONFIDENTIALITY OF DOCUMENTS AND INFORMATION. 8.1. GENERAL RULE. Any documents or information provided pursuant to this Agreement in connection with a Tax Contest or filing with a Taxing Authority shall be disclosed by the recipient solely to its employees responsible for any Tax Contest or Tax filing or to attorneys or accountants advising the recipient on these matters. Any wider dissemination of these documents or this information shall be allowed only if required by law or authorized by the party providing the documents or information. 8.2. CONFIDENTIAL DISCLOSURE AGREEMENT. The parties acknowledge that communications between and among them may also be governed by that certain Confidential Disclosure Agreement entered between the parties, dated effective as of ___________, 2002. 9. DISPUTE RESOLUTION. 9.1. OBLIGATION TO NEGOTIATE TO RESOLVE ANY DISPUTE. Except as provided in Section 2.7 of this Agreement, if any dispute between the parties relating to the validity, performance, interpretation or construction of this Agreement, then the parties shall use commercially reasonable efforts to resolve any such Tax related dispute through informal negotiation between the parties or their authorized representatives. If at any time a party feels that such negotiations are not leading to a resolution of the Tax related dispute, such party may send a notice to the other parties describing the Tax related dispute and requesting a meeting of the senior executives from each party. Within ten (10) business days after such notice is given, each party shall select appropriate senior executives (e.g., director or V.P. level) of each party who shall have the authority to resolve the matter and shall meet to attempt in good faith to negotiate a resolution of the Tax related dispute prior to pursuing the arbitration remedy described below. During the course of negotiations under this Section 9.1, all reasonable requests made by one party to the Page 13 of 18 TAX SHARING AGREEMENT others for information, including requests for copies of relevant documents, will be honored. The specific format for such negotiations will be left to the discretion of the designated negotiating senior executives, but may include the preparation of agreed upon statements of fact or written statements of position furnished to the other parties. 9.2 BINDING ARBITRATION. In the event that any Tax related dispute arising out of or related to this Agreement is not settled by the parties within thirty (30) days after the first meeting of the negotiating senior executives as described in Section 9.1 of this Agreement, the dispute shall be submitted to binding arbitration, to be held in Santa Clara County, California, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, before a single arbitrator selected in accordance with such Commercial Arbitration Rules. After affording the parties a reasonable opportunity to present written and testimonial evidence in support of their respective positions, the arbitrator shall issue his/her decision and award, which shall be (i) in writing, stating the reasons therefor; (ii) based solely on the terms and conditions of this Agreement, as interpreted under the laws of the State of California; and (iii) final and binding upon the parties. The decision and award of the arbitrator in any arbitration proceeding under this Section 9.2 may be enforced in any court of competent jurisdiction. 9.3. CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise agreed in writing, the parties will continue to provide service and honor all other commitments under this Agreement and any related agreements during the course of dispute resolution pursuant to the provisions of Section 9 of this Agreement with respect to all matters not subject to such dispute, controversy or claim. 10. MISCELLANEOUS. 10.1. LIMITATION OF LIABILITY. IN NO EVENT SHALL A PARTY OR ITS SUBSIDIARIES BE LIABLE TO THE OTHER PARTIES OR THEIR SUBSIDIARIES FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 10.2. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. 10.3. GOVERNING LAW. This Agreement shall be construed in accordance with and all Disputes hereunder shall be governed by the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County and/or the United States District Court for the Northern District of California shall have jurisdiction and venue over all Disputes between the parties that are permitted to be brought in a court of law pursuant to Section 9 of this Agreement. Page 14 of 18 TAX SHARING AGREEMENT 10.4. NOTICES. Any notice, demand, offer, request or other communication required or permitted to be given by a party pursuant to the terms of this Agreement shall be in writing and shall be deemed effectively given the earlier of (i) when received, (ii) when delivered personally, (iii) one (1) Business Day after being delivered by facsimile (with receipt of appropriate confirmation), (iv) one (1) Business Day after being deposited with a nationally recognized overnight courier service or (v) four (4) days after being deposited in the US mail, First Class with postage prepaid, and addressed to the attention of: IF TO KINETIC SYSTEMS, INC.: ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- with a copy to: ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- IF TO KINETICS BIOPHARM, INC.: ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- with a copy to: ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- Page 15 of 18 TAX SHARING AGREEMENT IF TO CELERITY GROUP, INC. (FORMERLY KNOWN AS KINETICS HOLDINGS CORPORATION): ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- with a copy to: ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- A party may substitute a different address or facsimile number, from time to time, if such substitute is provided to the intended notice recipient in writing by notice given in the manner provided in this Section 10.4. 10.5. COUNTERPARTS. This Agreement may be executed in counterparts via facsimile or otherwise, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. 10.6. BINDING EFFECT; ASSIGNMENT. A party may not assign or transfer this Agreement or any of its rights or obligations hereunder (including, without limitation, in connection with a sale of all or substantially all of such party's assets), without the prior written consent of each of the other parties. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective legal representatives, successors and permitted assigns. 10.7. SEVERABILITY. The parties hereto have negotiated and prepared the terms of this Agreement in good faith with the intent that each and every one of the terms, covenants and conditions herein be binding upon and inure to the benefit of the respective parties. Accordingly, if any one or more of the terms, provisions, promises, covenants or conditions of this Agreement or the application thereof to any person or circumstance shall be adjudged to any extent invalid, unenforceable, void or voidable for any reason whatsoever by a court of competent jurisdiction, such provision shall be as narrowly construed as possible, and each and all of the remaining terms, provisions, promises, covenants and conditions of this Agreement or their application to other persons or circumstances shall not be affected thereby and shall be valid and enforceable to Page 16 of 18 TAX SHARING AGREEMENT the fullest extent permitted by law. To the extent this Agreement is in violation of applicable law, then the parties agree to negotiate in good faith to amend the Agreement, to the extent possible consistent with its purposes, to conform to law. 10.8. WAIVER OF BREACH. The waiver by a party hereto of a breach or violation of any provision of this Agreement shall not operate as, or be construed to constitute, a waiver of any subsequent breach of the same or another provision hereof. 10.9. AMENDMENT AND EXECUTION. This Agreement may not be amended except with the express written consent of each party to this Agreement. This Agreement and amendments hereto shall be in writing and executed in multiple copies via facsimile or otherwise on behalf of KSI, KBI, and Celerity, and by their respective duly authorized officers and representatives. Each multiple copy shall be deemed an original, but all multiple copies together shall constitute one and the same instrument. 10.10. AUTHORITY. Each of the parties hereto represents to the other parties that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general equity principles. 10.11. DESCRIPTIVE HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When a reference is made in this Agreement to a section hereof, such reference shall be to a section of this Agreement unless otherwise indicated. 10.12. GENDER AND NUMBER. Whenever the context of this Agreement requires, the gender of all words herein shall include the masculine, feminine and neuter, and the number of all words herein shall include the singular and plural. 10.13. ADDITIONAL ASSURANCES. Except as may be specifically provided herein to the contrary, the provisions of this Agreement shall be self-operative and shall not require further agreement by the parties; provided, however, at the request of any party, the other parties shall execute such additional instruments and take such additional acts as are reasonable, and as the requesting party may reasonably deem necessary, to effectuate this Agreement. 10.14. FORCE MAJEURE. A party shall not be liable or deemed to be in default for any delay or failure in performance under this Agreement or other interruption of service deemed to result, directly or indirectly, from acts of God, civil or military authority, acts of public enemy, war, accidents, explosions, earthquakes, floods, failure of transportation, strikes or other work interruptions by a party's employees, or any other similar cause beyond the reasonable control of a party unless such delay or failure in performance is expressly addressed elsewhere in this Agreement. Page 17 of 18 TAX SHARING AGREEMENT WHEREFORE, the parties have signed this Tax Sharing Agreement effective as of the date first set forth above. KINETIC SYSTEMS, INC. KINETICS BIOPHARM, INC. By: /s By: /s --------------------------- ---------------------------- Name: Name: --------------------------- ---------------------------- Title: Title: --------------------------- ---------------------------- Date: Date: --------------------------- ---------------------------- CELERITY GROUP, INC. (formerly known as Kinetics Holdings Corporation) By: /s --------------------------- Name: --------------------------- Title: --------------------------- Date: --------------------------- Page 18 of 18 EX-2.06 7 f82015a1exv2w06.txt EXHIBIT 2.06 Exhibit 2.06 TRADEMARK LICENSE AGREEMENT THIS TRADEMARK LICENSE AGREEMENT (the "AGREEMENT") is entered into effective as of _________, 2002 (the "EFFECTIVE DATE"), by and among Celerity Group, Inc., a Delaware corporation ("LICENSOR," formerly known as Kinetics Holdings Corporation), and Kinetic Systems, Inc., a California corporation and Kinetics Biopharm, Inc., a Delaware corporation (each, a "LICENSEE", and collectively, the "LICENSEES"). RECITALS A. Licensor uses the trademarks and owns applications and registrations as specified in Exhibit A (the "TRADEMARKS"). B. Before the Effective Date, each Licensee was a direct or indirect wholly owned subsidiary of Licensor, and Licensor and the Licensees were all using the Trademarks. C. Licensor and the Licensees are parties to a Separation Agreement dated the same date as the Effective Date (the "SEPARATION AGREEMENT") and related agreements, pursuant to which Licensees will no longer be subsidiaries of Licensor and the businesses of Licensor and Licensees will be separated. D. Licensor plans to cease using the Trademarks within one year after the Effective Date (the "TRANSITION PERIOD"), however the Licensees plan to continue to use the Trademarks in connection with design, manufacture and installation of process piping and control systems for use in the manufacturing processes, biotechnology, pharmaceutical, semi-conductor, and fiber optic industries and related products and services (the "SERVICES"). E. The parties desire that each Licensee will have the right to continue use the Trademarks after the Effective Date, and each Licensee will have an option to purchase an assignment of the Trademarks, in accordance with the terms of this Agreement. NOW, THEREFORE, in partial consideration for the considerations provided by the parties pursuant to the Separation Agreement and other related agreements referred to therein, the parties agree as follows: 1. Grant of License. Subject to the terms and conditions of this Agreement, Licensor grants to each Licensee a non-transferable, perpetual, worldwide, royalty-free license to use the Trademarks in connection with the Services. This license shall be exclusive to the Licensees except that Licensor may continue to use the Trademarks during the Transition Period. After the Transition Period, Licensor shall cease all use of the Trademarks and the license shall be exclusive to the Licensees. 2. Trademark Usage and Attribution. Each Licensee shall, in connection with such Licensee's use of the Trademarks: (i) materially comply with Licensor's reasonable trademark usage guidelines provided to such Licensee; (ii) refer to Licensor as the owner of the Trademarks and use any denotation and attribution trademark symbol and statement reasonably directed by Licensor; (iii) ensure that the nature and quality of the Services sold and/or rendered by such Licensee in connection with the Trademarks shall conform to industry standards regarding the nature and quality of such Services; (iv) cooperate with Licensor in facilitating Licensor's control of such nature and quality of the Services; and (v) comply with all applicable laws and regulations, and obtain all appropriate government approvals pertaining to the sale, rendering, and advertising of the Services. 3. Ownership. Each Licensee acknowledges the ownership of the Trademarks by Licensor, and each Licensee shall have no rights to the Trademarks other than the rights expressly granted by this Agreement. All use of the Trademarks by each Licensee and goodwill associated therewith shall inure to Licensor's benefit. Each Licensee shall not attack the validity of the Trademarks, and applications or registrations thereof, or Licensor's ownership of the Trademarks. Each Licensee shall assist Licensor as reasonably necessary in the registration and enforcement of Licensor's rights in and to the Trademarks, including recordation of this Agreement. If a Licensee becomes aware of any infringement of a Trademark by a third party, then that Licensee shall promptly notify Licensor. 4. Option to Purchase. Either Licensee may, by written notice to Licensor purchase the Trademarks, along with the goodwill of the business symbolized by the Trademarks, and the domain name kineticsgroup.com (the "DOMAIN NAME"), from Licensor for payment to the Licensor of one hundred United States dollars (USD $100). The "PURCHASING LICENSEE" shall be the Licensee from which Licensor receives the first written notice. Upon receipt of such written notice by Licensor, the remaining Licensee's option to purchase the Trademarks and Domain Name from Licensor is immediately extinguished. Upon receipt of written notice and payment from the Purchasing Licensee, the provisions of Sections 1, 2, 3, 6, and 7 of this Agreement shall terminate and: (a) Licensor shall assign, transfer and convey to Purchasing Licensee all of Licensor's right, title and interest worldwide in and to the Trademarks and the Domain Name, including, without limitation, registered and common law trademark rights, together with the goodwill of the business symbolized by the Trademarks, and, with respect to those Trademarks that are the subject of intent-to-use applications filed with the United States Patent and Trademark Office ("USPTO") pursuant to Section 1(b) of the Trademarks Act, that portion of Licensor's business to which the Trademarks pertain, as well as all pending applications for USPTO and state registration of the Trademarks, all foreign applications and registrations for the Trademarks, all rights appurtenant to the Trademarks under the International Convention for the Protection of Industrial Property and all other international treaties to which the United States is a member, all claims for damages by reason of past infringement of the Trademarks, with the right to sue for and collect the same for Purchasing Licensee's own use and benefit; (b) Licensor shall, at Purchasing Licensee's expense, cooperate reasonably with Purchasing Licensee to do all affirmative acts, and to execute all papers that are necessary and/or desirable in connection with the perfection in Purchasing Licensee of the rights assigned under paragraph (a) of this Section, including, without limitation, the execution of separate assignments in connection with such property and the provisions of any international treaty to which the United States is a member; (c) Purchasing Licensee shall grant to Licensor a non-transferable, worldwide, royalty-free license to use the Trademarks during the remainder of the Transition Period on terms, restrictions and conditions similar to license terms, restrictions and conditions granted by Licensor to the Licensees hereunder, if such assignment, transfer and conveyance is effected during the Transition Period; and 2 (d) Purchasing Licensee shall grant to the other Licensee an exclusive (subject to any license granted to Licensor pursuant to paragraph (c) of this Section, and subject to the Purchasing Licensee's right to use the Trademarks), non-transferable, perpetual, worldwide, royalty-free license to use the Trademarks on terms, restrictions and conditions similar to license terms, restrictions and conditions granted by Licensor to the Licensees hereunder. 5. Term. This Agreement will commence as of the Effective Date and will remain in force and effect perpetually thereafter, unless and until terminated in accordance with its terms. 6. Termination by Licensor. Licensor may terminate this Agreement as against a Licensee immediately by giving notice to such Licensee: (i) if such Licensee commits a material breach of this Agreement and fails to correct such breach within thirty (30) days after receiving written notice from Licensor of such material breach; or (ii) upon the occurrence of any one or more of the following events: (a) if such Licensee shall be unable to pay its debts when due, or shall make any assignment for the benefit of creditors, or shall file any petition under the bankruptcy or insolvency laws of any jurisdiction, country or place, or shall have or suffer a receiver or trustee to be appointed for its business or property, or be adjudicated a bankrupt or insolvent; (b) if any government agency or court finds that the Services provided by such Licensee are defective in any way, matter or form; (c) if actual or potential adverse publicity or other information about such Licensee's use of a Trademark is such that Licensor, in its sole judgment, believes that Licensor's reputation will be adversely affected. 7. Termination Obligations. Upon termination of this Agreement by Licensor as against a Licensee, such Licensee shall: (i) immediately discontinue all use of the Trademarks and any term confusingly similar thereto; (ii) cooperate with Licensor or its appointed agent to apply to the appropriate authorities to cancel recording of this Agreement from all government records: (iii) destroy all printed materials bearing the Trademarks in the possession of such Licensee, and (iv) acknowledge that all rights in the Trademarks and the goodwill connected therewith shall remain the property of Licensor. 8. General Provisions. (a) Assignment. A party may not assign its rights or obligations under this Agreement (including, without limitation, in connection with a sale of all or substantially all of such party's assets), without the express written consent of each of the other parties. Subject to the foregoing, this Agreement will inure to the benefit and bind the successors and permitted assigns of each party. (b) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to or application of, conflict of laws rules or principles. (c) Waiver. The waiver of any breach or default will not constitute a waiver of any other right under this Agreement or any subsequent breach or default. (d) Severability. If for any reason a court of competent jurisdiction finds any provision of this Agreement to be unenforceable, that provision of the Agreement will be enforced 3 to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement will continue in full force and effect. (e) Notices. All notices required or permitted under this Agreement will be in writing and delivered by confirmed facsimile transmission, by courier or overnight delivery service, or by certified mail, and in each instance will be deemed given upon receipt. All communications will be sent to the addresses set forth above or to such other address as may be specified by a party to the other parties in accordance with this Section. A party may change its address for notices under this Agreement by giving written notice to the other parties by the means specified in this Section. (f) Relationship of the Parties. The parties to this Agreement are independent contractors and this Agreement will not establish any relationship of partnership, joint venture, employment, franchise, or agency among the parties. No party will have the power to bind another party or incur obligations on the another party's behalf without such other party's prior written consent. (g) Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof, and supersedes and replaces all prior or contemporaneous understandings or agreements, written or oral, regarding such subject matter. No modification of this Agreement shall be effective unless in writing and signed by duly authorized representatives of each party. (h) Force Majeure. A party shall not be liable or deemed to be in default for any delay or failure in performance under this Agreement or other interruption of service deemed to result, directly or indirectly, from acts of God, civil or military authority, acts of public enemy, war, accidents, explosions, earthquakes, floods, failure of transportation, strikes or other work interruptions by a party's employees, or any other similar cause beyond the reasonable control of a party unless such delay or failure in performance is expressly addressed elsewhere in this Agreement. 4 IN WITNESS WHEREOF, the parties have executed this Agreement through their duly authorized representatives as of the Effective Date. CELERITY GROUP, INC. (formerly known as Kinetics Holdings Corporation) By: ________________________________ Name:_______________________________ Title: _____________________________ KINETIC SYSTEMS, INC. By: ________________________________ Name:_______________________________ Title: _____________________________ KINETICS BIOPHARM, INC. By: ________________________________ Name:_______________________________ Title: _____________________________ 5 Exhibit A Trademarks KINETICS - U.S. Registration No. 2158214 KINETICS - France Registration No. 657734/96 Ring Design - U.S. Registration No. 2160105 Ring Design - Mexico Registration No. 597345 Water Icon - U.S. Registration No. 2278282 Gas Icon - U.S. Registration No. 2285861 Chemical Icon - U.S. Registration No. 2281909 SAFETY BEGINS WITH ME - common law rights 6 EX-2.07 8 f82015a1exv2w07.txt EXHIBIT 2.07 Exhibit 2.07 EMPLOYEE MATTERS AGREEMENT This EMPLOYEE MATTERS AGREEMENT is entered into effective as of _________, 2002, between Celerity Group, Inc., a Delaware corporation (the "COMPANY", formerly known as Kinetics Holdings Corporation), Kinetic Systems, Inc., a California corporation ("KSI"), and Kinetics Biopharm, Inc., a Delaware corporation ("KBI"). WHEREAS, the Company, KSI and KBI have agreed to enter into this Agreement to allocate between them assets, liabilities and responsibilities with respect to certain employee compensation, benefit plans, programs and arrangements, and certain employment matters; NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 "AGREEMENT" means this Employee Matters Agreement, including all the Schedules hereto, and all amendments made hereto from time to time. 1.2 "BENEFITS COMMITTEE" means the Benefits Committee established, implemented and operated pursuant to Section 2.5. 1.3 "CLOSING DATE" has the meaning set forth in the Separation Agreement. 1.4 "COBRA" means the continuation coverage requirements for "group health plans" under Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended from time to time, and as codified in Code Section 4980B and ERISA Sections 601 through 608. 1.5 "CODE" means the Internal Revenue Code of 1986, as amended from time to time. 1.6 "COMPANY EMPLOYEE" means an individual who, on the Distribution Date, is: (a) either actively employed by, or on leave of absence from, the Company or a subsidiary of the Company: (b) a former employee of the Company or a subsidiary of the Company and who, on the Distribution Date, is not a KSI Employee or KBI Employee; or (c) an employee or group of employees designated as Company Employees by the Company and KSI or KBI, as the case may be. 1.7 "DEFERRED COMPENSATION PLAN," when immediately preceded by "Company" means the Kinetics Group, Inc. Management Deferred Compensation Plan. When immediately preceded by "KSI," "Deferred Compensation Plan" means the deferred compensation plan to be established by KSI pursuant to Article 4. 1.8 "DISTRIBUTION" has the meaning set forth in the Separation Agreement. 1 1.9 "DISTRIBUTION DATE" has the meaning set forth in the Separation Agreement. 1.10 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.11 "FMLA" means the Family and Medical Leave Act of 1993, as amended from time to time. 1.12 "FOREIGN PLAN," when immediately preceded by "Company," means a Plan maintained by the Company for the benefit of eligible employees of the Company and its subsidiaries outside the U.S. When immediately preceded by "KSI," "Foreign Plan" means a Plan to be established by KSI for the benefit of the eligible employees of KSI and its subsidiaries outside the U.S. 1.13 "401(K) PLAN," when immediately preceded by "Company," means the Kinetics Group, Inc. Retirement Savings Plan. When immediately preceded by "KSI," "401(k) Plan" means the 401(k) plan to be established by KSI pursuant to Article 3 for the benefit of eligible employees of KSI and its subsidiaries. 1.14 "FRINGE BENEFIT PLANS," when immediately preceded by "Company," means the fringe benefit plans, programs and arrangements, offered from time to time under the personnel policies and practices of the Company and sponsored and maintained by the Company (as set forth in Article 7 and Schedule 7.1) for the benefit of eligible employees of the Company and its subsidiaries. When immediately preceded by "KSI," "Fringe Benefit Plans" means the fringe benefit plans, programs and arrangements to be established by KSI pursuant to Article 7 for the benefit of eligible employees of KSI and its subsidiaries. 1.15 "HEALTH PLANS," when immediately preceded by "Company," means the medical, health maintenance organization ("HMO"), dental, and pre-tax premium payment plans listed on Schedule 5.1 established and maintained by the Company for the benefit of eligible employees of the Company and its subsidiaries. When immediately preceded by "KSI," "Health Plans" means the medical, HMO, dental, and pre-tax premium payment plans to be established by KSI pursuant to Article 5 for the benefit of eligible employees of KSI and its subsidiaries. 1.16 "HEALTH AND WELFARE PLANS," when immediately preceded by "Company," means the Health Plans, Section 125 Plan and any similar health and welfare plans listed on Schedule 5.1 established and maintained by the Company for the benefit of eligible employees of the Company and its subsidiaries, and such other welfare plans or programs as may apply to such employees as of the Distribution Date. When immediately preceded by "KSI," "Health and Welfare Plans" means the medical, HMO, dental, pre-tax premium payment, Section 125 and any similar health and welfare plans to be established by KSI pursuant to Article 5 for the benefit of eligible employees of KSI and its subsidiaries. 1.17 "INITIAL PUBLIC OFFERING" has the meaning set forth in the Separation Agreement. 1.18 "INSURANCE PLANS," when immediately preceded by "Company," means the various insurance plans maintained by the Company for the benefit of eligible employees of the Company and its subsidiaries including accidental death and dismemberment, business travel 2 accident, long term disability, group life and workers' compensation insurance plan as set forth in Schedule 5.2. When immediately preceded by "KSI," "Insurance Plans" means the KSI insurance plans to be established by KSI pursuant to Article 5 for the benefit of eligible employees of KSI and its subsidiaries. 1.19 "KBI EMPLOYEE" means any individual who is: (a) either actively employed by, or on leave of absence from, KBI or a subsidiary of KBI on or at any time after the Distribution Date; (b) either actively employed by, or on leave of absence from, the Company or KSI as either part of a work group or organization, or common support function that, at any time before the Distribution Date, moves to the employ of KBI from the employ of the Company or KSI; (c) any other employee or group of employees designated as KBI Employees (as of the specified date) by the Company and KBI by mutual agreement; or (d) an alternate payee under a QDRO, alternate recipient under a QMCSO, beneficiary, covered dependent, or qualified beneficiary (as such term is defined under COBRA), in each case, of an employee or former employee, described in (a) through (c) with respect to that employee's or former employee's benefit under the applicable Plan(s). Unless specified otherwise in this Agreement, such an alternate payee, alternate recipient, beneficiary, covered dependent, or qualified beneficiary shall not otherwise be considered a KBI Employee with respect to any benefits he or she accrues or has accrued under any applicable Plan(s), unless he or she is a KBI Employee by virtue of (a) through (c). 1.20 "KSI BUSINESS" and "KBI BUSINESS" have the meanings set forth in the Separation Agreement. 1.21 "KSI EMPLOYEE" means any individual who is: (a) either actively employed by, or on leave of absence from, KSI or a subsidiary of KSI on or at any time after the Distribution Date; (b) either actively employed by, or on leave of absence from, the Company or KBI as either part of a work group or organization, or common support function that, at any time before the Distribution Date, moves to the employ of KSI from the employ of the Company or KBI; (c) any other employee or group of employees designated as KSI Employees (as of the specified date) by the Company and KSI by mutual agreement; or (d) an alternate payee under a QDRO, alternate recipient under a QMCSO, beneficiary, covered dependent, or qualified beneficiary (as such term is defined under COBRA), in each case, of an employee or former employee, described in (a) through (c) with respect to that employee's or former employee's benefit under the applicable Plan(s). Unless specified otherwise in this Agreement, such an alternate payee, alternate recipient, beneficiary, covered dependent, or qualified beneficiary shall not otherwise be considered a KSI Employee with respect to any benefits he or she accrues or has accrued under any applicable Plan(s), unless he or she is a KSI Employee by virtue of (a) through (c). 1.22 "MATERIAL FEATURE" means any feature of a Plan that could reasonably be expected to be of material importance, in the aggregate, to the sponsoring employer or the participants (or their dependents or beneficiaries) of that Plan, which could include, depending on the type and purpose of the particular Plan, the class or classes of employees eligible to participate in such Plan, the nature, type, form, source, and level of benefits provided under such Plan, the amount or level of contributions, if any, required to be made by participants (or their dependents or beneficiaries) to such Plan, and the costs and expenses incurred by the sponsoring employer or Participating Companies for implementing and/or maintaining such Plan. 3 1.23 "PARTICIPATING COMPANY" means: (a) the Company; (b) any Person (other than an individual) that the Company has approved for participation in, a Plan sponsored by the Company; and (c) any Person (other than an individual) which, by the terms of such Plan, participates in such Plan or any employees of which, by the terms of such Plan, participate in or are covered by such Plan. 1.24 "PERSON" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, and a governmental entity or any department, agency or political subdivision thereof. 1.25 "PLAN" means any plan, policy, program, payroll practice, arrangement, contract, trust, insurance policy, or any agreement or funding vehicle providing compensation or benefits to employees, former employees, directors or consultants of the Company, KSI or KBI. 1.26 "QDRO" means a domestic relations order which qualifies under Code Section 414(p) and ERISA Section 206(d) and which creates or recognizes an alternate payee's right to, or assigns to an alternate payee, all or a portion of the benefits payable to a participant under the Company 401(k) Plan. 1.27 "QMCSO" means a medical child support order which qualifies under ERISA Section 609(a) and which creates or recognizes the existence of an alternate recipient's right to, or assigns to an alternate recipient the right to, receive benefits for which a participant or beneficiary is eligible under any of the Company or KSI Health and Welfare Plans that are group health plans. 1.28 "RABBI TRUST," when immediately preceded by "Company," means the grantor trust established for purposes of holding assets under the Company Deferred Compensation Plan. When immediately preceded by "KSI," "Rabbi Trust" means the grantor trust to be established by KSI pursuant to Section 4.1(a) for the purpose of holding assets under the KSI Deferred Compensation Plan. 1.29 "SEPARATION AGREEMENT" means Separation Agreement dated the date hereof between the Company, KSI and KBI. 1.30 "STOCK PLAN" means any plan, program, or arrangement, pursuant to which employees and other service providers hold stock options, restricted stock (stock that is subject to transfer restrictions or to employment and/or performance vesting conditions) or other equity incentives. ARTICLE 2 GENERAL PRINCIPLES 2.1 ASSUMPTION OF KSI LIABILITIES. Except as specified otherwise in this Agreement or as mutually agreed upon by KSI and the Company from time to time, effective as of the Distribution Date, KSI hereby assumes and agrees to pay, perform, fulfill and discharge, in accordance with their respective terms, all of the following: (a) all liabilities of, or relating to, 4 KSI Employees relating to, arising out of, or resulting from future, present or former employment with the KSI Business (including liabilities relating to, arising out of, or resulting from Company Plans and KSI Plans, other than any liability for medical coverage for KSI Employees who terminated service prior to the Distribution Date); (b) all liabilities relating to, arising out of, or resulting from any other actual or alleged employment relationship with the KSI Business; and (c) all other liabilities relating to, arising out of, or resulting from obligations, liabilities and responsibilities expressly assumed or retained by KSI, or a KSI Plan pursuant to this Agreement. 2.2 KSI'S PARTICIPATION IN COMPANY PLANS. (a) PARTICIPATION IN COMPANY PLANS. Except as specified otherwise in this Agreement or as the Company and KSI may mutually agree, KSI Employees shall, until the Distribution Date, continue to participate in the Company 401(k) Plan as provided in Article 3, and in such other Company Plans as provided in Articles 3 through 7. (b) COMPANY'S GENERAL OBLIGATIONS AS PLAN SPONSOR PRIOR TO THE DISTRIBUTION DATE. To the extent that KSI is a Participating Company in any Company Plan prior to the Distribution Date, the Company shall continue to administer, or cause to be administered, in accordance with its terms and applicable law, such Company Plan, and shall have the sole and absolute discretion and authority to interpret the Company Plan, as set forth therein. The Company shall not amend any Material Feature of any Company Plan in which KSI is a Participating Company, except to the extent: (i) such amendment would not materially affect any coverage or benefits solely with respect to KSI Employees under such Plan; or (ii) such amendment is necessary or appropriate to comply with applicable law. (c) KSI'S GENERAL OBLIGATION AS PARTICIPATING COMPANY. KSI shall perform, with respect to its participation in the Company Plans prior to the Distribution Date, the duties of a Participating Company as set forth in each such Plan or any procedures adopted pursuant thereto, including (without limitation): (i) assistance in the administration of claims, to the extent requested by the claims administrator of the applicable Company Plan; (ii) full cooperation with Company Plan auditors, benefit personnel and benefit vendors; (iii) preservation of the confidentiality of all financial arrangements the Company has or may have with any vendors, claims administrators, trustees, service providers or any other entity or individual with whom the Company has entered into an agreement relating to the Company Plans; and (iv) preservation of the confidentiality of participant information (including, without limitation, health information in relation to FMLA leaves) to the extent not specified otherwise in this Agreement. (d) TERMINATION OF PARTICIPATING COMPANY STATUS. Except as otherwise may be mutually agreed upon by the Company and KSI, effective as of the Distribution Date, KSI shall automatically cease to be a Participating Company in the corresponding Company Plans. 2.3 ESTABLISHMENT OF KSI PLANS. 5 Except as otherwise provided herein, KSI shall adopt certain Plans, as described in Articles 3 through 7, as of the Distribution Date or as the Company and KSI may mutually agree. Except as specified otherwise in this Agreement, nothing in this Agreement shall preclude KSI at any time after the Distribution Date, from amending, merging, modifying, terminating, eliminating, reducing, or otherwise altering in any respect any KSI Plan, any benefit under any KSI Plan or any trust, insurance policy or funding vehicle related to any KSI Plans, or any employment or other service arrangement with the KSI Employees or vendors (to the extent permitted by law). 2.4 TERMS OF PARTICIPATION BY KSI EMPLOYEES IN KSI PLANS. (a) NON-DUPLICATION OF BENEFITS. Except as specified otherwise in the Agreement, as of the Distribution Date, the KSI Plans shall be, with respect to KSI Employees, in all respects the successors in interest to, and shall not provide benefits that duplicate benefits provided by, the corresponding Company Plans. The Company and KSI shall agree on methods and procedures, including amending the respective Plan documents, to prevent KSI Employees from receiving duplicate benefits from the Company Plans and the KSI Plans. (b) SERVICE CREDIT. Except as specified otherwise in this Agreement, with respect to KSI Employees, each KSI Plan shall provide that all service, all compensation and all other benefit-affecting determinations that, as of the Distribution Date, were recognized under the corresponding Company Plan shall, as of the Distribution Date, receive full recognition and credit and be taken into account under such KSI Plan to the same extent as if such items occurred under such KSI Plan, except to the extent that duplication of benefits would result. The service crediting provisions shall be subject to any respectively applicable "service bridging," "break in service," "employment date," or "eligibility date" rules under the KSI Plans and the Company Plans. (c) ASSUMPTION OF LIABILITIES. Except as specified otherwise in this Agreement (including, without limitation, the exception applicable to self-insured long-term disability and workers compensation plans), the provisions of this Agreement for the transfer of assets relating to Company Plans to KSI and/or the appropriate KSI Plans are based upon the understanding of the parties that KSI and/or the appropriate KSI Plan shall assume all liabilities of the corresponding Company Plan to or relating to KSI Employees, as provided for herein. 2.5 BENEFITS COMMITTEE. From the date of this Agreement through the later of the Distribution Date or the end of the Post-Distribution Period, as applicable, the management of the Plans shall be conducted under the supervision of the Company's Chief Financial Officer, Company's Vice President of Human Resources and the KSI Vice President of Human Resources (or their authorized delegates). Issues that cannot be resolved by such Benefits Committee shall be decided, at the request of either party, by a designated representative of the KSI Corporate Executive Committee and a designated representative of the Company Corporate Executive Committee. 2.6 FOREIGN PLANS. KSI and the Company each intend that the matters, issues or liabilities relating to, arising out of, or resulting from Foreign Plans and non-U.S.-related employment matters be handled in a manner that is in compliance with the requirements of 6 applicable local law and, to the extent permitted by applicable local law, in a manner consistent with comparable U.S. matters, issues or liabilities as reflected in this Agreement. Without in any way limiting the general principle set forth in the preceding sentence, Schedule 2.6 sets forth the manner in which certain existing Company Foreign Plans in non-U.S. jurisdictions shall be handled, effective as of the Distribution Date (or such other date(s)) as the Company and KSI may mutually agree) consistent with the provisions of this Section 2.6 or as permitted under applicable local law. 2.7 RIGHTS AND OBLIGATIONS OF KBI AND KBI EMPLOYEES. KBI shall have the same rights, duties, responsibilities, liabilities and obligations with respect to the KBI Employees and KBI Business as KSI has with respect to the KSI Employees and KSI Business under Articles 2 through 9 of this Agreement, except that KBI shall not be required to establish any Plans or take actions related thereto (e.g., as is required of KSI in Sections 2.3, 3.1, 4.1(a), 5.1(a), 5.1(c), 5.2(a) and 7.1(a)). Notwithstanding that new Plans shall be established by KSI (and not KBI) upon or following the Distribution, the parties intend that KBI Employees be entitled to the same treatment as KSI Employees with respect to the benefits and other matters that are the subject of this Agreement and that KBI Employees be entitled to participate in the same manner as KSI Employees in any Company Plans or KSI Plans. KSI and KBI shall enter into such further agreements and arrangements and take such other actions as may be necessary or appropriate to allow such participation by KBI Employees in the KSI Plans and to provide for the respective rights, duties, responsibilities, liabilities of KSI and KBI in connection therewith. ARTICLE 3 401(K) PLAN 3.1 401(k) PLAN. Effective as of the Distribution Date (or such other date as the Company and KSI may mutually agree), KSI shall establish or cause to be established a separate plan and trust which are intended to be tax-qualified under Code Section 401(a) and 401(k), to be exempt from taxation under Code Section 501(a)(1), (the "KS1 401(k) Plan") to which KSI Employees may make salary reduction contributions and KSI can make matching contributions and discretionary profit sharing contributions. To the extent that KSI makes a discretionary profit sharing contribution to the KSI 401(k) Plan for 2002, it shall make such contribution with respect to compensation of plan participants that was earned from the Company and KSI during 2002. 3.2 TRANSFER OF ACCOUNTS FROM COMPANY 401(k) PLAN. As of a date as soon as practicable after the Distribution Date (or such other date as the Company and KSI may mutually agree (the "401(K) TRANSFER DATE")), the Company and KSI shall cause to be transferred to the KSI 401(k) Plan the accounts in the Company 401(k) Plan that are attributable to KSI Employees. In addition, effective as of the 401(k) Transfer Date (or such other date as the Company and KSI may mutually agree), the Company shall cause any participant loans held in the Company 401(k) Plan that are attributable to KSI Employees to be assigned to the Trustee of the KSI 401(k) Plan to enable such KSI Employees to continue to repay such loans through payroll deduction, and after such assignment such KSI Employees shall repay such loans to the KSI 401(k) Plan only. 7 ARTICLE 4 NON-QUALIFIED PLANS 4.1 DEFERRED COMPENSATION PLANS. (a) ESTABLISHMENT OF KSI RABBI TRUST. Effective on or before the Distribution Date (or such other date as the Company and KSI may mutually agree), KSI shall establish the KSI Deferred Compensation Plan and the KSI Rabbi Trust. (b) TRANSFER OF LIABILITIES AND RABBI TRUST INSURANCE POLICIES. The Company Rabbi Trust maintains policies of insurance (the "POLICIES") on the lives of participants in the Company Deferred Compensation Plan as a means of funding the benefit liabilities to participants thereunder. As of the Distribution Date, the Company shall cause the Company Rabbi Trust to assign and transfer to the KSI Rabbi Trust, and KSI shall cause the KSI Rabbi Trust to assume, the rights and obligations of the Company Rabbi Trust under the Policies that insure the lives of KSI Employees. Coincident with such transfer of the Policies, KSI shall assume all responsibilities and obligations relating to, arising out of, or resulting from such liabilities under the Company Deferred Compensation Plan. (c) PARTICIPATION IN DEFERRED COMPENSATION PLANS. Effective as of the Distribution Date (or such other date as the Company and KSI may mutually agree), eligible KSI Employees may commence participation in the KSI Deferred Compensation Plan. KSI Employees who are currently participating in the Company Deferred Compensation Plans shall continue their participation in such Plans (according to its terms) to the Distribution Date (or such other date as the Company and KSI may mutually agree). ARTICLE 5 HEALTH AND WELFARE PLANS 5.1 HEALTH PLANS. (a) KSI HEALTH PLANS. As of the Distribution Date (or such other date(s) and the Company and KSI may mutually agree), KSI shall establish the KSI Health Plans similar to the Company Health Plans listed on Schedule 5.1 and, correspondingly, KSI shall be solely responsible for the administration of the KSI Health Plans, including the payment of all employer-related costs in establishing and maintaining the KSI Health Plans, and for the collection and remittance of employee premiums, subject to Section 8.1. (b) MEDICAL PLANS THROUGH THE DISTRIBUTION DATE. Except as otherwise agreed by the Company and KSI, until the Distribution Date, KSI shall be a Participating Company in the Company Health Plans listed in Schedule 5.1. The Company shall administer claims incurred under the Company Health Plans by KSI Employees before the Distribution Date. Any determination made or settlements entered into by the Company with respect to such claims shall be final and binding. The Company shall retain financial and administrative ("run-out") liability and all related obligations and responsibilities for all claims incurred by KSI Employees before the Distribution Date (or such other date(s) as the Company 8 and KSI may mutually agree), including any claims that were administered by Company as of, on, or after ________________ (or such other date(s) as the Company and KSI may mutually agree). Except as set forth in the preceding sentence, KSI shall reimburse the Company for any and all direct and indirect costs and expenses associated with its participation in the Company Health Plans prior to the Distribution Date, subject to Section 8.1. (c) SECTION 125 PLAN. Through the Distribution Date (or such other date as the Company and KSI may mutually agree), KSI shall remain a Participating Company in the Company Section 125 Plan. The existing elections for KSI Employees participating in the Company Section 125 Plan shall remain in effect until the Distribution Date (or such other date as Company and KSI may mutually agree). Effective on the day after the Distribution Date (or such other date immediately following the date that KSI's participation in the Company Section 125 Plan terminates), KSI shall establish, or caused to be established, the KSI Section 125 Plan and KSI shall be solely responsible for the KSI Section 125 Plan. As of the Distribution Date, the Company shall assign and transfer to KSI the rights and obligations of the Company under the medical and dependent care flexible spending accounts maintained on behalf of KSI Employees pursuant to the KSI Section 125 Plan. As of the Distribution Date, the Company and KSI shall determine, with respect to each KSI Employee as of the Distribution Date, the net difference between the amount of flexible spending account contributions and the amount of flexible spending account reimbursements for such KSI Employee during the period between January 1, 2002 and the Distribution Date. If the total contributions during such period for a KSI Employee exceed the total reimbursement during such period for such KSI Employee, the difference for such KSI Employee shall be characterized as a "NET CONTRIBUTION." If the total reimbursement during such period for a KSI Employee exceeds the total contributions during such period for such KSI Employee, the difference for such KSI Employee shall be characterized as a "NET REIMBURSEMENT." If the sum of all Net Contributions for all KSI Employees exceeds the sum of all Net Reimbursements for all KSI Employees, the Company shall, as of the Distribution Date, pay to KSI the amount of such excess. If the sum of all Net Reimbursements for all KSI Employees exceeds the sum of all Net Contributions for all KSI Employees, KSI shall, as of the Distribution Date, pay to the Company the amount of such excess. (d) COBRA. The Company shall be responsible through the Distribution Date (or such other date as Company and KSI may mutually agree) for compliance with the health care continuation coverage requirements of COBRA and the Company Health and Welfare Plans with respect to KSI Employees and qualified beneficiaries (as such term is defined under COBRA). KSI shall be responsible for providing the Company with all necessary employee change notices and related information for covered dependents, spouses, qualified beneficiaries (as such term is defined under COBRA), and alternate recipients pursuant to any QMCSO, in accordance with applicable Company COBRA policies and procedures. Effective as of the Distribution Date (or such other date as the Company and KSI may mutually agree), the Company shall be solely responsible for compliance with the health care continuation coverage requirements of COBRA and the Company Health and Welfare Plans for Company Employees and their qualified beneficiaries (as such term is defined under COBRA). Effective as of the Distribution Date (or such other date as the Company and KSI may mutually agree), KSI shall be solely responsible for compliance with the health care continuation coverage requirements of COBRA and the KSI Health and Welfare Plans for KSI Employees and their qualified beneficiaries (as such term is defined under COBRA); provided, however, KSI may elect to 9 retain the Company's services in such manner and for such period as the Company and KSI may mutually agree to assist it with COBRA administration and KSI shall reimburse the Company for its costs and expenses associated with such administration, subject to Section 8.1. 5.2 INSURANCE PLANS (a) KSI INSURANCE PLANS. Effective as of the Distribution Date, KSI shall assume and be solely responsible for all liabilities relating to, arising out of, or resulting from claims by KSI Employees attributable to employment with the KSI Business whether incurred before or after the Distribution Date. As of the Distribution Date (or such other date(s) as the Company and KSI may mutually agree), KSI shall establish Insurance Plans to provide benefits similar to those listed on Schedule 5.2 and, correspondingly, KSI shall be solely responsible for the administration of the KSI Insurance Plans, including the payment of all employer-related costs in establishing and maintaining the KSI Insurance Plans, and for the collection and remittance of employee premiums, subject to Section 8.1. (b) INSURANCE PLANS THROUGH THE DISTRIBUTION DATE. Except as otherwise agreed by the Company and KSI, for the period ending on the Distribution Date (or such other period as Company and KSI may mutually agree), KSI shall be a Participating Company in the Company Insurance Plans listed in Schedule 5.2. The Company shall administer claims incurred under the Company Insurance Plans by KSI Employees before the Distribution Date but only to the extent that KSI has not, before such date, established and assumed administrative responsibility for a corresponding Insurance Plan. Any determination made or settlements entered into by the Company with respect to such claims shall be final and binding. The Company shall retain financial and administrative ("run-out") liability and all related obligations and responsibilities for all claims incurred by KSI Employees before the Distribution Date (or such other date(s) as the Company and KSI may mutually agree), including any claims that were administered by the Company as of, on, or after the Distribution Date (or such other date(s) as Company and KSI may mutually agree). Except as set forth in the preceding sentence, KSI shall reimburse the Company for any and all direct and indirect costs and expenses associated with its participation in the Company Insurance Plans, subject to Section 8.1. ARTICLE 6 EQUITY COMPENSATION The treatment of options and restricted stock issued under Stock Plans of the Company and held by Company Employees and KSI Employees as of the Distribution Date shall be as described in Schedule 6. ARTICLE 7 FRINGE AND OTHER BENEFITS 7.1 FRINGE BENEFITS: (a) KSI FRINGE BENEFIT PLANS. Effective as of the Distribution Date, KSI shall assume and be solely responsible for all liabilities relating to, arising out of, or 10 resulting from KSI Employees' participation in fringe benefit plans, programs, personnel policies and practices of Company listed on Schedule 7.1, whether such liabilities are incurred before or after the Distribution Date. As of the Distribution Date (or such other date(s) as the Company and KSI may mutually agree), KSI shall establish Fringe Benefit Plans to provide benefits similar to those listed on Schedule 7.1 and, correspondingly, KSI shall be solely responsible for the administration of the KSI Fringe Benefit Plans, including the payment of all employer-related costs in establishing and maintaining the KSI Fringe Benefit Plans, subject to Section 8.1. (b) FRINGE BENEFIT PLANS THROUGH THE DISTRIBUTION DATE. Except as otherwise agreed by the Company and KSI, for the period ending on the Distribution Date (or such other period as the Company and KSI may mutually agree), KSI shall be a Participating Company in the Company Fringe Benefit Plans listed in Schedule 7.1. The Company shall administer benefits under the Company Fringe Benefit Plans for KSI Employees before the Distribution Date but only to the extent that KSI has not, before such date, established and assumed administrative responsibility for a corresponding Fringe Benefit Plan. KSI shall reimburse Company for any and all direct and indirect costs and expenses associated with its participation in the Company Fringe Benefit Plans, subject to Section 8.1. 7.2 OTHER BENEFIT PLANS. To the extent that the Company maintains, sponsors or provides benefits other than those specified in Schedule 7.1 to its eligible employees, then the Company shall, to the extent permitted by law, continue to make such benefits available to KSI Employees on substantially similar terms and conditions as are offered to Company Employees through the Distribution Date (or such other date upon which KSI and the Company mutually agree). KSI shall reimburse the Company for any and all direct and indirect costs and expenses associated with, arising out of, or resulting from the provision of such other fringe benefits. ARTICLE 8 ADMINISTRATIVE PROVISIONS 8.1 PAYMENT OF LIABILITIES, PLAN EXPENSES AND RELATED MATTERS. (a) EXPENSES AND COSTS CHARGEABLE TO A TRUST. Effective as of the Distribution Date, KSI shall pay its share of any contributions made to any trust maintained in connection with a Company Plan while KSI is a Participating Company in that Company Plan. (b) CONTRIBUTIONS TO TRUSTS. With respect to Company Plans to which KSI Employees make contributions, the Company shall use reasonable procedures to determine KSI assets and liabilities associated with each such Plan, taking into account such contributions, settlements, refunds and similar payments. (c) ADMINISTRATIVE EXPENSES NOT CHARGEABLE TO A TRUST. Effective as of the Distribution Date, to the extent not charged pursuant to the Management Services Agreement entered into by the parties of even date herewith, and to the extent not otherwise agreed to in writing by the Company and KSI, and to the extent not chargeable to a trust established in connection with a Company Plan (as provided in paragraph (a)), KSI shall be 11 responsible, through either direct payment or reimbursement to the Company, for its allocable share of actual third party and/or vendor costs and expenses incurred by the Company and additional costs and expenses, subject to the methodology reasonably agreed upon by the Company and KSI, in the administration of (i) the Company Plans while KSI participates in such Company Plans, and (ii) the KSI Plans, to the extent the Company procures, prepares, implements and/or administers such KSI Plans. To the extent not otherwise determinable through direct allocation of costs and expenses, KSI's allocable share of such costs and expenses will be based on the number of KSI Employees at the commencement of the period for which costs are being allocated, as a percentage of the total number of Company Employees and KSI Employees at such time. 8.2 SHARING OF PARTICIPANT INFORMATION. In addition to the responsibilities and obligations of the Company and KSI specified in this Agreement, the Company and KSI shall share, or cause to be shared, all participant information that is necessary or appropriate for the efficient and accurate administration of each of the Company Plans and the KSI Plans during the respective periods applicable to such Plans (as KSI and the Company may mutually agree). The Company and KSI and their respective authorized agents shall, subject to applicable laws of confidentiality and data protection, be given reasonable and timely access to, and may make copies of, all information relating to the subjects of this Agreement in the custody of the other party or its agents, to the extent necessary or appropriate for such administration. 8.3 REPORTING AND DISCLOSURE COMMUNICATIONS TO PARTICIPANTS. While KSI is a Participating Company in the Company Plans, KSI shall take, or cause to be taken, all actions necessary or appropriate to facilitate the distribution of all Company Plan-related communications and materials to its employees, participants and beneficiaries, including (without limitation) summary plan descriptions and related summaries of material modification(s), summary annual reports, investment information, prospectuses, notices and enrollment material for the Company Plans and KSI Plans. KSI shall reimburse the Company for the costs and expenses relating to the copies of all such documents provided to KSI. KSI shall assist the Company in complying with all reporting and disclosure requirements of ERISA, including the preparation of Form Series 5500 annual reports for the Company Plans, as applicable. 8.4 AUDITS REGARDING VENDOR CONTRACTS. From the period beginning as of the Distribution Date and ending on ____________________ (or such later date as the Company and KSI may mutually agree), the Company and KSI and their duly authorized representatives shall have the right to conduct joint audits with respect to any vendor contracts that relate to both the Company Health and Welfare Plans and the KSI Health and Welfare Plans. The scope of such audits shall encompass the review of all correspondence, account records, claim forms, cancelled drafts (unless retained by the bank), provider bills, medical records submitted with claims, billing corrections, vendor's internal corrections of previous errors and any other documents or instruments relating to the services performed by the vendor under the applicable vendor contracts. The Company and KSI shall agree on the performance standards, audit methodology, auditing policy and quality measures, reporting requirements, and the manner in which costs and expenses incurred in connection with such audits shall be shared. 12 8.5 EMPLOYEE IDENTIFICATION NUMBERS. Until the Distribution Date (or such other period as the Company and KSI may mutually agree), the Company and KSI shall not change any employee identification numbers assigned by the Company. The Company and KSI mutually agree to establish a policy pursuant to which employee identification numbers assigned to either employees of the Company or KSI shall not be duplicated between the Company and KSI. 8.6 BENEFICIARY DESIGNATIONS. Subject to Section 8.9, all beneficiary designations made by KSI Employees for the Company Plans shall be transferred to and be in full force and effect under the corresponding KSI Plans, in accordance with the terms of each such applicable KSI Plan, until such beneficiary designations are replaced or revoked by the KSI Employees who made the beneficiary designations. 8.7 REQUESTS FOR REGULATORY OPINIONS. The Company and KSI shall make such applications to regulatory agencies, including the Internal Revenue Service and Department of Labor, as may be necessary or appropriate. KSI and the Company shall cooperate fully with one another on any issue relating to the transactions contemplated by this Agreement for which the Company and/or KSI elects to seek a determination letter or private letter ruling from the Internal Revenue Service or an advisory opinion from the Department of Labor. 8.8 FIDUCIARY MATTERS. The Company and KSI each acknowledge that actions contemplated to be taken pursuant to this Agreement may be subject to fiduciary duties or standards of conduct under ERISA or other applicable law, and that no party shall be deemed to be in violation of this Agreement if such party fails to comply with any provisions hereof based upon such party's good faith determination that to do so would violate such a fiduciary duty or standard. 8.9 CONSENT OF THIRD PARTIES. If any provision of this Agreement is dependent on the consent of any third party (such as a vendor) and such consent is withheld, the Company and KSI shall use their commercially reasonable best efforts to implement the applicable provisions of this Agreement. If any provision of this Agreement cannot be implemented due to the failure of such third party to consent, the Company and KSI shall negotiate in good faith to implement such provision in a mutually satisfactory manner. 8.10 COMPANY INTRANET. Through the Distribution Date (or such other date as KSI and the Company may mutually agree), the Company shall make its Company intranet site available to KSI Employees. KSI shall reimburse the Company for any and all costs and expenses related to making its intranet site available to KSI Employees, subject to the Management Services Agreement. The Company and KSI shall use their commercially reasonable best efforts to mutually agree on the appropriate methods by which KSI shall establish its own intranet site. ARTICLE 9 EMPLOYMENT-RELATED MATTERS 13 9.1 TERMS OF KSI EMPLOYMENT. All basic terms and conditions of employment for KSI Employees including, without limitation, their pay and benefits in the aggregate, shall, to the extent legally and practicably possible, remain substantially the same through the Distribution Date as the terms and conditions that were in place when the KSI Employee or KSI Employee was employed by the Company, as applicable. Notwithstanding the foregoing, KSI Employees shall be required to execute a new agreement regarding confidential information and proprietary developments in a form approved by KSI by the Distribution Date. In addition, nothing in this Agreement shall be construed to change the at-will status of the employment of any of the employees of the Company or KSI. 9.2 HR DATA SUPPORT SYSTEMS. [The Company shall provide human resources data support for KSI Employees through __________________ (or such other period as the Company and KSI may mutually agree). KSI agrees to fully reimburse the Company for any and all direct and indirect costs and expenses associated with its use of the Company human resources data support systems, subject to Section 8.1. In the event that the Company and KSI agree to extend the time period beyond ___________________, then the costs and expenses shall be computed in accordance with Section 8.1. The Company and KSI each reserves the right to discontinue KSI's access to any Company human resources data support systems with sixty (60) days' notice (or such other period as Company and KSI may mutually agree).] 9.3 EMPLOYMENT OF EMPLOYEES WITH U.S. WORK VISAS. KSI shall request amendments to the nonimmigrant visa status of KSI Employees with U.S. work visas authorizing them to work for the Company, to request authorization to work for KSI. 9.4 CONFIDENTIALITY AND PROPRIETARY INFORMATION. No provision of this Agreement shall be deemed to release any individual for any violation of the Company non-competition guideline or any agreement or policy pertaining to confidential or proprietary information of the Company, or otherwise relieve any individual of his or her obligations under such non-competition guideline, agreement, or policy. 9.5 PERSONNEL RECORDS. Subject to applicable laws on confidentiality and data protection, the Company shall deliver to KSI prior to the Distribution Date (or such other date as the Company and KSI may mutually agree), personnel records of KSI Employees to the extent such records relate to KSI Employees' active employment by, leave of absence from, or termination of employment with KSI. KSI shall fully reimburse Company for any and all direct and indirect costs and expenses associated with such delivery, subject to Section 8.1. 9.6 MEDICAL RECORDS. Subject to applicable laws on confidentiality and data protection, the Company shall deliver to KSI prior to the Distribution Date (or such other date as the Company and KSI may mutually agree), medical records of KSI Employees to the extent such records (a) relate to KSI Employees' active employment by, leave of absence from, or termination of employment with KSI. KSI shall fully reimburse the Company for any and all direct and indirect costs and expenses associated with such delivery, subject to Section 8.1. 9.7 UNEMPLOYMENT INSURANCE PROGRAM. Unless otherwise directed by KSI, the Company shall use its commercially reasonable best efforts to cause KSI to receive service from the Company's third party unemployment insurance administrator through 14 _____________ (or such other date as the Company and KSI may mutually agree). KSI shall reimburse the Company for its allocable share of fees paid and related costs and expenses by the Company to its third party unemployment insurance administrator for services rendered during such period, pursuant to the Management Services Agreement. KSI shall cooperate with the unemployment insurance administrator by providing any and all necessary or appropriate information reasonably available to KSI. 9.8 NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES. No provision of this Agreement shall be construed to create any right or accelerate entitlement to any compensation or benefit whatsoever on the part of any Company Employee, KSI Employee or other former, present or future employee of the Company or KSI under any Company Plan or KSI Plan or otherwise. Without limiting the generality of the foregoing: (a) neither the Distribution, nor the termination of the Participating Company status of KSI shall cause any employee to be deemed to have incurred a termination of employment; and (b) no transfer of employment between the Company and KSI before the Distribution Date shall be deemed a termination of employment for any purpose hereunder. 9.9 EMPLOYMENT LITIGATION. (a) CLAIMS TO BE TRANSFERRED TO KSI AND/OR JOINTLY DEFENDED BY THE COMPANY AND KSI. On or before the Distribution Date, the Company and KSI shall enter into a written agreement that specifies the legal responsibility and accompanying liability for any identified claims of KSI. (b) UNSCHEDULED CLAIMS. KSI shall have the sole responsibility for all employment-related claims regarding KSI Employees that exist, or come into existence, on or after the Distribution Date relating to, arising out of, or resulting from their employment with KSI. ARTICLE 10 GENERAL PROVISIONS 10.1 EFFECT IF DISTRIBUTION AND/OR INITIAL PUBLIC OFFERING AND/OR DISTRIBUTION. Subject to Section 10.9, if the Initial Public Offering and/or Distribution does not occur, then all actions and events that are, under this Agreement, to be taken or to occur effective as of the Distribution Date and/or Closing Date, shall not be taken or occur except to the extent specifically agreed by the parties. 10.2 RELATIONSHIP OF PARTIES. Nothing in this Agreement shall be deemed or construed by the parties or any third party as creating the relationship of principal and agent, partnership or joint venture between the parties, the understanding and agreement being that no provision contained herein, and no act of the parties, shall be deemed to create any relationship between the parties other than the relationship set forth herein. 10.3 SUBSIDIARIES. Each party shall cause to be performed and hereby guarantees the performance of any and all of its actions and those of its subsidiaries (as such subsidiaries exist immediately following the Distribution). 15 10.4 GOVERNING LAW; DISPUTE RESOLUTION. To the extent not preempted by applicable federal law, including, without limitation, ERISA, the Code and applicable securities laws, this Agreement shall be construed in accordance with the laws of the State of California, excluding its conflict of law rules and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County, California and/or the United States District Court for the Northern District of California, San Jose Division, shall have jurisdiction and venue over all disputes between the parties that are permitted to be brought in a court of law pursuant to Article VII of the Separation Agreement. The terms of Article VII of the Separation Agreement shall govern with respect to all disputes, claims and controversies under this Agreement. 10.5 ASSIGNMENT. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and permitted assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. Except as herein specifically provided to the contrary, a party may not assign this Agreement or any rights or obligations hereunder (including, without limitation, in connection with a sale of all or substantially all of such party's assets), without the prior written consent of each of the other parties hereto. 10.6 SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without prejudice to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages would be an inadequate remedy for any breach of the provisions of this Agreement and agrees that the obligations of the parties hereunder shall be specifically enforceable. 10.7 TITLES AND HEADINGS. Titles and headings to Sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 10.8 AMENDMENT. This Agreement may not be altered or amended, nor may rights hereunder be waived, except by an instrument in writing executed by the party or parties to be charged with such amendment or waiver. No waiver of any terms, provision or condition of or failure to exercise or delay in exercising any rights or remedies under this Agreement, in any one or more instances shall be deemed to be, or construed as, a further or continuing waiver of any such term, provision, condition, right or remedy or as a waiver of any other term, provision or condition of this Agreement. 10.9 TERMINATION. This Agreement may be terminated and the Distribution and/or the Initial Public Offering may be deferred, modified or abandoned at any time prior to Distribution Date or the Closing Date, as applicable, by and in the sole discretion of the Board of Directors of the Company without the approval of KSI or KBI. In the event of such termination, no party hereto (or any of its respective directors or officers) shall have any liability to any other party pursuant to this Agreement. 16 10.10 CONFLICT. In the event of any conflict between the provisions of this Agreement and any Plan, the provisions of this Agreement shall control. 10.11 COUNTERPARTS. This Agreement, including the Schedules hereto and the other documents referred to herein, may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement. 10.12 FORCE MAJEURE. A party shall not be liable or deemed to be in default for any delay or failure in performance under this Agreement or other interruption of service deemed to result, directly or indirectly, from acts of God, civil or military authority, acts of public enemy, war, accidents, explosions, earthquakes, floods, failure of transportation, strikes or other work interruptions by a party's employees, or any other similar cause beyond the reasonable control of a party unless such delay or failure in performance is expressly addressed elsewhere in this Agreement. IN WITNESS WHEREOF, each of the parties have caused this Employee Matters Agreement to be executed on its behalf by its officers hereunto duly authorized on the day and year first above written. CELERITY GROUP, INC. (formerly known as Kinetics Holdings Corporation) By: __________________________________ Name: Title: KINETIC SYSTEMS, INC. BY: __________________________________ Name: Title: KINETICS BIOPHARM, INC. By: __________________________________ Name: Title: [SIGNATURE PAGE TO EMPLOYEE MATTERS AGREEMENT] 17 [SCHEDULES (OTHER THAN THE ATTACHED SCHEDULE 6) TO BE AGREED TO BY THE PARTIES ON OR BEFORE THE DISTRIBUTION DATE.] 18 EX-3.03 9 f82015a1exv3w03.txt EXHIBIT 3.03 Exhibit 3.03 CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF KINETICS HOLDINGS CORPORATION (Originally incorporated on October 22, 1999) Kinetics Holdings Corporation, a Delaware corporation, does hereby certify that the following amendment to the corporation's Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law, with the approval of such amendment by the corporation's stockholders having been given by written consent without a meeting in accordance with Sections 228(d) and 242 of the Delaware General Corporation Law. Article One of the Restated Certificate of Incorporation, relating to the name of the corporation, is amended to read in its entirety as follows: The name of the corporation is Celerity Group, Inc. IN WITNESS WHEREOF, said corporation has caused this Certificate of Amendment to be signed by its duly authorized officer this sixth day of June, 2002 and the foregoing facts stated herein are true and correct. KINETICS HOLDINGS CORPORATION By: /s/ John Goodman -------------------------------- John Goodman Secretary EX-10.15 10 f82015a1exv10w15.txt EXHIBIT 10.15 Exhibit 10.15 CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, has been marked with an asterisk to denote where omissions have been made. The confidential material has been filed separately with the Commission. GLOBAL SUPPLY AGREEMENT APPLIED MATERIALS CONFIDENTIAL This Global Supply Agreement dated and effective as of June 1, 2002 is by and between Applied Materials, Inc., a Delaware corporation, having places of business in Santa Clara, California and Austin, Texas, and Kinetics Fluid Systems, Inc., a California corporation, having places of business in Santa Clara, California, and Austin, Texas. In consideration of the mutual promises and consideration provided for in this Agreement, the parties agree as follows: DEFINITIONS The following capitalized terms will have the meanings given below when used in this Agreement: "Agreement" means this Global Supply Agreement, all its Exhibits and Attachments, and all Specifications for Items, all as amended from time to time, and all Applied Purchase Orders and other Authorized Demand Signals that may be issued for the purchase of Items (including Services). When used with reference to the purchase of a particular Item or Items, "Agreement" means those provisions of the foregoing that apply to such Item or Items and to the transaction for such purchase. "Applied's Standard Terms and Conditions of Purchase" means Exhibit 1 to this Agreement. "Applied" means Applied Materials, Inc., and all of its domestic and international divisions and subsidiaries. "Applied IP" has the meaning given in the IPA. "Applied System(s)" means capital equipment sold by Applied that incorporates a Fluid Delivery System. "Asset Purchase Agreement" means the Asset Purchase Agreement dated June 25, 1999 between Applied Materials, Inc. and Kinetics Fluid Systems, Inc., as amended and supplemented from time to time. "Attachment" means one of the documents, records or instruments identified as an "Attachment" on the List of Exhibits and Attachments set out in this Agreement. CONFIDENTIAL TREATMENT REQUESTED "Authorized Demand Signal" means an order or record issued by Applied to Supplier pursuant to Section 2.1.5.1. "Bus Route" or "Blanket Order" means an arrangement, method or agreement for the order and purchase of goods under which the buyer issues a standing, blanket or open order (under which quantities may be indeterminate, forecasted, or otherwise provided for) and then periodically specifies quantities for delivery through summary orders, issuance of a purchase order document, or by electronic or other notice. "Business Day" means a day that is not a Saturday, a Sunday, or a holiday or operating shut down day under the most current fiscal year operating calendar of Applied in effect under this Agreement. "Committed Delivery Date" means the date on which Supplier shall deliver a completed Item and all required documentation to Applied, as determined under Sections 2.1.5.2 and 2.1.5.3. As to Services for which a Purchase Order is the "Authorized Demand Signal," the "Committed Delivery Date" means each date established by such Purchase Order for completion of Services and delivery of work product or other deliverables to Applied. "Confidential Information" means all of the following: (a) "Confidential Information," as such term is defined by the IPA, a Design SOW, a DSA or a DVA (each as defined below), (b) Internal Applied Data, as defined below, and new product plans of Applied that are included as Confidential Information under Section 2.9.2 below, and (c) "Confidential Information" or "Proprietary Information" of, or received from, Applied or Supplier, under (and as such term(s) are defined in) any NDA now in effect or hereafter in effect (but in any case, only for the period applicable under the IPA, NDA or other agreement, as applicable). "Configurable Subassemblies" means those configurable products identified by a non-repeating part numbering system established by Applied (in which a Subassembly part numbering follows a particular convention, i.e., XXXX-cont.). A Configurable Subassembly may contain a number of Piece Parts, Modules or devices (or a combination thereof) that are electrically and/or mechanically connected and perform a specific function. An FDS is a Configurable Subassembly. "Configuration Engineering Services" means the engineering services requested by Applied and provided by Supplier for Applied * "CCR Services" means the Configuration Engineering Services or CES Services provided by Supplier pursuant to Applied's CCR. "CCR" means Applied's request for CES Services or Configuration Engineering Services in the revision of a Configured BOM or CES Package, which request is issued after Supplier's acceptance of the applicable SSR or NSO order. * Material has been omitted and filed separately with the Commission. 2 CONFIDENTIAL TREATMENT REQUESTED "Contract Price" means the price for an Item, including a Service, established by or in accordance with Attachment 1 or, as to Services for which pricing is not determined under Attachment 1, the price for Services established by or in accordance with the applicable Applied Purchase Order issued under this Agreement. "CES Package" means all documentation, drawings, specifications and information prepared or provided by Supplier to implement and record a CES. "CES Services" means the engineering services provided by Supplier pursuant to Applied's request to Supplier for a Customer Engineering Special. "CES" or "Customer Engineering Special" means a modification to an existing standard Fluid Delivery System configuration, wherein the modification involves either * "CPS" means Applied's Installed Customer Productivity Support organization, formerly known as the Installed Base Service & Support organization, and any successor organization (such organization being sometimes referred to as "IBSS" or "CPS"). "Design Services," "Design SOW," "Design Services Agreement," and "DSA" have the meanings given in the IPA. "Development Services," "Development Services Agreement," and "DVA" have the meanings given in the IPA. "ECO" means an Engineering Change Order issued by Applied to change a Specification or to make another Engineering Change under (and as defined in) Section 4.1.1 below or approved by Applied to authorize a change in a Specification or to make another Engineering Change under Section 4.1.1 below. "ERS Program" means Applied's "Evaluated Receipts Settlement Program," which is a system for payment by Applied for Items purchased hereunder, as described in Section 2.11.1.3 below. "Exhibit" means one of the documents, records or instruments identified as an "Exhibit" on the list of Exhibits and Attachments set out in this Agreement. "FDS" or "Fluid Delivery System" has the meaning given in the IPA. The term FDS includes (unless otherwise limited by particular provisions of this Agreement) Volume Manufacturing FDS, Pilot FDS, R&D FDS and NSO FDS. "First Article" means a new Item, an Item with revised Specifications (including drawings), or an Item manufactured after a change in Supplier's (or a sub-tier supplier's) manufacturing location, manufacturing process or any other change that, pursuant to the QRD (defined below) or the Quality Framework Document (Attachment 15 to this Agreement), requires the change or the affected Item to be evaluated and accepted by Applied prior to delivery to Applied or use in manufacturing of Items under this Agreement. * Material has been omitted and filed separately with the Commission. 3 CONFIDENTIAL TREATMENT REQUESTED "Internal Applied Data" means all non-public, proprietary information from any source that is recorded, displayed, maintained or accessed on Applied's SPR, SSR, NSR, CCR or any internal database, subject to the exclusions of Section 4.1, clauses (i) through (v) of the IPA. "IP Rights" has the meaning given in the IPA. "Item" or "Items" means FDS(s), Module(s), other Subassembly(ies), Piece Part(s) and any other good(s) or Service(s) that (a) Supplier is to provide to Applied under this Agreement pursuant to any Authorized Demand Signal and (b) are identified in, or have pricing terms determined as set forth in, Attachment 1 and any amendments to Attachment 1 or are identified in and have pricing terms set forth in an Applied Purchase Order issued as an Authorized Demand Signal under this Agreement. Items (excluding Services) shall be deemed to constitute "goods" as that term is defined in, and used in, the Uniform Commercial Code as adopted in California, including amendments to such statutes. Certain exclusions affecting "Items" are also set out in Section 1.4 below. "Manufacturing Process" has the meaning given in the IPA. "MFC" means mass flow controller. "Module" means those standard or configurable parts that may be identified by a single Applied part number, that contain multiple Piece Parts and that are sold by Supplier to Applied on a recurring basis as separate units or as assemblies for use in FDSs, NSOs or other fluid delivery products. "NDA" means any and all agreements between Applied and Supplier for confidentiality, nondisclosure or limitation on use of Confidential Information. Such term, unless otherwise indicated in this Agreement, includes the IPA. "New Product Transition" or "NPT" means the transition, in accordance with criteria approved by Applied, of an FDS or Applied System from * to *, or from * to *. "New Product Transition Services" or "NPT Services" means the *, * and * preparation services necessary for New Product Transition. The particular requirements for each NPT Services project will be defined in * for NPT Services issued pursuant to an RFP/RFQ process, and will generally include (when appropriate to the particular project and with compensation to be negotiated) *and *,* and * specifications, * and *,* of * and *, and * preparation. "NSO" or "Non-System Order" means a Subassembly or other Item (excluding an FDS) that (a) is ordered by Applied for Volume Manufacturing, Pilot Manufacturing or R&D use and (b) either is to be installed or incorporated in a previously manufactured Configurable Subassembly or is to be used by Applied for R&D purposes. "NSR" means a nonstandard request for an Item to be manufactured by Supplier, which request will include basic process, platform, fab, and chamber information and other information to describe the Item ordered. * Material has been omitted and filed separately with the Commission. 4 CONFIDENTIAL TREATMENT REQUESTED "Piece Parts" means piece parts that are contained in Subassemblies or that are provided by Supplier to Applied separately from a Subassembly. "Pilot FDSs" means FDSs manufactured by Supplier for incorporation into Applied Systems under Applied's Pilot Manufacturing program. "Pilot Manufacturing" excludes R&D Manufacturing and means (i) manufacturing in the United States of America of FDSs or Modules that have not been released for Volume Manufacturing by completion of New Product Transition, and/or (ii) manufacturing of FDSs or Modules in each other country which is specifically identified from time to time in an Attachment to this Agreement as a country in which Supplier may provide FDSs or Modules that have not been released for Volume Manufacturing by completion of New Product Transition. "Product Development Process" means Applied's process and management procedures for its new product development programs employed to control design and delivery of Applied's products. "Purchase Order," (i) when used to describe a method of ordering Items, means that method of ordering (sometimes also referred to as "Spot Buy") under which Applied issues Authorized Demand Signals in accordance with Section 2.1.5.1, including SSRs, NSRs and Purchase Orders (as defined in the following clause (ii)), that identify or describe particular Items to be manufactured or provided to Applied; and (ii) when used to describe an order issued by Applied for particular Item(s), means Applied's order for particular Item(s) contained in an Applied purchase order form, except that the provisions of this Agreement (including Exhibit 1 to this Agreement) shall be a part of each purchase order form issued as a Purchase Order under this Agreement and shall supersede and replace in their entirety the terms and conditions stated on the reverse side of the purchase order form. The Purchase Order method is distinguished from the Bus Route method. The Purchase Order method will be utilized for the ordering of FDSs by Applied from Supplier. When used in Section 2.2.3, "Spot Buy" refers to Supplier's method, arrangement or agreement for the purchase of Piece Parts under a Purchase Order method. "QRD" means the "Quality Requirements Document for Manufactured Assemblies--Kinetics Gas Systems," attached to this Agreement as Attachment 20, as such document is modified from time to time. "R&D" means the development, design and related scientific analysis (a) for new or modified capital equipment for use or application in any Applied System; and (b) for the prototype manufacture of such new or modified capital equipment. "R&D Manufacturing" means the manufacturing of FDSs or Modules on a prototype or other limited basis for use by Applied for R&D purposes. "R&D Services" means Design Services and Development Services required for R&D or R&D Manufacturing. R&D Services may include creation of product definitions and functional requirements, schematics, product structure trees, electronic valve assignments, definition of test requirements, determination and resolution of manufacturing engineering issues, and the manufacture of one or more prototypes. CES Services are not included in the term R&D Services. 5 CONFIDENTIAL TREATMENT REQUESTED "RFP," "RFQ," or "RFP/RFQ" means, as applicable, Applied's Request for Proposal or Request for Quotation process, as applicable, or a combination of such processes. "SAT" means the Supply Account Team (or successor organization) assigned to Supplier by Applied. "Services" means Configuration Engineering Services, CES Services, CCR Services, NPT Services, Design Services, Development Services, and other services performed by Supplier for Applied pursuant to this Agreement, the IPA (to the extent applicable), or (as to Design Services or Development Services) the relevant DSA or DVA. "SMT" means Applied's Subsystem Management Team (or successor organization) assigned to Supplier by Applied. "Source Inspection" means any inspection at Supplier's facilities required by the quality provisions of this Agreement, including the QRD or the Quality Framework, Attachment 15. "Spares" means Items ordered by Applied's CPS pursuant to Section 2.1.5 below. "Specifications" means authorized drawings, designs, specifications, instructions relating to installation, assembly and testing, and manufacturing and product requirements that are applicable to an Item. Specifications include any ECOs applicable to an Item and information of the types set out above that is included in, or referred to in, an SSR, NSR, CCR or Purchase Order issued as to an Item. "SPR" or "System Production Report" means, as to Volume Manufacturing FDSs, Pilot Manufacturing FDSs, and NSO Items, Applied's schedule for anticipated production of Applied Systems and NSOs, which is posted by Applied from time to time and updated at least weekly for Supplier's electronic access and review, identifying the Applied Systems and NSO transactions for which Supplier (subject to the provisions of this Agreement) is anticipated to provide FDSs or NSOs under this Agreement. "Standard Services" means any or all of the following: Configuration Engineering Services; CCR Services; CES Services; and NPT Services. "Standard Subassemblies" means those products discretely identified by a single Applied part number. A Standard Subassembly may contain a number of Piece Parts, Modules or devices (or a combination thereof) that are electrically and/or mechanically connected and performs a specific function. "Subassemblies" means both Standard Subassemblies and Configurable Subassemblies. "Supplier" means Kinetics Fluid Systems, Inc., a California corporation, and (x) all unincorporated divisions of Kinetics Fluid Systems, Inc. and (y) those subsidiaries and affiliates of Kinetics Fluid Systems, Inc. that are approved (through written supplement to this Agreement) by Applied as permitted to perform supply or service obligations hereunder. Unit Instruments, Inc. shall not be included in the term "Supplier" unless a written amendment to this Agreement, executed by all parties, so provides. As set out in Section 1.4 below, this Agreement does not 6 CONFIDENTIAL TREATMENT REQUESTED apply to goods, products, parts or services that are the subject of agreement(s) previously entered into with Applied by Insync Systems, Inc., even though Supplier has succeeded to such prior agreement(s) by merger. "Supplier Performance Plan" means a formal performance plan for Supplier in the form of Attachment 16, as modified from time to time. Attachment 16 is the Supplier Performance Plan in effect on the Effective Date. "System Specification Report" or "SSR" means Applied's internally generated report of basic process, platform, fab and chamber information and requirements describing an order for an Applied System requiring FDS or other Item(s), or for an NSO, from Supplier, as the same is posted by Applied to the Applied website designated for Supplier access or as otherwise furnished to Supplier. "UCC" means the Uniform Commercial Code, as adopted, amended and in effect in the State of California from time to time, which is currently codified in the California Commercial Code. "Volume Manufacturing FDSs" means FDSs manufactured by Supplier for incorporation into Applied Systems in Applied's Volume Manufacturing operations. "Volume Manufacturing" or "VMO" means (i) manufacturing in the United States of America of those FDSs or Modules that are released *, and also (ii) manufacturing of FDSs or Modules in each other country which is specifically identified from time to time in an Attachment to this Agreement as a country in which Supplier may provide FDSs or Modules that have been released *. "Will" or "shall" have the same meaning and are used to convey an affirmative duty or obligation (i.e., a requirement). Capitalized terms used in this Agreement and defined in other provisions will have the meanings in this Agreement given in such other provision(s). Unless otherwise indicated, references to Sections, provisions, paragraphs or like terms are to such elements of this Agreement and to all subsections or subparts of the referenced Section, provision or paragraph, and "hereof," "herein" and like words refer to this Agreement as a whole and not to a particular provision, also unless otherwise indicated. "Including" or "includes" does not indicate a limitation. Capitalized terms defined in the text of this Global Supply Agreement that are also used in its Attachments or Exhibits are used in the Attachments and Exhibits as defined in the text of the Global Supply Agreement, unless the context of usage indicates otherwise. 1. SCOPE. 1.1. Description of Agreement. This Agreement defines the terms and requirements applicable between Applied and Supplier with respect to the supply of Items by Supplier to Applied and to matters related to such supply * Material has been omitted and filed separately with the Commission. 7 CONFIDENTIAL TREATMENT REQUESTED that are covered by this Agreement; each party agrees to observe, perform under and comply with this Agreement. Applied may, from time to time, issue Authorized Demand Signals to Supplier for the purchase of Items. Upon acceptance (including deemed acceptance) of each Authorized Demand Signal, and for valuable consideration received, Supplier agrees that it shall, throughout the term of this Agreement, sell and deliver the Item(s) covered by each such Authorized Demand Signal under and in compliance with this Agreement. Decisions regarding future purchases from Supplier will be based in part upon Supplier's performance under this Agreement, and Supplier's achievement toward Applied's business objectives. 1.2. Addresses and Contact Persons; Notices. 1.2.1. Contact Persons. The persons to receive notices generally under this Agreement and the procedures for notice are set out in Section 1.2.2. The following individual contact persons are identified for convenience of the parties and certain of the persons listed below are designated, in specific sections of this Agreement, as the person(s) to receive or initiate certain specific notices or actions. Each party may change any of its contact persons or other information in this Section 1.2.1 from time to time. Upon any such change, notice of the change shall be given promptly to the other party through the person(s) specified to receive notice under Section 1.2.2 below, and until such notice is given the change shall not be effective as to the other party. SUPPLIER CONTACT PERSONS: KINETICS FLUID SYSTEMS, INC. Senior Vice President: Joe Foster Phone: (408) 935-4570 Facsimile: (408) 934-6302 E-mail address: jfoster@kineticsgroup.com Vice President Operations: Brad Sander Phone: (512) 246-5100 E-mail address: bsander@kineticsgroup.com Vice President Sales: Mark Thomas Phone: (408) 935-4592 E-mail address: mthomas@kineticsgroup.com Senior Director of Operations - Round Rock Division: Mark Hutson Phone: (512) 246-5103 E-mail address: mhutson@kineticsgroup.com Director of Operations - Milpitas Division: Shireen Zekanoski Phone: (408) 934-4603 E-mail address: szekanoski@kineticsgroup.com 8 CONFIDENTIAL TREATMENT REQUESTED Customer Service Manager (Austin): Geoff Chriswisser Phone: (512) 246-5852 E-mail address: gchriswisser@kineticsgroup.com Cell phone: (512) 917-4670 Pager: (888) 789-1928 Customer Service Manager (Milpitas): Sapana Talwalker Phone: (408) 935-7414 Email address: stalwalker@kineticsgroup.com Cell phone: (408) 621-6605 Pager: (408) 388-0687 Engineering Manager: John Rowland Phone: (512) 246-5841 E-mail address: jrowland@kineticsgroup.com Quality Manager (Round Rock): Dave Thomas Phone: (512) 246-5775 E-mail address: dthomas@kineticsgroup.com Quality Manager (Milpitas): Tina Caspar Phone: (408) 935-4595 E-mail address: tcaspar@kineticsgroup.com Finance Manager (Milpitas): Diep Ha Phone: (408) 935-7470 E-mail address: dha@kineticsgroup.com Finance Manager (Round Rock): Paul Senecal Phone: (512) 246-5104 E-mail address: psenecal@kineticsgroup.com Customer Service Manager-Warranty Claims: Mark Kitchen Phone: (512) 246-5848 E-mail address: mkitchen@kineticsgroup.com Senior Counsel - Austin: Nicol Hebert Phone: (512) 246-9092 E-mail address: nhebert@kineticsgroup.com Milpitas Division Address: 1463 Center Pointe Drive, Milpitas, CA 95035 Austin/Round Rock Division Address: 200 C. Parker Drive, Austin, Texas 78728 9 CONFIDENTIAL TREATMENT REQUESTED APPLIED CONTACT PERSON: Craig Romick, Supply Account Team Lead, M/S 3300 Applied Materials, Inc., 9700 Highway 290E, Austin Texas 78724 Phone: 512-272-2535 Facsimile: (512) 272-3908 Attn: Craig Romick E-mail: Craig_A_Romick@amat.com 1.2.2. Notices. Notices required or permitted under this Agreement shall be given in writing, which shall include facsimile and e-mail transmission with receipt confirmed (either electronically or by the recipient or on behalf of the recipient) to the recipient, at the recipient's current business address, facsimile number or e-mail address, addressed to Supplier or Applied, as the case may be, and to the attention of the persons specified below, except as otherwise provided in this Agreement. If hand-delivered or transmitted by facsimile or e-mail, notice is effective at the time of receipt at the designated business address, facsimile number or e-mail address or on the next Business Day after receipt if receipt occurs after 5:00 p.m. (local time of recipient) or on a non-Business Day; if sent by nationally recognized courier or express service (e.g., Federal Express, Airborne, Express Mail or equivalent service), or by mail (which shall be certified mail -- return receipt requested), notice is effective on the Business Day of receipt, or the next Business Day after receipt, if receipt occurs on a non-Business Day. The persons specified to receive notices under the Agreement as provided in this Section 1.2.2 are: FOR APPLIED, Craig Romick, Supply Account Team Lead, at the address given above in Section 1.2.1, with a copy to: Barry Quan, Vice President-Legal Affairs, Applied Materials, Inc., Legal Department, 2881 Scott Blvd., Building 20, Santa Clara, California 95050. Telephone: (408) 986-7930, Facsimile: (408) 986-2836, E-mail: Barry_Quan@amat.com; FOR SUPPLIER, Joe Foster, Senior Vice President, 2805 Mission College Blvd., Santa Clara, California 95054, and whose telephone and facsimile numbers and e-mail address are given above in Section 1.2.1, with a copy to: 10 CONFIDENTIAL TREATMENT REQUESTED (a) Brad Sander, Vice President Operations at the address given above in Section 1.2.1, and (b) John Goodman, Vice President and General Counsel, 2805 Mission College Blvd., Santa Clara, California 95054. Telephone: (408) 588-4422, Facsimile: (408) 576-0196, E-mail: jgoodman@kineticsgroup.com. Either party may specify that notices to it, and any required copies of same, be provided to no more than three persons, and notice shall be effective as to a party when it has been given as above provided to all persons so specified. Further, each party may, from time to time, change the persons(s) specified to receive notice under this Section 1.2.2. Notice of such a change shall be given to the person(s) specified to receive notice for the other party under this Section 1.2.2, and such change shall be effective when notice thereof is effective under the procedures of this Section 1.2.2. In certain instances, notice may also be given to one or more "Guarantors" under and for purposes of the "Performance Guaranty Agreement" (such terms being defined below) relating to this Agreement. The persons to receive such notice(s) are set out in such Performance Guaranty Agreement. 1.3. Entire Agreement; Related Agreements; Modification; Prior Transactions. 1.3.1. Certain Related Agreements. In addition to this Agreement, the parties and certain affiliates of Supplier have entered into and delivered concurrently with this Agreement certain other agreements related to, and constituting part of the consideration for, this Agreement (the "Related Agreements"). The Related Agreements are the following: (i) an Acknowledgement and Supplement agreement of even date herewith to the Asset Purchase Agreement; (ii) two Acknowledgement and Supplement agreements of even date herewith to the two Facilities Use Agreements between the parties and dated, respectively, June 28, 1999, as to Applied's facilities in Austin, Texas, and September 20, 1999, as to Applied's facilities in Santa Clara County, California, as the same have been amended (such Facilities Use Agreements, as amended, being called the "FUAs"); (iii) An Amended and Restated Intellectual Property Agreement of even date herewith (such agreement, as amended from time to time, being called the "IPA"); and (iv) a Performance Guaranty Agreement of even date herewith of Kinetics Holdings Corporation (sometimes called "KHC") and 11 CONFIDENTIAL TREATMENT REQUESTED The Kinetics Group, Inc. (sometimes called "KGI") (such agreement, as amended from time to time, being called the "Performance Guaranty Agreement" and such corporations being collectively called "Guarantors") with and for the benefit of Applied. 1.3.2. Entire Agreement. This Agreement and the Related Agreements set forth the entire understanding and agreement of the parties as to the subject matter of this Agreement and of the Related Agreements. From and after the Effective Date (defined below) of this Agreement, this Agreement and the Related Agreements supersede, in accordance with their respective terms and subject to the other provisions below in this Section 1.3.2, all prior agreements, understandings, negotiations and discussions between the parties as to the subject matter of this Agreement and of the Related Agreements. 1.3.2.1. In addition to this Agreement and the Related Agreements, other agreements now in effect between Applied and Supplier and referred to in Section 1.3.2.2, clause "third" below, relate to the subject matter of this Agreement and provide Applied or Supplier with rights in or licenses of Confidential Information or intellectual property of the other party, or protect or limit the use by either of Confidential Information or intellectual property of the other party (the "Separate Confidential Information Agreements"). The Separate Confidential Information Agreements shall remain in effect for the respective terms thereof and each of such agreements shall control as to the matters covered by such Separate Confidential Information Agreements, subject to Section 1.3.2.2. 1.3.2.2. In the event (and to the extent) of conflict between or among any of the documents set out in this Section 1.3.2.2, precedence shall be given as follows (except as otherwise expressly agreed in writing, with reference to this Agreement or to the other affected agreement): first, to any DVA entered into by Applied and Supplier, and then to the IPA ; second, to this Agreement (other than its incorporated Exhibits or Attachments, unless and to the extent otherwise provided expressly by this Agreement); third, to any DSA, and then to any applicable Separate Confidential Information Agreement (including any NDA) other than the IPA, a DVA or DSA; fourth, to Exhibit 1 to this Agreement, and then to all Attachments and other Exhibits (if any) to this Agreement; 12 CONFIDENTIAL TREATMENT REQUESTED fifth, to Specifications, to other technical documents incorporated in this Agreement (other than Attachments), and then to Authorized Demand Signals; and sixth, to any of the Related Agreements that are not specifically identified above for precedence. 1.3.2.3. From and after the Effective Date (defined below), this Agreement supersedes and replaces in its entirety the Amended and Restated Comprehensive Supplier Agreement dated as of June 28, 1999, as amended and extended through the Effective Date (the "CSA"), so that the term of the CSA expires concurrently with this Agreement becoming effective on its Effective Date, except as to those obligations, rights and liabilities arising under such CSA that have accrued at or prior to the Effective Date, or that hereafter accrue with respect to transactions between the parties that have occurred under and pursuant to such CSA at or prior to the Effective Date (including, by way of example, obligations, rights and liabilities relating to Items provided prior to the Effective Date of this Agreement), as to which the CSA shall continue in effect in accordance with its terms. In this regard, the parties specifically agree (i) that pricing for Items for which an SSR or Purchase Order issued under the CSA has been accepted, under the procedures described in Section 2.1.5.1 below, prior to the Effective Date shall be determined under the CSA, and (ii) that, except for such pricing of those Items within clause (i) above, the provisions of this Agreement will apply to Items that are delivered after the Effective Date but were ordered under the CSA prior to the Effective Date of this Agreement. 1.3.3. Provisions Continuing in Effect. Following any termination, cancellation, or expiration of this Agreement, the provisions of each of Articles 2, 3, 5, 9,11, 21, 22, and 27 of Exhibit 1 and Sections 2.9.1.1.D, 2.9.2, 4.8, 7 and 9 of this Agreement will remain in full force and effect, unless specifically terminated by mutual written agreement between the parties, until the respective stated expiration of such provisions. The termination, cancellation or expiration of this Agreement shall not relieve a party of its obligations and liabilities that accrue or arise under or in connection with this Agreement through the time of, or in connection with, termination, cancellation or expiration of this Agreement (or thereafter under or in connection with provisions that survive as set out above), which obligations and liabilities and related claims, demands and causes of action shall continue until the expiration of the applicable period for the bringing of claims under controlling statutes of limitation or repose. The various Related Agreements and Separate Confidential Information Agreements (including NDAs) shall terminate or continue in effect as provided in such agreements. 1.3.4. Modification. No amendment to or modification of this Agreement will be binding unless in writing and signed by a duly authorized representative of each party, except for amendments or 13 CONFIDENTIAL TREATMENT REQUESTED modifications which Applied is permitted to initiate by posting or notice under this Section 1.3.4. The Attachments to this Agreement that are identified on the List of Exhibits and Attachments following the signature page of this Agreement as subject to modification or amendment by Applied upon notice (the "Implementation Attachments"), will be deemed to be the most current versions of such Attachments, as updated and revised from time to time by Applied in accordance with this Section 1.3.4. Unless prohibited by law or by separate modification of this Agreement, to initiate a modification or amendment of an Implementation Attachment, Applied will either (i) post updates or revisions to current versions of such Attachment on the Applied website which shall be designated for Supplier's use and made available to Supplier, or (ii) provide other written or electronic notice to Supplier of the revision or update, which notice shall be sent or given to Supplier's Senior Counsel - Austin identified in Section 1.2.1 above. If Supplier fails to object within thirty (30) calendar days after the date (i) on which such modification or amendment to an Implementation Attachment was posted on Applied's website (provided that Supplier had timely notice of posting of such modification or amendment through notice on the Applied website designated for Supplier's use) or (ii) on which such other notice was provided to Supplier, then such Attachment, as modified or amended, shall be deemed to be accepted by Supplier as the Attachment to this Agreement and shall be effective as the applicable Attachment upon the expiration of such thirty (30) day period. Any update or revision to an Attachment that is initiated by Applied's posting of the update or revision on the applicable Applied web site and that would have the effect of amending this Agreement (other than the modification or amendment of the affected Attachment) shall be effective only if Supplier fails to object within thirty (30) days after written, electronic or other actual notice of such update or revision is received by Supplier. Notice of such an update or revision subject to this provision shall be given to Supplier's Senior Counsel - Austin, as above identified. 1.4. Items Covered. All Items supplied (including Services other than Development Services) to Applied by Supplier, even if sold pursuant to a separate Purchase Order, will be covered by this Agreement; provided that the terms, provisions and conditions of this Agreement (if any) applicable to Services rendered pursuant to a DVA shall be determined in accordance with the DVA. This Agreement does not apply to goods, parts, products or services that Unit Instruments, Inc., or any other subsidiary or affiliate of Supplier provides to Applied. This Agreement likewise does not apply to goods, parts, products or services provided to Applied pursuant to the currently effective Global Supply Agreement dated as of October 27, 2000 (with execution dates of October 4, 2000 and October 19, 2000), for weldments and other items provided to Applied by Insync Systems, Inc. (now merged into, and a division of, Supplier), or pursuant to subsequent agreements for such goods, parts, products or services, even though Supplier is successor by merger to Insync Systems, Inc. Such other agreement(s) for goods, parts, products or services shall continue in effect in accordance with their respective terms, but shall not affect this Agreement. New Items may be added to Attachment 1 upon mutual written agreement of Applied and Supplier from time to time. 14 CONFIDENTIAL TREATMENT REQUESTED 1.5. Duration of Agreement. This Agreement is effective and commences on and as of June 1, 2002 (the "Effective Date"). This Agreement will remain in effect for a term of *, from the Effective Date through * (the "Initial Term"), unless and to the extent earlier terminated or cancelled in accordance with its provisions. At any time before expiration of the Initial Term, Applied may, at Applied's option, extend the term of this Agreement (subject to all other provisions of this Agreement) for an additional period of up to 6 months, by notifying Supplier in writing of such extension. The Initial Term shall include the period of such an extension. 2. LOGISTICS, ORDERING AND OPERATIONAL FRAMEWORK. 2.1. Operation and Management of Orders. 2.1.1. Operating Calendar & Holidays. This Agreement operates on the basis of Applied's current fiscal year operating calendar, shown in Attachment 2, as modified from time to time. Recognized holidays and operating shut down days are as shown on such calendar. Supplier shall, unless commercially impracticable, adjust its operations, holidays and any shut down days as necessary to provide all Items (including Services) and meet its other agreements and obligations in accordance with this Agreement. Applied may, in accordance with Section 1.3.4, modify its calendar as needed for its operations, which may result in the requirement for production support seven days a week, twenty-four hours a day. 2.1.2. Monthly Volume Summaries. Supplier will prepare periodic summary reports showing quantities of FDSs and Modules projected by Applied for manufacture by Supplier (the "Monthly Volume Summaries"), and Supplier will retain a copy or electronic record of at least one (1) Monthly Volume Summary for each month during the term of this Agreement. Supplier will retain such copies and records for audit purposes for a minimum of twelve (12) months following the end of the month for which the respective Monthly Volume Summary was prepared. All of Applied's SPRs and other reports regarding Items or Applied Systems and the information provided by Applied in such SPRs and reports are Applied Confidential Information, to be used only by Supplier to meet its obligations to Applied under this Agreement and treated by Supplier as Confidential Information of Applied. The Monthly Volume Summaries are Confidential Information of each of Applied and Supplier to the extent of their respective Confidential Information included in, or used in the preparation of, any Monthly Volume Summary. * Material has been omitted and filed separately with the Commission. 15 CONFIDENTIAL TREATMENT REQUESTED 2.1.3. Manufacture and Delivery. Supplier will manufacture, provide, sell and deliver all Items to Applied for which an Authorized Demand Signal has been issued and accepted or deemed accepted. Supplier will deliver all such Items to the locations, in the quantities, and at the times specified in or determined from the applicable Authorized Demand Signal, as accepted or deemed accepted, as such Authorized Demand Signal is modified pursuant to this Agreement and as otherwise required by a controlling provision of this Agreement. 2.1.3.1. Delivery Mechanics. The specific mechanics and requirements for delivery of Items to Applied are set out in Attachment 3, and other delivery and transportation terms and requirements are set out in Section 2.10.3. Applied and Supplier may provide, by subsequent written agreement, that Supplier shall manufacture and deliver Items on a lean manufacturing system; if so, the requirements and specific mechanics to be followed for lean manufacturing shall be as shown in Attachment 3, subject to such modifications as may be mutually agreed at the time. 2.1.3.2. Delivery Dates. Supplier shall deliver each Item to Applied on its Committed Delivery Date, as determined under Section 2.1.5.2, as the same may be modified pursuant to or as provided by Section 2.1.5.3 (or Section 2.1.4) or extended pursuant to Section 4.2.4(b). Supplier may make actual delivery of an Item no more than three (3) Business Days prior to the Committed Delivery Date; unless an earlier actual delivery date is permitted pursuant to Section 2.5.3. Delivery shall not be made after an Item is cancelled as provided in this Agreement, except as provided in Section 2.3.3(a). Supplier shall use all commercially reasonable efforts to make delivery of an Item on a date requested by Applied pursuant to Section 2.1.4.4. If Items are purchased under a Blanket Order (Bus Route) procedure, Items under the Blanket Order procedures shall be delivered at the date, time and location specified in the applicable Bus Route delivery requirements. The provisions of Section 2.1 shall control over provisions of Attachment 3 with regard to determination of actual and permitted dates of delivery. 2.1.4. Change in Delivery Date. 2.1.4.1. Applied may request Supplier to accelerate the manufacture, completion and delivery of any Item to a date other than the Committed Delivery Date then established under Section 2.1.5 below. A request for accelerated delivery shall be issued by a written or electronic record transmitted to Supplier to the attention of the Customer Service Manager or Director of Operations (including Senior Director of Operations) at the affected facility. A request for accelerated delivery may propose modification of the delivery date of one or more scheduled Items. 16 CONFIDENTIAL TREATMENT REQUESTED 2.1.4.2. Supplier will respond to the request for accelerated delivery within forty-eight (48) hours (measured during Business Days and under prevailing Pacific Time), after its receipt of the request. Supplier will include in its response the following: changes in price for accelerated manufacture, completion and delivery; impact of requested accelerated manufacture, completion and delivery on other Items for which an Authorized Demand Signal has been issued or which are listed on the most recent SPR; additional NSR or CCR information required; and limitations or requirements applicable to the response. Upon request by either party, Applied and Supplier will consult regarding the request for accelerated delivery during such forty-eight (48) hour period to facilitate Supplier's response and to resolve questions as to the request or response. 2.1.4.3. Promptly upon receipt of Supplier's response to the request for accelerated delivery, Applied will review such response and consult with Supplier regarding any additional information needed by Applied or Supplier. Upon agreement of the parties pursuant to such request and response, Applied shall issue a revised Authorized Demand Signal and include in such revised Authorized Demand Signal the new Committed Delivery Date and all changes in price or other cost, established in accordance with the request and response. 2.1.4.4. A request for a change accelerating delivery by three (3) Business days or less from the applicable Committed Delivery Date is not an accelerated delivery subject to this Section, and the Contract Price for the Item will not (due to the acceleration of delivery) be changed. Likewise, the Committed Delivery Date shall not be deemed to be altered, unless otherwise expressly agreed, pursuant to a request for accelerated delivery of three (3) Business days or less. 2.1.5. Orders for Items. Orders for Items may be issued by Applied under the following methods of ordering: Bus Route or Blanket Order: If Bus Route Orders apply, then Applied will send via daily EDI transmission an Authorized Demand Signal to Supplier containing Applied's material requirements for Items, which will be organized according to part numbers and will represent Applied's daily purchase from Supplier. Unless otherwise agreed by Applied and Supplier by written amendment to this Agreement, the Blanket Order or Bus Route method shall not be used for the ordering and delivery of Items. Purchase Order: As needed by Applied, Applied will issue Authorized Demand Signals for one or more Items to Supplier under the procedures set out in Section 2.1.5.1. Each Authorized Demand Signal shall apply to the particular Item(s) specified in that signal. Authorized Demand Signals for orders by Applied under this Agreement may be issued by Applied using any of the methods provided for in Section 2.1.5.1. 2.1.5.1. Authorized Demand Signals. 17 CONFIDENTIAL TREATMENT REQUESTED Each Authorized Demand Signal issued by Applied constitutes Applied's offer to purchase from Supplier, in accordance with and subject to this Agreement, the Item(s) identified in such Authorized Demand Signal. Supplier agrees that (subject to the refusal terms of this Agreement and to Section 4.11 of this Agreement) it will accept the Authorized Demand Signals issued by Applied and sell, provide and deliver, in accordance with and subject to this Agreement (including delivery in accordance with provisions regarding Committed Delivery Date), all Items for which an Authorized Demand Signal is accepted or deemed accepted by Supplier. Issuance of a Purchase Order as an Authorized Demand Signal may be made by e-mail transmission or by facsimile transmission, or, if such transmission services are not available, by mail or hand delivery, and shall be effective when transmitted or delivered to Supplier's Customer Service Manager - Austin, or Customer Service Manager - Milpitas, as appropriate. Issuance of an Authorized Demand Signal to Supplier through website posting by Applied and acceptance of such posted Authorized Demand Signals is effective between the parties as provided in other provisions below in this Section 2.1.5.1. A. Issuance of Authorized Demand Signal. 1. VMO or Pilot FDSs, NSOs, and Modules. An Authorized Demand Signal for Volume Manufacturing FDSs, Pilot Manufacturing FDSs, NSOs or Modules is issued by Applied posting, at the Applied website designated for Supplier's access (or, at such times that website access is unavailable, by transmission by e-mail or facsimile to, or other delivery to, Supplier's Customer Service Manager - Austin or Milpitas, as appropriate), an SSR, NSR, or equivalent spreadsheet, report or record of basic FDS or other Item Specification, which identifies the FDS or other Item(s) being ordered and includes the Applied Project Number or Applied "Spec Id" number. If Applied elects to provide an Applied Configured BOM pursuant to Section 2.1.5.1.A.4.c below (Coordination as to Services), Applied shall issue (or make available by electronic means) the Applied Configured BOM as part of the Authorized Demand Signal. The SSR, NSR, or equivalent spreadsheet, report or record so posted or furnished (and including an Applied Configured BOM if such is provided) is an "Authorized Demand Signal." Applied may also order Modules through an RFP/RFQ process and issuance of a Purchase Order, as provided in Section 2.1.5.1.A.3 below. 2. R&D. An Authorized Demand Signal for Items for Applied's R&D purposes is issued by Applied in either of the following ways: (a) for FDSs, Modules and NSOs that do not require Design Services or Development Services, by issuing (or furnishing) an SSR, NSR or equivalent spreadsheet, report or record of basic 18 CONFIDENTIAL TREATMENT REQUESTED Specification to Supplier in the manner provided in Paragraph A.1 above; or (b) for any Item to be manufactured in connection with or as a deliverable under a Design Services Agreement or Development Services Agreement, by issuance to Supplier of the Purchase Order that is a part of the relevant Design Services Agreement, or the Purchase Order for the Development Services Agreement, in each instance based on Supplier's proposals or quotations received by Applied through an RFP/RFQ process and as agreed by the parties pursuant to the RFP/RFQ process. The SSR, NSR or equivalent spreadsheet, report or record, or Purchase Order, for FDS or other Items ordered for R&D purposes is an "Authorized Demand Signal." Authorized Demand Signals for R&D purposes shall be issued by electronic transmission (including e-mail or facsimile transmission), or by delivery of a written Purchase Order to Supplier to the attention of Supplier's Customer Service Manager -Milpitas. If an Item is to be manufactured in connection with or as a deliverable in connection with Design Services or Development Services, the Authorized Demand Signal must include the Purchase Order for such Services and the Authorized Demand Signal is not effective until that Purchase Order is accepted or deemed accepted. 3. Spares and Certain Modules. An Authorized Demand Signal for Spares or for Modules not ordered through the issuance and acceptance of an SSR ("Non SSR Modules") is issued by Applied when it issues a Purchase Order to Supplier, to the attention of Supplier's Customer Service Manager - Warranty based on Supplier's proposals or quotations received by Applied through the RFP/RFQ process. A Purchase Order so issued is an "Authorized Demand Signal." A Purchase Order issued as an Authorized Demand Signal for Spares or Non SSR Modules, issued pursuant to an RFP/RFQ process and in conformity with Supplier's proposal or quotation (or as agreed by the parties pursuant to such process), is deemed accepted on issuance. 4. Services. An Authorized Demand Signal for Services is issued as follows: a. Configuration Engineering Services, CES Services and CCR Services. (i) For Configuration Engineering Services, by issuing the SSR for the Applied System for which Configuration Engineering is to be performed, or, as to Configuration Engineering Services that are CCR Services incident to a CCR, by issuing the CCR. 19 CONFIDENTIAL TREATMENT REQUESTED (ii) For CES Services, by issuing an NSR incident to an SSR, and for CES Services that are CCR Services incident to a CCR, by issuing the CCR. Issuance of an NSR, SSR, CCR or Purchase Order as to Services under this Section 2.1.5.1.A.4.a shall be made as follows: with respect to VMO or Pilot FDSs, NSOs or Modules, by posting electronic record of the NSR or SSR on the Applied website designated by Supplier's access (or as otherwise provided by Section 2.1.5.1.A as to Purchase Orders, and in other circumstances as there provided for), or, with respect to NSRs, SSRs or Purchase Orders for Items for which posting is not used, by e-mail or facsimile transmission (or as otherwise provided by Section 2.1.5.1.A as to Purchase Orders, and in other circumstances as there provided for), or with respect to CCR Services, by e-mail or facsimile transmission, or by hand delivery (if e-mail or facsimile transmission is not available), of the CCR to Supplier, to the attention of the Supplier contact person to whom the initial order to which the CCR relates was issued. b. Other Services. All other Services (including NPT Services) shall be ordered through a Request for Proposal/Request for Quotation process, pursuant to which the Authorized Demand Signal will be an Applied Purchase Order issued in accordance with this Section 2.1.5.1.A.4.b. Design Services or Development Services shall only be ordered through an RFP/RFQ process and by issuance of an Applied Purchase Order conforming to Supplier's response to the RFP/RFQ (or as is otherwise agreed by the parties pursuant to the RFP/RFQ process). If Item(s) are to be manufactured in connection with, or as a deliverable under, a Design Services Agreement or Development Services Agreement, the Purchase Order that is a part of the Design Services Agreement, or that is issued for the Development Services Agreement, must also include the order for such Item(s). Further, a Purchase Order for Design Services or for Development Services shall also be issued in accordance with the IPA (including provisions of the IPA applicable to a DSA or DVA.) The IPA (and any DVA, as applicable) shall control and have priority in the event of conflict with this Agreement in accordance with Section 1.3.2.2 above. c. Coordination as to Services. (i) Applied may, at the time it issues the Authorized Demand Signal for an Item, elect to provide to Supplier the Configured BOM for the Item 20 CONFIDENTIAL TREATMENT REQUESTED that would otherwise be prepared by Supplier as part of its Configuration Engineering Services (the "Applied Configured BOM"). If Applied elects to provide an Applied Configured BOM for an Item, the Authorized Demand Signal for the Item will be the SSR, NSR or equivalent spreadsheet, report or record plus the Applied Configured BOM issued with and included in the SSR, NSR or equivalent document. If Applied does not issue an Applied Configured BOM as part of its Authorized Demand Signal in accordance with this Section 2.1.5.1.A.4.c, then Supplier shall perform those Services that are ordered pursuant to the Authorized Demand Signal as determined under other provisions of Section 2.1.5.1.A.4, and Applied shall pay for Services so performed at the rates applicable under the cost model (Attachment 1). (ii) Applied shall be responsible for engineering services in the preparation of an Applied Configured BOM. Supplier shall not be required to perform or provide engineering review of an Applied Configured BOM prior to commencing the manufacture of the Item. (iii) Supplier will advise Applied of defects in an Applied Configured BOM that are identified by Supplier in the manufacture of the Item. If an Applied Configured BOM is defective: (a) Supplier is excused from compliance with the Committed Delivery Date applicable at the time the defect in the Applied Configured BOM was identified; (b) Applied will re-engineer the Applied Configured BOM to correct the defect(s), or, upon mutual written agreement pursuant to an RFP/RFQ process (which includes e-mail and facsimile records of the agreement), Supplier will re-engineer the Applied Configured BOM to correct the defect(s) pursuant to the Purchase Order issued through the RFP/RFQ process; (c) Changes in Piece Parts for an Item that result from re-engineering of an Applied Configured BOM pursuant to this Section 2.1.5.1.A.4.c. (excluding changes involving digital line-side configurable MFCs) shall be treated as *s in accordance with Section 2.8 of this Agreement if occurring within the period covered by Section 2.8.3.1; (d) Applied and Supplier shall negotiate in good faith to determine an adjusted Committed Delivery Date; and (e) Appropriate written modifications of the Committed Delivery Date shall be made upon mutual agreement. * Material has been omitted and filed separately with the Commission. 21 CONFIDENTIAL TREATMENT REQUESTED (iv) Supplier shall review the documentation and information provided as part of each Authorized Demand Signal and shall coordinate its Services so that Supplier provides or performs those Services necessary or appropriate under the Authorized Demand Signal and its related documentation or information. (v) The parties may, by mutual written agreement, amend the scope of or charges for Services for repeat build Items. d. Quotation of CES Charges. (i) Applied may require that Supplier provide "Quoted CES Charges" (as such term is defined below) as to one or more product line(s), type(s) or model(s) of Applied Systems. The Applied SAT Team Lead for Supplier shall notify Supplier's Engineering Manager that Quoted CES Charges are required, and such notice shall specify the Applied product line(s), type(s) or model(s) of Applied Systems for which Quoted CES Hours are required, the date on which Supplier shall commence providing such quotes, and the person at Applied to whom the Quoted CES Charges shall be sent. Quotations setting out Quoted CES Charges shall be provided by Supplier by e-mail or facsimile transmission to the person so identified. (ii) "Quoted CES Charges" means the charges for CES Services that Supplier is to perform pursuant to an Authorized Demand Signal for CES Services under Section 2.1.5.1.A.4.a that are in excess of 20 hours as to a Volume Manufacturing FDS or 40 hours as to a Pilot Manufacturing FDS, or such higher reportable charges threshold as may be specified in the notice requiring Supplier to provide quotations. Supplier may charge, in addition to Quoted CES Charges, for two (2) hours of engineering services for the release of a Configured BOM through Applied's ECO procedures applicable to an Item when Supplier performs Configuration Engineering Services or CCR Services as to the Configured BOM, without having to include such charges for release of the Configured BOM in its quote. (iii) If Quoted CES Charges are required with respect to a Volume Manufacturing FDS or Pilot Manufacturing FDS for which the Authorized Demand Signal (for the FDS and related CES Services) is the NSR incident to the primary SSR (a "Conditional ADS") Supplier shall accept or refuse the Conditional ADS within the time period otherwise applicable to that Authorized Demand Signal. The obligations of Supplier and Applied with respect to a Conditional ADS upon its acceptance under other provisions of Section 2.1.5.1 are, however, subject to subsequent agreement on Quoted CES Charges, as provided in this Section 2.1.5.1.A.4.d. Within two (2) Business Days after the date of acceptance of a Conditional ADS, Supplier shall provide its quotation of hours and amounts to be charged for Quoted CES Services to Applied. Until 22 CONFIDENTIAL TREATMENT REQUESTED Applied accepts (or is deemed to have accepted) the time and amount for Quoted CES Services shown on the quotation of Quoted CES Charges, the affected Conditional ADS shall be subject to Applied's acceptance of the quote for Quoted CES Services and until such acceptance the Conditional ADS shall not be binding as to Applied; Supplier, however, shall not revoke its acceptance of the Conditional ADS or withdraw its quote of Quoted CES Charges. (iv) Applied may reject or accept a quotation of Quoted CES Services by e-mail, facsimile or other record or writing (but not by telephone or voice-mail) at any time prior to the time acceptance is deemed to occur by the following sentence. If a quote for Quoted CES Services is not rejected by Applied within two (2) Business Days after the quote is issued to Applied, then the quote for Quoted CES Services shall be deemed accepted by Applied. Upon Applied's acceptance of the quotation of Quoted CES Charges, the related Conditional ADS Demand Signal becomes binding on and agreed to by both Supplier and Applied at such time. The Committed Delivery Date shall be determined based on such date of acceptance of the quotation of Quoted CES Services. Applied's notice of rejection of Quoted CES Services shall be issued to Supplier's Engineering Manager. If Applied rejects a quote for Quoted CES Services, then Supplier and Applied shall promptly negotiate as to the scope, time and costs for Quoted CES Services. If the parties agree on the scope, time and costs for Quoted CES Services after a quote is rejected, then Supplier shall issue a revised quote for Quoted CES Services and upon Applied's issuance of an acceptance of such revised quote, the related Authorized Demand Signal shall be binding on and is agreed to by both Supplier, and the Committed Delivery Date shall be determined based on the date of acceptance of the revised quote by Applied. (v) Except in those instances in which a quotation of Quoted CES Charges applies and has been accepted, CCR Services are not subject to the procedures for quotation and acceptance in this Section 2.1.5.1.A.4.d. If, after a quote of Quoted CES Charges has been accepted, Applied changes the relevant SSR or NSR and such change affects CES Services previously quoted and accepted, then (a) Supplier shall promptly requote its Quoted CES Charges to include additional CES Services (or CCR Services) resulting from the changes in SSR or NSR, (b) Applied shall promptly accept or reject the Quoted CES Charges, as so requoted, (c) requoted Quoted CES Charges accepted by Applied shall become part of the Contract Price of the Item(s) affected; and (d) the parties shall negotiate in good faith to determine an adjusted Committed Delivery Date (if any) due to changes in the SSR or NSR that adversely affect Supplier's ability to meet the otherwise applicable Committed Delivery Date. 23 CONFIDENTIAL TREATMENT REQUESTED (vi) A charge for up to two (2) hours for engineering services for release of a Configured BOM through Applied's ECO procedures applicable to the Item may be made in addition to Quoted CES Services. B. Acceptance and Refusal. Each Authorized Demand Signal issued by Applied in compliance with Section 2.1.5.1.A and not timely refused by Supplier as provided by this Section 2.1.5.1.B is agreed to have been accepted and is effective between Applied and Supplier upon the expiration of the period specified for Supplier's refusal. 1. VMO or Pilot FDSs, NSOs and Modules. Supplier may refuse an Authorized Demand Signal issued by Applied for purchases within the scope of Paragraph A.1. (a) for error by Applied in the SSR, CCR, or NSR (or equivalent document), (b) as exceeding Supplier's capacity or flexibility requirements determined under Section 2.5 (except as to CCRs), or (c) for failure to provide a required NSR or to provide an Applied Configured BOM that should have been part of the Authorized Demand Signal under Section 2.1.5.1.A.4.c, but not for other reasons. Supplier shall effect a refusal to accept an SSR, CCR, or NSR (or equivalent document) by posting its refusal on Supplier's Master Production Schedule document as maintained on an Applied server, or (if server access is unavailable) by e-mail or facsimile transmission to the Applied purchasing representative for the Applied organization issuing the SSR, CCR, or NSR. Refusal shall be made within ninety-six (96) hours (measured during Business Days and under prevailing Pacific Time) after Applied's issuance of the Authorized Demand Signal for orders in this category. 2. R&D. Supplier may refuse an Authorized Demand Signal issued by Applied initiated by the SSR process for R&D purchases within the scope of Paragraph A.2 for (a) error by Applied in the SSR or NSR (or equivalent document), (b) incomplete design or unresolved manufacturing issues, (c) as exceeding Supplier's capacity or flexibility requirements under Section 2.5 below, or (d) failure to provide a required NSR, but not otherwise. Supplier shall effect a refusal to accept an R&D SSR order (or equivalent) by posting its refusal on Supplier's Master Production Schedule document as maintained on an Applied server, or (if server access is unavailable) by e-mail or facsimile transmission to the purchasing representative for the Applied organization issuing the Authorized Demand Signal. Refusal shall be made within five (5) Business Days after posting of the R&D SSR. A Purchase Order issued as an Authorized Demand Signal for an R&D purchase pursuant to an RFQ/RFP process and in conformity with the proposal or quotation received from Supplier and the requirements of Section 2.1.5.1.A.2 where applicable (or as agreed by the parties pursuant to such RFP/RFQ process) is deemed accepted upon its issuance. 24 CONFIDENTIAL TREATMENT REQUESTED 3. Services. With respect to those Standard Services that are required for or are incident to the manufacture of an Item or Items for which the Authorized Demand Signal is an SSR or NSR (or equivalent spreadsheet or record), the corresponding Authorized Demand Signal for Standard Services is accepted or deemed accepted upon and by the acceptance or deemed acceptance of the SSR or NSR. An Authorized Demand Signal for CCR Services is deemed accepted upon and by acceptance or deemed acceptance of the CCR under Section 2.1.5.1.B.1. A Purchase Order constituting an Authorized Demand Signal for other Services, issued in accordance with Section 2.1.5.1.A.4, is deemed accepted upon issuance, whether for Services required for or incident to manufacture of an Item or Items, or otherwise. 4. Assurance to Supplier. In addition to the matters set out above in this Section 2.1.5.1.B as grounds for refusal of an Authorized Demand Signal, Supplier may also refuse an Authorized Demand Signal in the circumstances allowed by Section 2609 of the UCC. 2.1.5.2. Committed Delivery Dates. A. Except as provided for in Paragraph B, C or D below in this Section 2.1.5.2, the Committed Delivery Date for Volume, Pilot and R&D Items shall be determined in accordance with applicable cycle times in effect at the time the Authorized Demand Signal is accepted or deemed accepted under the following schedule: Volume: From the date of acceptance or deemed acceptance of Authorized Demand Signal *. Pilot: From the date of acceptance or deemed acceptance of Authorized Demand Signal *. R&D: From the date of acceptance or deemed acceptance of Authorized Demand Signal when issued by SSR, *; and, for R&D Items for which a Purchase Order is issued, * from the date of issuance of the Purchase Order, unless another date is specified in the Purchase Order. B. The Committed Delivery Date for NSO Items shall be * from the date of acceptance or deemed acceptance of the Authorized Demand Signal; the Committed Delivery Date for Modules shall be * from the date of acceptance or deemed acceptance of the Authorized Demand Signal. * Material has been omitted and filed separately with the Commission. 25 CONFIDENTIAL TREATMENT REQUESTED C. Services for Items ordered through an SSR, NSR, CCR or equivalent process shall be provided and completed as required to achieve the applicable Committed Delivery Date for the Items. Services for which the Authorized Demand Signal is a Purchase Order (or DSA or DVA, if applicable) shall be provided in accordance with the applicable Purchase Order (or DSA or DVA, if applicable) and its Committed Delivery Date or other delivery or completion requirements of such Purchase Order (or DSA or DVA, if applicable). D. For any Items not otherwise governed by the preceding terms for which the initial Authorized Demand Signal is an Applied Purchase Order, the Committed Delivery Date shall be the delivery date set out in such Purchase Order. E. By mutual written agreement, the parties may amend the cycle times provided in this Section 2.1.5.2 with respect to one or more Item(s). The parties will consult together, identify and, upon mutual written agreement, implement reductions in cycle time for repeat build Item(s). 2.1.5.3 Modification of Committed Delivery Dates. A. For Items for which the Committed Delivery Date is established pursuant to Section 2.1.5.2.A or B, the Committed Delivery Date may be changed only with Supplier's approval; provided that any Committed Delivery Date may be changed, without Supplier's approval, as provided in Section 2.3.2. The delivery date for an Item as modified as provided in Section 2.3.2 shall become the "Committed Delivery Date" for such Item. B. For Items for which the Committed Delivery Date is established by a Purchase Order issued under Sections 2.1.5.1 and 2.1.5.2, the Committed Delivery Date shall be modified only through issuance of a revised Purchase Order, or pursuant to Section 2.3.2. C. The Committed Delivery Date for an Item may also be modified pursuant to Section 2.1.4 or Section 2.1.5.1.A.4.c. or d. 2.1.6. Electronic Commerce. For transactions conducted by electronic means (other than facsimile, internet or e-mail transmission), Supplier is required to communicate with Applied using the then current EDI ANSI standards and encouraged to use either GEIS, EDICT or other approved software. Facsimile, internet and e-mail transmissions shall be made using commercially available systems compatible with Applied's e-mail, internet and facsimile applications. The parties agree that they shall conduct transactions hereunder by various electronic means and will rely upon electronic means to issue Authorized Demand Signals, to enter into purchase and sale transactions, and to exchange delivery and order information under this Agreement. To the extent electronic means are not accessible or become otherwise 26 CONFIDENTIAL TREATMENT REQUESTED unavailable due to technical difficulties or due to the effect of any law or regulation governing electronic transactions (collectively "Unavailability"), the parties agree: (1) that any transactions entered into, and any delivery or order information received, by electronic means prior to the Unavailability date will remain valid, and Supplier and Applied shall honor their respective obligations; and (2) that they will continue to conduct their transactions, to the extent of the Unavailability, by other than electronic means, such as written form or fax as contemplated in Section 2.1.5 of this Agreement. This Agreement shall not require all transactions to be conducted by electronic means. If required by applicable law, a separate agreement concerning electronic transactions between Applied and Supplier will set out other terms that will control as to certain aspects of electronic transactions. 2.1.7. Pro Forma. 2.1.7.1. Estimated Pro Forma. No later than three (3) Business Days prior to Supplier's shipment of each Item to Applied for which the Contract Price is determined under Attachment 1, Supplier shall transmit its preliminary "pro forma invoice" (a "Pro Forma") for such Item. The preliminary Pro Forma shall identify the Item(s) covered, shall calculate the Contract Price by applying the appropriate elements of the cost model set out in Attachment 1, and shall specify separately any charges (stated separately as to each applicable category) for *s, Reconfigure Items, Relabel Items, Restock Items (as such terms are defined below), and any other charges included as applicable to the Item(s) but not provided for in Attachment 1. The preliminary Pro Forma shall be delivered by e-mail (or upon request by Applied, by fax or hand delivery) to the finance representative of the Applied organization issuing the Authorized Demand Signal, and to such other persons as Applied may reasonably request. The preliminary Pro Forma shall identify charges for Standard Services by category. 2.1.7.2. Final Pro Forma. At the time of Supplier's shipment of each Item to Applied for which the Contract Price is determined under Attachment 1, Supplier shall transmit to Applied its final Pro Forma for such Item. The final Pro Forma shall contain all information, costs and charges applicable to the Item, including all elements described in Section 2.1.7.1, and shall be delivered in the manner and to the persons specified in Section 2.1.7.1. The final Pro Forma shall further identify separately for each category of Standard Services the charges for that category of Service and the portions of such charges attributable to Configuration Engineering Services, CES Services, and engineering for the release of the Bill of Materials for the Item through Applied's ECO procedures, as applicable. * Material has been omitted and filed separately with the Commission. 27 CONFIDENTIAL TREATMENT REQUESTED 2.2. Definition of Terms for Certain Provisions Affecting Prices or Charges. 2.2.1 The definitions set out in this Section shall apply in determining charges, credits and payments under Sections 2.8 (*), 2.14 (Provisions for Reconfiguration or Restocking), 3.1.4 (Further Agreements as to Pricing) through 3.1.6 (Adjustment for *), and 4.11 (Wind Down Provisions). Each of these sections will provide further definitions or procedures that will control the particular matters to which it applies. 2.2.2 For the purposes of Section 2.2 and the sections identified in Section 2.2.1, Piece Parts (including MFCs) installed on or removed from an Item are classified in one of the following categories: i) NonReusable Materials ii) NonConsumable Materials iii) NonConsumable MFCs iv) Consumable Materials v) Consumable MFCs vi) Floor Stock Scrap. 2.2.3 The following provisions and definitions apply generally for the purposes of Section 2.2 and the Sections indicated above: (a) "NonReusable Materials" means those Piece Parts, excluding Floor Stock Scrap, used in the manufacture of an Item that are (i) missing or damaged at the time of inspection prior to disassembly and teardown (as Reconfigure or Restock Items only), (ii) damaged in the course of disassembly and teardown when using commercially reasonable practices, or (iii) obsolete and no longer meet current revision levels of applicable specifications. (b) "Floor Stock Scrap" means those Piece Parts removed from an Item in the course of disassembly and teardown that have a unit cost of $10.00 or less. (c) "Consumable Materials" are all recoverable Piece Parts for an Item other than NonReusable Materials, NonConsumable Materials, NonConsumable MFCs and Floor Stock Scrap. (d) "NonConsumable Materials" consists of Bus Route NonConsumable Materials, and Spot Buy NonConsumable Materials. * Material has been omitted and filed separately with the Commission. 28 CONFIDENTIAL TREATMENT REQUESTED (e) "Bus Route NonConsumable Materials" are those * Piece Parts for an Item that * on a Bus Route basis and have been used in, or delivered to Supplier for, the manufacture of the Item at the Relevant Date that are * (x) Supplier's * for such Piece Parts over the * following the Relevant Date *. (f) "Spot Buy NonConsumable Materials" are those * Piece Parts for an Item that * on a Spot Buy basis and have been used in, or delivered to Supplier for (or for which Supplier has issued its non-cancelable purchase order), the manufacture of the Item at the Relevant Date, that are * (x) Supplier's * for such Piece Parts over the * following the Relevant Date, *. (g) "NonConsumable MFCs" are those MFCs (excluding all * configurable MFCs) that have been used in, or delivered to Supplier for (or for which Supplier has issued its non-cancelable purchase order), the manufacture of the Item at the Relevant Date, and that are in excess of Supplier's then applicable * (calculated separately for Spot Buy and Bus Route MFCs using the methodology for Spot Buy NonConsumable Materials and for Bus Route NonConsumable Materials) for such MFCs current at the Relevant Date. NonConsumable MFCs shall be handled only under provisions for NonConsumable MFCs, and not through charges for NonConsumable Materials. (h) Supplier's "Current Average Cost of Materials" shall be the average cost to Supplier calculated with respect to quantities * and taking into account the * of the affected Piece Part under the method employed by Supplier on the Effective Date and in accordance with generally accepted accounting principles in effect in the United States of America and consistently applied. The "Current Average Cost of Materials" as so determined is subject to adjustment under Sections 3.1.5 and 3.1.6 of this Agreement. (i) Supplier's "Standard Cost of Materials" is the materials cost charged by Supplier to Applied for Piece Parts incorporated in Items sold to Applied and conforming to the schedule or database of materials costs then in effect and maintained by Supplier on its Oracle (or other enterprise accounting system) database. The "Standard Cost of Materials" as so determined is subject to adjustment under Sections 3.1.5 and 3.1.6 of this Agreement. (j) "MRP Demand" means the demand for an affected Piece Part under the manufacturing requirements planning standards employed in the industry. (k) "Relevant Date" means the following: 1) For * charges (Section 2.8.3), the date on which the * is requested by Applied. * Material has been omitted and filed separately with the Commission. 29 CONFIDENTIAL TREATMENT REQUESTED 2) For Restock Items and Reconfigure Items (Section 2.14), the date on which the Item is classified by Applied as a Restock Item or Reconfigure Item. (l) Each Piece Part shall be included in only one category of charge. (m) Supplier shall return to Applied's Asset Recovery Management organization, or destroy if so instructed by Applied, all Piece Parts for which a cancellation charge is made, except for Floor Stock Scrap and NonConsumable MFCs (to be retained by Supplier). 2.3. Cancellation of Items. 2.3.1. Items Subject to Cancellation. Applied may cancel Items in accordance with this Section 2.3 at any time by written or electronic notice (but not telephone or verbal notice) to Supplier's Customer Service Manager (Austin or Milpitas, as applicable) as designated in Section 1.2, between (a) the date on which Applied's Authorized Demand Signal has been accepted or deemed accepted and (b) the Committed Delivery Date. Applied may withdraw order(s) for Item(s) set out in Authorized Demand Signal(s) issued, but not accepted or deemed accepted, at any time prior to acceptance or deemed acceptance. 2.3.2. Deferral. Without cancellation of an Item, Applied may defer the delivery date of any Item(s) for a period of up to * following the initially applicable Committed Delivery Date *. To defer delivery, Applied shall give notice of deferral, to the Supplier contact person and in the manner provided under Section 2.3.1, no later than * before the Committed Delivery Date in effect at the time of deferral; provided that the cumulative period of deferral as to each Item shall not exceed * from the initially applicable Committed Delivery Date. In exercising its rights of deferral under this Section 2.3.2, Applied will consult with Supplier with respect to the date that will become the new Committed Delivery Date resulting from deferral so that, to the extent consistent with Applied's requirements for manufacturing and shipment of Applied Systems, such new Committed Delivery Date is not unreasonably burdensome to Supplier, taking into account the available manufacturing capacity and flexibility capabilities of Supplier through the new Committed Delivery Date. Applied shall, however, be entitled to set the new Committed Delivery Date as required for its timely manufacturing and shipment of Applied Systems. * Material has been omitted and filed separately with the Commission. 30 CONFIDENTIAL TREATMENT REQUESTED 2.3.3. Cancellation. If Applied cancels an Item (including as a cancellation any Item as to which Applied does not initiate delivery of an Item within the * period provided by Section 2.3.2 following a deferral), the costs, expenses and charges arising from such cancellation (including failure to initiate delivery) shall be governed by the following terms: (a) If cancellation occurs less than * calendar days before the Committed Delivery Date, then Applied shall purchase the Item at its *, the Item shall be delivered to Applied only if requested by Applied, and the Item may be classified by Applied as a * Item under Section 2.14 below. Applied shall have no obligation to Supplier arising from cancellation except those under this Section 2.3.3(a). (b) All costs, expenses and charges for cancellation of Items, other than cancellations to which Section 2.3.3(a) applies, are accounted for and included in the * and shall be the sole responsibility of Supplier. Applied shall have no obligation to Supplier arising from cancellations to which Section 2.3.3(a) does not apply. 2.3.4. Applicability; Payment. (a) If an Item that has been deferred under Section 2.3.2 is subsequently cancelled, Section 2.3.3(a) applies if either (a) the cancellation occurs * before the Committed Delivery Date as then applicable following deferral, or (b) the Item was initially deferred * prior to the original Committed Delivery Date. (b) The Pro Forma for an Item purchased pursuant to Section 2.3.3(a) shall be issued by Supplier to Applied within * after the date on which cancellation becomes effective, and such purchase amount shall be payable (and subject to prompt payment discount) under the terms of Section 2.11. 2.3.5. Other Rights. Applied's rights of cancellation are in addition to, and shall be independent of its rights under, and the limitations of, Section 2.14 of this Agreement, except as to Items that become classified under Section 2.14 pursuant to Section 2.3.3(a). 2.3.6. Services. If Services for which a Purchase Order was issued are cancelled, and such cancelled Services are not CES Services, Configuration Engineering Services or CCR Services performed on a cancelled Item, Supplier shall charge for its Services actually performed through the date of cancellation, at rates and in accordance with the applicable Purchase Order. * Material has been omitted and filed separately with the Commission. 31 CONFIDENTIAL TREATMENT REQUESTED 2.4. Response Time, Turnaround and Implementation Time. This Section establishes the methods by which Applied will communicate its Production Issues to Supplier and the time periods for Supplier to respond and implement solutions. 2.4.1. Production Issues. A "Production Issue" is an interruption or stoppage of any of Applied's manufacturing operations in the United States of America (as, or equivalent to, a "line down" situation) that results from a failure of an Item to conform to warranty, from other defect in or damage to an Item delivered by Supplier, a failure or interruption in the timely delivery of Items by Supplier on Committed Delivery Dates, or from other failure in Supplier's performance under this Agreement. Applied shall notify Supplier of a Production Issue by telephone, cell-phone or pager to the following persons: Supplier's Customer Service Manager at Austin or Milpitas, as appropriate, using the contact information set out in Section 1.2.1. Supplier shall contact the Applied originator of a notice of Production Issue within * of the issuance by Applied of the notice of a Production Issue. This notice and response procedure is not subject to Section 1.2.2. 2.4.2. Turnaround and Implementation Time. Supplier will, in the case of a Production Issue, repair, replace and correct Item(s), deliver (or restore delivery of) Items, and otherwise resolve and correct such Production Issue in accordance with the following requirements: (a) Supplier shall commence its repair, replacement, correction or solution of a Production Issue within one (1) hour after its response to Applied and shall complete the repair, replacement, correction or solution within the time period necessary to meet Applied's production requirements, not to exceed * after its response to Applied, unless a longer time is required for completion in accordance with best practices in the industry. (b) Supplier shall provide timely status reports to Applied regarding the repair, replacement, correction or solution to assist Applied in managing its manufacturing operations affected by the Production Issue. 2.5. Capacity Planning and Flexibility Requirements. 2.5.1 Capacity Planning. (a) Supplier will use commercially reasonable efforts to plan its manufacturing capacity, including materials, staff, engineering support, facilities, and other production factors in order to: * Material has been omitted and filed separately with the Commission. 32 CONFIDENTIAL TREATMENT REQUESTED have capacity adequate for projected quantities and projected delivery dates shown in Applied's SPR, as released to Supplier and as revised from time to time (and at least weekly); have additional capacity available to supply Items ordered through Purchase Orders as Authorized Demand Signals but not previously shown on the SPR provided to Supplier; and to implement adjustments in operations and manufacturing to comply with the flexibility requirements applicable under Section 2.5.2. (b) As part of its capacity planning, Supplier shall review with Applied's Supplier Performance Management organization and any Applied organization subsequently performing its functions (the "SPM") on a monthly basis (as part of its monthly performance review) Supplier's manufacturing capacity and Supplier's capability to increase such capacity when and as changes occur in Applied's manufacturing volumes and requirements. Supplier shall advise Applied at such monthly meetings of Supplier's manufacturing capacity as planned by Supplier under Section 2.5.1 (a) and, in consultation with the Applied SPM, determine appropriate changes in manufacturing capacity for periods covered in the monthly performance review (collectively, the "Capacity Projections") The Capacity Projections shall be made a part of the Supplier Performance Plan (Attachment 16) and shall provide capacity at least equal to the rolling * forecast of the then-current SPR for Items anticipated to be provided by Supplier. 2.5.2 Flexibility. In addition to manufacturing capacity planning under Section 2.5.1, Supplier shall also use commercially reasonable efforts to plan for and to implement manufacturing flexibility capabilities in addition to Supplier's manufacturing capacity. Supplier shall review such plans and capabilities with Applied's SPM at least monthly (as part of the monthly performance review activity) and, in consultation with the Applied SPM, establish manufacturing flexibility levels applicable to Supplier as part of the Supplier Performance Plan (Attachment 16) consistent with known or anticipated changes in Applied's manufacturing volumes, delivery dates and product requirements. Supplier's manufacturing flexibility levels shall at least allow for manufacturing volumes and output to * over Supplier's basic manufacturing capacity established and reported to Applied, from time to time, in accordance with Section 2.5.1 within a given * period. * Material has been omitted and filed separately with the Commission. 33 CONFIDENTIAL TREATMENT REQUESTED 2.5.3. Acceptance; Delivery. (a) Supplier shall not refuse to accept, on the basis of the quantity of Items involved, Authorized Demand Signals under Section 2.1.5.1 that are within current manufacturing capacities, production volumes, and operating levels or are within Capacity Projections or flexibility levels included in the Supplier Performance Plan. Supplier shall also advise Applied (upon request) regarding additional volumes of Items that are within increases in such capacities, volumes and levels, beyond the Capacity Projections and flexibility levels under the Supplier Performance Plan, that Supplier can achieve through use of commercially reasonable efforts. (b) If week to week variations in the quantities of Items deliverable under Authorized Demand Signals, together with changes in Committed Delivery Dates through deferral of Items pursuant to Section 2.3.3 cause the volumes of Items that are to be delivered in a weekly period to exceed Supplier's delivery volumes provided for by the Supplier Performance Plan and if Supplier is not able to complete and make delivery of the quantities solely due to such variations (and exclusive of any delivery volume limitations or other problems resulting from Supplier's failure or inability to achieve capacity and flexibility levels established for the affected periods under the Supplier Performance Plan), then Applied will allow Supplier to deliver Items that are affected by the excessive increase for that period up to a maximum of two (2) weeks in advance of the applicable Committed Delivery Dates. Such early delivery allowance shall be in effect only to the extent and for the period commercially necessary to enable Supplier to comply with the Committed Delivery Date(s) of Items exceeding its capacity and flexibility levels, and in no event later than the time revised capacity or flexibility requirements can be established on a commercially reasonable basis. This Section 2.5 does not alter the provisions of this Agreement in Section 2.3 (Cancellation of Items), Section 2.14 (Provisions for Reconfiguration or Restocking), or Section 2.8 (*). 2.6. On-Site Support Requirements. Supplier may be asked by Applied to provide appropriate or necessary personnel required to support on-site operations at Applied's facilities. On-site representatives will comply with all Applied facilities requirements. Applied, at its sole discretion, may require Supplier to execute an On-site Representative Agreement, in the form set forth in Attachment 18, and may require the On-site Representative to execute an NDA joinder in the form required by the On-Site Representative Agreement, prior to issuing a building badge to Supplier's representative(s) or permitting access to Confidential Information. Supplier agrees to notify Applied immediately of any changes in its staffing assignments involving those individuals with access to Applied's facilities or IS&T systems, applications or databases. * Material has been omitted and filed separately with the Commission. 34 CONFIDENTIAL TREATMENT REQUESTED In the event that Supplier's personnel will provide such support at the premises of a customer of Applied, Supplier agrees to comply with the requirements and restrictions imposed by such customer for access to its premises (in addition to the terms of any On-site Representative Agreement executed by Supplier). 2.7. [Omitted] 2.8. *. 2.8.1. Modifications and *s. In addition to its rights of cancellation under Section 2.3 and of relabeling, reconfiguration and restocking under Section 2.14, Applied shall have the right to modify the SSR or Specifications for Items after the issuance and acceptance of any Authorized Demand Signal and prior to the actual delivery of the Item. Changes initiated by Applied as to an Item through changes to an SSR or Specifications (including those initiated by Applied as ECOs) * covered by this Section 2.8 are * or "*s." 2.8.2. Scope of *s. An * includes only changes initiated by Applied * the * of an Authorized Demand Signal and excludes changes resulting from other requests for CES Services, CCR Services or Configuration Engineering Services, and design or engineering changes attributable to Supplier. Changes that involve * are not *s. 2.8.3. Charges for *s. Applied shall * for *s ("*") determined under the following terms: 1. If the * is requested * prior to the then applicable Committed Delivery Date, the * Charges shall be the *: Supplier's Standard Cost of Materials for Bus Route NonConsumable Materials, Supplier's Standard Cost of Materials for Spot Buy NonConsumable Materials, 70% of Supplier's Standard Cost of Materials for NonConsumable MFCs, and Supplier's Standard Cost of Materials for NonReusable Materials, applied to Piece Parts removed from the affected Item as a result of the *. * for materials resulting from an * shall be shown as a separate line item materials charge in Supplier's Pro Forma for the affected Item and become a part of the Contract Price for an Item. 2. If the * is requested * or more prior to the then applicable Committed Delivery Date, no * Charges shall apply. * Material has been omitted and filed separately with the Commission. 35 CONFIDENTIAL TREATMENT REQUESTED 3. Supplier shall also charge for, as a rate per hour charge in accordance with the terms of Attachment 1, but subject to the terms of Section 2.1.5.1.A.4.d as to "Quoted CES Charges" and Section 2.1.5.1.A.4.c as to "Coordination of Services," the actual CES, CCR and Configuration Engineering Services resulting from an *, as part of the Contract Price for the affected Item. Supplier shall maintain a record of the Piece Parts removed from an Item or classified as NonConsumable or NonReusable as a result of *s, and Supplier shall identify all NonConsumable and NonReusable Materials (excluding Floor Stock Scrap) by preparation of a Bill of Materials for NonConsumable and NonReusable Materials (the "NRM BOM"), classified by the affected Applied System or affected Purchase Order, which NRM BOM will be invoiced on the Pro Forma for the Item and will be retained by Supplier for a period of one (1) year from the invoice date for the *. All removed Piece Parts, excluding NonConsumable MFCs, for which an * is made to Applied shall be delivered to Applied's Asset Recovery Management Unit. 2.9. Information. 2.9.1. Applied Internal Databases. Supplier may be given electronic access to Internal Applied Data, and such access may, at Applied's sole discretion, be subject to certain further limitations and requirements on Supplier, including Supplier-provided employee control lists, audit rights and the requirement that Supplier's employees execute a joinder in the IPA as to confidentiality with Applied. This access, if granted, and all Internal Applied Data accessed shall be used solely by Supplier and only to directly facilitate Supplier's production and delivery of Items to support Applied's requirements. Supplier's access to, and utilization of, all Internal Applied Data is subject to the confidentiality provisions and obligations of the IPA with respect to Confidential Information and the terms of this Agreement and any applicable NDA between the parties. Applied may terminate Supplier's access to Internal Applied Data at any time at the discretion of Applied. If Applied terminates Supplier's access to Internal Applied Data under this Section, whether with or without cause, then Applied and Supplier shall promptly consult to develop alternative ways of providing Supplier with access to Internal Applied Data for the purpose of Supplier's performance under this Agreement. * Material has been omitted and filed separately with the Commission. 36 CONFIDENTIAL TREATMENT REQUESTED 2.9.1.1. Applied IS&T Services. A. Applied and Supplier have agreed on the services and scope of services * for voice and data telecommunication and * to Applied *, all for Supplier's use in the performance of its obligations under this Agreement and the Related Agreements, as more fully set out in the "EPSP Global Help Desk Service Level Agreement" attached to this Agreement as Attachment 21 (the "IS&T Services" and the "IS&T Agreement"), as such is modified by the provisions of this Section 2.9.1.1 regarding costs and rates of charge. The IPA and the Tooling Loan Agreement (Attachment 19) also set out rights and obligations of Applied and Supplier with respect to the services, * and telecommunications and access services provided under the IS&T Agreement. Applied and Supplier each shall perform, provide, pay for and observe such IS&T Agreement, as herein modified, as part of this Agreement from and after the Effective Date hereof for the term of this Agreement, as the same may be amended from time to time. B. All charges and costs payable by Supplier pursuant to the "Custom IS Services Service Level Agreement" as in effect between Applied and Supplier pursuant to the FUAs prior to the Effective Date through the Effective Date have been resolved by the parties through, and are payable by Supplier to the extent provided for by, separate agreements. From and after the Effective Date, Applied will * not be * charges and costs for IS&T Services * of the IS&T Agreement for initial set-up activities or for additional services requested by Supplier. C. Except as provided below, failure by Applied to furnish the IS&T Services to any extent, or any cessation thereof, shall not render Applied liable in any respect for damages to either person or property, and such failure or cessation shall not relieve Supplier from performing as provided in this Agreement, except to the extent that such failure to perform on the part of Supplier is excused under Article 23(b) of Exhibit 1. If IS&T Services are not restored by the fifteenth (15th) Business Day after cessation or failure by Applied to furnish such Services, Supplier may terminate the IS&T Agreement with respect to the particular IS&T Services affected. To the extent so terminated, neither Supplier nor Applied shall have any further rights or obligations under the IS&T Agreement from and after the date of termination except for any rights or obligations that expressly survive termination of the IS&T Agreement. Termination by Supplier under this paragraph shall not relieve Supplier of its obligations for performance under this Agreement, but such performance shall be excused to the extent provided by Article 23(b) of Exhibit 1, or the time for performance shall be equitably adjusted. * Material has been omitted and filed separately with the Commission. 37 CONFIDENTIAL TREATMENT REQUESTED D. Access to IS&T Services. The IS&T Services are those services to be provided by Applied, as specified in the IS&T Agreement. D.1. Access Restriction. Access to Applied's network and the Confidential Information contained thereon is granted to Supplier solely to facilitate the performance of Supplier's obligations under this Agreement and the IPA, is limited to the specific information, applications, systems, time periods and personnel approved by Supplier and Applied and is subject to the obligations regarding confidentiality of Article 4 of the IPA. Access is subject to and Supplier agrees to be governed by business control and information protection policies, standards, and guidelines of Applied. Use of any other Applied information, applications, systems or in other time periods or by other personnel is expressly prohibited. This prohibition applies even when information or an application or system that Supplier is authorized to access serves as a gateway to other information, application(s) or system outside the scope of Supplier's authorization. Without limiting the foregoing, Supplier shall be responsible for the implementation and execution of security measures as to its operations and personnel designed to comply with the above obligations and to insure that access granted hereunder will not impair the integrity and availability of Applied's information, applications and systems. D.2. Provision of Information. Supplier agrees to take commercially reasonable actions to provide to Applied all employee and other information that is reasonably necessary for Applied to approve or disapprove, as the case may be, access and use by any Supplier employees, consultants, agents or representatives to the Applied network. Furthermore, Supplier agrees to advise Applied, as soon as reasonably possible, of any changes in the status or identities of those employees, consultants, agents, or representatives to whom Applied has granted access and use. D.3. Audit Rights. Supplier acknowledges that Applied has a vested interest in assuring that Supplier complies with its obligations of confidentiality. Accordingly, Supplier agrees that Applied may take all steps that Applied, in its sole discretion, believes are useful in limiting and controlling Supplier's access to the Applied network and the Applied Confidential Information presented or accessed thereby, including the provision of passwords, the utilization of security checks, and the issuance of user identifications that restrict Supplier's access, provided that such discretion shall be reasonably exercised. Supplier also agrees that Applied, upon prior notice to Supplier's Senior Director of 38 CONFIDENTIAL TREATMENT REQUESTED Operations - Round Rock, or Director of Operations - Milpitas, as appropriate, and at reasonable times, may audit Supplier's access to the Applied network and use of Applied Confidential Information, including inspection or audit of Supplier's facilities, inventory, records, documentation and personnel, with respect to compliance with the requirements of this Section 2.9.1. Applied, in its sole discretion, will decide the frequency and extent of such audits, provided that such discretion shall be reasonably exercised. Applied agrees to cooperate with Supplier to limit the burden to Supplier of any such audits and to implement steps to protect the Applied Confidential Information. D.4. Segregation of Applied Confidential Information. Supplier agrees: to segregate the Applied Confidential Information that it receives; to take all other reasonable steps to keep Applied Confidential Information separate from Supplier information or information of others to which Supplier has access; and to assure that the Applied Confidential Information is readily locatable and identifiable. D.5. Effect of Failure to Comply. Supplier agrees that its failure to comply in any material respect with any duty or obligation pursuant to this Section 2.9.1.1.D constitutes a breach of its confidentiality obligations under the IPA and that Applied may initiate termination pursuant to Section 5.2.3 of the IPA. D.6. Need to Know. The parties will cooperate to limit the number of Supplier's employees accessing and utilizing the Applications and Databases (as such are defined in the IPA) to only those employees reasonably necessary for Supplier to perform its duties and obligations under this Agreement and the Related Agreements. The parties agree, however, that Applied retains final approval concerning access to and utilization of any such Applications and Databases. Supplier agrees to have all current employees with access to Applied Confidential Information execute an Employee Joinder (in the form attached to the IPA) within two (2) weeks after the execution and delivery of this Agreement, and to forward a copy of each signed Joinder to Applied, by transmission to Applied Materials, Inc., Attn: Law Department, 9700 Highway 290E, M/S 3100, Austin, Texas 78724. Thereafter, Supplier agrees to provide to Applied, as soon as reasonably possible and to its Law Department at the above address, a copy of an executed Joinder for each employee receiving Applied Confidential Information. In this regard, for those Supplier employees requiring access to the Applied computer network, Supplier will forward the original executed Joinders concurrently with the respective request for access to the Applied 39 CONFIDENTIAL TREATMENT REQUESTED Law Department at the above address. For those Supplier employees receiving Applied Confidential Information, but for whom access to the Applied computer network is not required, Supplier will forward copies of executed Joinders to the Applied Law Department, at the above address. The liability of Supplier and any of its employees involved for any violation of the provisions of this Agreement or of the IPA regarding Applied's Confidential Information, shall be joint and several. If an employee violates any of the provisions of this Agreement or the IPA regarding Applied's Confidential Information after the time his or her employment with Supplier has terminated and if Supplier, as part of its exit interviews and procedures, specifically advised such former employee of the continuing nature of his or her obligation regarding such Confidential Information, then Supplier shall not have such joint and several liability to Applied for such subsequent violation by such former employee by reason of the previous employment relationship. 2.9.2. Applied New Product Plans. Supplier will, on occasion and at Applied's discretion, be invited to forums in which Applied's new product plans are shared. Any Applied new product plans provided to Supplier are Confidential Information of Applied and are subject to the confidentiality provisions of Article 4 of the IPA and of this Agreement, and any applicable NDA executed in connection with the forum(s) at which such plans are shared. 2.9.3. Compliance with Securities Laws. Supplier agrees that the Internal Applied Data and Applied new product plans contain Confidential Information of or disclosed by Applied to Supplier and to those of its employees, contractors, representatives, and agents receiving such Confidential Information or new product plans solely for performance of Supplier's obligations to Applied, and that possession of Confidential Information which is material, non-public information concerning companies with publicly-traded securities prohibits Supplier and its employees, contractors, representatives and agents with direct or indirect access to such Confidential Information from (1) buying or selling such companies' publicly traded securities (stock, options, etc.) ("insider trading") until after such Confidential Information has been disclosed to the public and absorbed by the market (at least two business days), and (2) passing the Confidential Information on to anyone who may buy or sell such companies' securities ("tipping"). Supplier shall comply with (and shall direct its employees, contractors, representatives and agents to comply with) all federal and state securities laws prohibiting insider trading and tipping, and shall immediately notify Applied if Supplier violates any such laws or if Supplier becomes aware of any such violation by any of its employees, contractors, agents or representatives. Supplier also agrees to execute additional NDAs or other agreements as may be required to comply with applicable securities laws. Applied has established a corporate policy prohibiting insider trading and tipping by all members of its workforce as to its securities 40 CONFIDENTIAL TREATMENT REQUESTED and as to securities of companies other than Applied. Applied will maintain a policy against such insider trading and tipping in effect throughout the term of this Agreement. 2.10. Packaging and Transportation. 2.10.1. Packaging and Shipment. Supplier will have all Items packaged "ready for use" in accordance with Applied's packaging Specification (Attachment 6a). Supplier will mark and identify every Item in compliance with Applied's part marking identification Specifications and requirements (Attachment 6b). In addition, Applied may require specific fit-for-use packaging for certain Items and/or deliveries. 2.10.2. Bar Coding. All shipments of Items shall be bar coded to Applied's Specifications in Attachment 5. 2.10.3. Transportation Requirements. 2.10.3.1. F.O.B Destination. Supplier shall ship all Items "F.O.B. Destination," provided that allocation of risk of loss and terms for passage of title otherwise applicable as to Items shipped by Supplier may be varied by the provisions of this Agreement. Applied will specify the applicable destination point, which may be an Applied Facility or another location. Supplier shall ship all Items in accordance with Applied's Corporate Routing Guide (Attachment 7), including use of approved carriers. Supplier shall ship all Items to accomplish delivery of all Items at the applicable destination point, on time. 2.10.3.2. Freight and Delivery Costs. Except for Items shipped by Supplier on Supplier owned trucks pursuant to prior written approval by Applied and except as provided below for Items shipped with freight prepaid with prior approval, all freight and delivery costs for Items shall be specified as "Freight Collect" on bills of lading or shipping receipts, to be paid directly by Applied. With prior written approval by Applied, Supplier may prepay freight and delivery costs (to be shown as "Freight Paid and Charged Back" on the bills of lading or shipping receipts) and invoice Applied for the actual amounts of such costs. Applied will not pay freight and delivery costs in excess of the costs determined under the Corporate Routing Guide for applicable delivery methods. Applied will not pay any freight and delivery costs if Supplier uses a carrier that is not approved under Applied's Corporate Routing Guide. Any variance in these requirements must be approved by Applied in advance, in writing. 41 CONFIDENTIAL TREATMENT REQUESTED 2.10.3.3. Risk of Loss; Title. For all Items shipped Freight Collect or "Freight Prepaid and Charged Back" in accordance with 2.10.3.2 and by a carrier approved by Applied, Applied shall bear all risk of loss as to such Items while in transit. For those Items that, with Applied's prior written approval, are shipped using Supplier owned trucks, Supplier shall bear all risk of loss as to all such Items while in transit and continuing until Applied or its designee has acknowledged receipt of the Items at the specified destination point. Acknowledgment of receipt occurs when Applied enters the receipt of the Items in Applied's data and accounting system. Applied shall be responsible, however, for any loss as to an Item occasioned by the gross negligence of its employees, acting within the scope of their employment, regardless of whether there has been acknowledgement of receipt or passing of title as to such Item. 2.11. Payment. 2.11.1. Invoices; Certain Acceptance Terms. (a) Invoices (other than for Services invoiced under Section 2.11.1(c) below) shall contain the following information: Purchase Order number, Item number, description, sizes, quantities, unit prices, and extended totals in addition to tax amounts and any other information requested. Pro Formas shall comply with Section 2.1.7. Applied's payment of an invoice or other account, or payment made under an ERS Program, does not in itself represent unconditional acceptance of Items or preclude revocation of acceptance. (b) If Services are included in an invoice described in Section 2.11.1(a), Supplier shall provide on the invoice the charges for each category of Service, and the portions of such charges attributable to Configuration Engineering Services, CES Services, engineering for Design Services or Development Services, and engineering for the release of the Bill of Materials for the Item through Applied's ECO procedures, as applicable. (c) When Supplier has completed Services which are not related to an Item for which Supplier is to issue a Pro Forma or an invoice and has delivered any work product or other deliverables related to the Services, Supplier shall issue an invoice or other notice of completion of Services and delivery (a "Completion Notice") to Applied, to the attention of the purchasing representative of the Applied organization issuing the relevant Authorized Demand Signal, which may have been a Purchase Order that is part of a DSA or that was issued for a DVA. A Completion Notice shall include: the Applied Purchase Order number, the date(s) of completion and delivery, a description of the Services performed and work product or other deliverables delivered, and the Applied representative to whom delivery was made. A Completion Notice may be issued by Supplier in invoice form or as an e-mail or letter, and may be delivered by mail, facsimile, or e-mail transmission. 42 CONFIDENTIAL TREATMENT REQUESTED (d) (i) Applied may reject any Item (including Services handled under Section 2.11.1(d)(ii)) until receipt of that Item has been acknowledged by entry of the receipt in Applied's data and accounting system (a "Receipt Entry"). Applied's Receipt Entry is deemed to be acceptance of the Item(s) identified in the Receipt Entry, in accordance with and subject to the terms of this Agreement. Supplier agrees that Applied may revoke its acceptance as to any Item or Items deemed accepted through Receipt Entry that do not conform to the warranty terms applicable to the Item(s) and are not timely corrected, repaired or replaced by Supplier in compliance with Section 7.2.2, as the value of such Item(s) to Applied is substantially impaired. Revocation of acceptance as to such Item(s) shall be made within a reasonable time after Applied discovers the defect or nonconformity and is not effective until Applied notifies Supplier of revocation. (ii) Services performed or provided by Supplier pursuant to a Purchase Order, DSA or DVA will be handled under the preceding Receipt Entry procedures by issuance of an Applied "in-house packing slip." Acceptance of such Services by Applied for purposes of payment shall not occur until all of the following have occurred: (i) an Applied Purchase Order, DSA or DVA, as applicable, has been issued for such Services; (ii) the Services have been completed and all work product deliverables have been delivered to Applied in accordance with the Purchase Order, DSA or DVA; (iii) Supplier has delivered its Completion Notice for the Services to Applied in accordance with the applicable Purchase Order, DSA or DVA; and (iv) Applied has issued its "in-house packing slip" to initiate payment of the amounts charged under the Completion Notice, whether by check, electronic funds transfer or otherwise. (iii) Acceptance of Items or of Services, as described above, is acceptance for purposes of payment and shall not impair any remedy or right of Applied, or warranty or other obligation of Supplier, under this Agreement or applicable law other than that of rejection of Item(s) deemed accepted that are governed by the UCC and rights equivalent to rejection as to Services governed by laws other than the UCC. All payments made by Applied will be subject to adjustment for errors, shortages or nonconformity with warranty provisions, and to revocation of acceptance where applicable. 2.11.1.1. Delivery of Invoices. All invoices must be sent directly to Applied's Accounts Payable Department in Austin: Accounts Payable Applied Materials 9700 US Highway 290 East M/S 4200 Austin, TX 78724-1199 2.11.1.2. Method of Payment. Applied is authorized by Supplier to make payments under this Agreement by either check or electronic funds transfer. Supplier will provide Applied with the 43 CONFIDENTIAL TREATMENT REQUESTED required bank routing coordinates and other information that may be required by Applied to establish electronic funds transfer capability. 2.11.1.3. ERS Program. If Supplier participates in Applied's ERS Program, Supplier will provide Pro Formas pursuant to Section 2.1.7, but otherwise will not provide invoices to Applied for sales of Items to which that program applies. Supplier will be responsible for the verification of all prices and quantities prior to shipment and will enter that information on the Pro Forma for each Item. All applicable sales and use tax will be remitted to Supplier with payment by Applied. ERS payments will be subject to adjustment for errors, shortages, non-conformities or defects, as well as prompt payment discounts. 2.11.1.4. Packing Slips. Supplier must include a valid packing slip number or package ID on each package or shipment. 2.11.2. *. Payment terms will be *: a. if payment is made from Supplier's invoice, then from the later of (i) Applied's receipt of Supplier's invoice, in form and substance acceptable to Applied, for the Item(s), or (ii) delivery of, and Applied's entry of receipt for, the Item(s) in Applied's data and accounting system. b. if payment is made under the ERS Program, then from the date of Applied's entry of its receipt of the Item(s) in Applied's data and accounting system. If payment is made within * after the applicable date under clause (a) or (b) *. 2.11.3. Offsets, Debits. Applied may at any time set off any amount owed by Applied to Supplier against any amount owed by Supplier (whether in Supplier's name or in the name of Insync Systems, Incorporated) to Applied. Applied anticipates implementing, in the Third Quarter of its 2002 fiscal year, a procedure under which Applied will issue to Supplier notices of scheduled debits or offsets approximately * in advance of the execution of such debit or offset. Applied will advise Supplier if Applied will not be able to implement such procedure in the anticipated period with use of commercially reasonable efforts, and the parties will negotiate in good faith to determine if alternative notice procedures can be established by the parties. * Material has been omitted and filed separately with the Commission. 44 CONFIDENTIAL TREATMENT REQUESTED Notices of debits or offsets under such a procedure, if implemented, shall be given to Supplier's Finance Manager. 2.11.4. Effect of Payment. Time and method of payment shall not alter the time at which title to Items passes to Applied, nor shall payment, in itself, preclude Applied from the exercise of remedies under this Agreement or as permitted by law, in each instance in accordance with this Agreement. 2.11.5. Reconciliation of Payment Discrepancies. Attachment 22 to this Agreement sets out agreements of Applied and Supplier as to any claims of Supplier with respect to "Payment Discrepancies," as such term is defined in Attachment 22. To the extent permitted by Attachment 22, Applied may initiate amendment(s) of such Attachment 22 by posting of an amendment on the Applied website to which Supplier has access in accordance with Section 1.3.4, and each amendment so initiated becomes effective if Supplier does not object to the amendment within thirty (30) days of such posting. Amendments that the terms of Attachment 22 exclude from such website modification procedure shall be made in accordance with the provisions of such attachment. 2.12. Disaster Recovery Plan. Supplier shall develop and provide to Applied, upon request, reasonable information describing or evidence of a disaster recovery plan that includes emergency back up capacity, and appropriate record protection and recovery. Applied shall have the right to verify Supplier's internal processes for compliance with this provision. 2.13. Performance Constraints. 2.13.1. Constraints. Supplier shall use commercially reasonable efforts to anticipate material constraints affecting its ability to perform its obligations under this Agreement. If Supplier believes that any such constraints are reasonably likely to materially and adversely affect its performance under this Agreement, Supplier will inform Applied's Subsystems Management Team and Supply Chain Management organizations (through the contact persons designated for Supplier by those organizations) thereof and of action plans to resolve them. Typical constraints might include, but are not limited to: a. Consumption over forecast b. Consumption under forecast c. Quality problems d. Capacity/production problems e. Sub-tier supplier supply-chain management problems 45 CONFIDENTIAL TREATMENT REQUESTED 2.14. Provisions for Reconfiguration or Restocking. 2.14.1. "Affected Items." This Section 2.14 applies to those FDS, NSO, Module and Spares Items which have been delivered to Applied by Supplier pursuant to an Authorized Demand Signal issued under Section 2.1.5, which conform to applicable requirements (including Specifications) of this Agreement, and which, subsequent to delivery to Applied (and prior to shipment by Applied to its customer), Applied identifies for relabeling, reconfiguration, or return and restock based on Applied's current manufacturing requirements ("Affected Items"). As to Items that Applied identifies as Affected Items, Applied shall use its commercially reasonable efforts to locate Applied customers that will purchase Affected Items, so that such will be treated as Relabel or Reconfigure Items, rather than as Restock Items. 2.14.2. Categories. Applied shall notify Supplier of those Items that are identified as Affected Items by Applied from time to time. Applied's notice to Supplier of the Affected Items so classified shall be given by fax or e-mail notice to Supplier's Customer Service Manager in Austin or Milpitas, as appropriate. Applied will classify Affected Items in the following categories: a. Relabel Items b. Reconfigure Items c. Restock Items 2.14.3. "Relabel Items." An Affected Item which Applied determines is appropriate for relabeling and/or minor reworking (for which no re-testing is required) at Applied's facility, to meet the requirements of an Applied customer, is a "Relabel Item." 2.14.3.A. Applied shall issue new or revised configuration, labeling and related Specifications and completion requirements (the "Revised SSR") to Supplier for each Relabel Item at the time when Applied has determined the particular manufacturing requirements of Applied and its customer. Within ninety-six (96) hours (measured during Business Days and under prevailing Pacific Time) following receipt of the Revised SSR, Supplier will determine if the Revised SSR requires any CES Services or Configuration Engineering Services, beyond Configuration Engineering Services required solely to relabel, and if the completion requirements are feasible. Unless (i) Supplier specifically refuses (under the standards applicable to refusal of an initial SSR) the new or Revised SSR for the Relabel Item within forty-eight (48) hours (measured during Business Days and under prevailing Pacific Time) following the time Supplier has made the determinations under the preceding sentence, or (ii) Supplier determines, with 46 CONFIDENTIAL TREATMENT REQUESTED Applied's concurrence, that CES Services or Configuration Engineering Services, beyond Configuration Engineering Services solely to relabel, are required by the Revised SSR, Supplier shall rework and relabel each Relabel Item at the Applied manufacturing facility where that Item is held. Such reworking and relabeling shall be performed by Supplier in compliance with all requirements of the Agreement applicable to such Item, including Applied's new or Revised SSR issued under this Section 2.14.3; as reworked and relabeled, the Relabel Item shall be deemed a new Item for warranty, performance and other provisions of this Agreement. 2.14.3.B. The total charge from Supplier to Applied for each Relabel Item shall be *. 2.14.3.C. Upon notice to Supplier, to be sent to the attention of Supplier's Customer Service Manager - Austin or - Milpitas, as appropriate, Applied may change the classification of a Relabel Item to another category, whether or not work under the applicable SSR has been initiated or completed. Pricing for a Relabel Item that is changed to a Restock Item after the work has been performed by Supplier for the relabeling shall be calculated as if such had originally been a *. 2.14.4. "Reconfigure Items." An Affected Item (i) which Applied determines (after consultation with Supplier as to the scope of work involved) is appropriate for reworking, reconfiguration (including related CES or Configuration Engineering Services) and testing at Supplier's facilities to meet the requirements of Applied or its customer(s), and (ii) for which Applied has issued a new or Revised SSR from which a new Committed Delivery Date is determined, is a "Reconfigure Item." Unless Supplier specifically refuses the applicable new or Revised SSR within ninety-six (96) hours (measured during Business Days and under prevailing Pacific Time) after its issuance by Applied (under the standards applicable to refusal of an initial SSR) the SSR shall be deemed accepted by Supplier and the Committed Delivery Date shall (unless otherwise mutually agreed) be determined by the standard cycle time for the Item based on the date of acceptance or deemed acceptance. 2.14.4.A. Upon Supplier's acceptance or deemed acceptance of a Revised SSR, Applied will ship Reconfigure Items to Supplier, at Applied's cost and risk of loss until delivery to Supplier's receiving dock. Supplier shall have risk of loss and shall hold all Reconfigure Items as bailee for Applied from the time the Item is delivered to Supplier's receiving dock. Supplier shall maintain in force insurance covering Reconfigure Items against risks and in amounts that are appropriate to protect the interests of Applied in such goods. Applied shall include, as part of its shipment to Supplier, any safety notice required for the Affected Item, to include a notice that the Affected Item has not been exposed to toxic or corrosive gases or chemicals and that no decontamination is required. * Material has been omitted and filed separately with the Commission. 47 CONFIDENTIAL TREATMENT REQUESTED 2.14.4.B. Applied shall issue a new SSR or a Revised SSR for each Reconfigure Item when Applied has determined the particular manufacturing requirements of Applied and its customer and prior to shipment of the Reconfigure Item to Supplier. Supplier will perform applicable CES Services, Configuration Engineering Services and CCR Services and reconfigure, rework, test, and relabel each Reconfigure Item at Supplier's facility. Such CES Services, Configuration Engineering Services and CCR Services, reconfiguration, reworking, testing, and relabeling shall be performed by Supplier in compliance with all requirements and Specifications of the Agreement applicable to such Item, including Applied's new SSR or Revised SSR issued under this Section 2.14.4, and as reconfigured, reworked, tested and relabeled, the Reconfigure Item shall be deemed a new Item for warranty, performance and other provisions of this Agreement. 2.14.4.C. The total charge from Supplier to Applied for each Reconfigure Item shall be equal to the sum of: * 2.14.4.D. Upon notice to Supplier, whether or not the reconfiguration has been initiated or completed, which notice shall be given by e-mail or fax transmission to the attention of Supplier's Customer Service Manager - Austin or - Milpitas, as appropriate, Applied may direct that Supplier cease work on a Reconfigure Item or may change the classification of a Reconfigure Item. Applied shall specify in its notice under this Section 2.14.4.D whether the Item as to which work is to cease shall then become a new Reconfigure Item, a Relabel Item, or a Restock Item; alternatively, Applied may direct that it be delivered as an incomplete Reconfigure Item. The date of the notice of conversion shall be deemed the date of receipt by Supplier of the Item as a Restock, Relabel, or new Reconfigure Item. If the Item is changed from a Reconfigure Item to a Restock Item, Section 2.14.5 shall apply after that date. 2.14.4.E. Each completed Reconfigure Item shall be shipped to Applied by Supplier in accordance with the terms of the Agreement and on the Committed Delivery Date. Supplier shall provide its Pro Forma for the Reconfigure Item in accordance with Section 2.1.7 and payment shall be handled under the applicable payment procedures for new Items. Applied shall review the Pro Forma under the applicable pricing model, shall advise Supplier of any dispute as to the Pro Forma amount, and then issue its Purchase Order in accordance with the pricing model, the above terms as to Reconfigure Items, and the Pro Forma (as revised, if necessary). * Material has been omitted and filed separately with the Commission. 48 CONFIDENTIAL TREATMENT REQUESTED 2.14.4.F. All NonReusable and NonConsumable Materials removed by Supplier from a Reconfigure Item (other than NonConsumable MFCs, missing parts and Floor Stock Scrap) shall be returned to Applied in accordance with Applied's Asset Recovery Management process. 2.14.4.G. If Applied directs Supplier to cease work on a Reconfigure Item under Section 2.14.4.D above without delivery of same to Applied, such Item shall be treated as a Restock Item under Section 2.14.5 as of the date of the direction to cease work. Supplier shall, however, charge Applied for the following amounts, which shall be determined in addition to the amounts payable with respect to the Restock Item: * 2.14.5. "Restock Items." Affected Items returned by Applied for disassembly and restocking by Supplier as set out in Sections 2.14.5 and 2.14.6 are "Restock Items." Applied will ship Restock Items to Supplier, at Applied's cost and risk of loss until delivery to Supplier's receiving dock. Supplier shall have risk of loss from the time the Restock Item is delivered to its receiving dock. Supplier shall acquire all Restock Items (including all materials and Piece Parts other than NonConsumable Materials or NonReusable Materials and Floor Stock Scrap) from Applied. Supplier shall deliver to Applied any applicable tax exemption certificates and shall pay any applicable tax. Supplier shall return all NonReusable Materials and NonConsumable Materials to Applied in accordance with Applied's Asset Recovery Management process (or destroy, as instructed by Applied). Applied shall include, as part of its shipment to Supplier, any safety notice required for the Affected Item, to include a notice that the Affected Item has not been exposed to toxic or corrosive gases or chemicals and that no decontamination is required. 2.14.6. Restocking Process and Charges. 2.14.6.A. Within ten (10) days after completion of disassembly of each Restock Item by Supplier, Supplier shall (i) immediately record and notify Applied under Section 2.14.6.C below of, all NonConsumable and NonReusable Materials (as defined in Section 2.2.3) and deliver a detailed listing of all Piece Parts; (ii) restock, or (as to NonConsumable and NonReusable Materials) return, all Piece Parts, and (iii) deliver to Applied the Reconfiguration/Tear-Down Reconciliation Form ("Reconciliation Form") for each Restock Item. The Reconciliation Form shall specify the amount for which Supplier shall acquire the Consumable Materials and NonConsumable MFCs from the Restock Item, which amount payable by Supplier is equal to the total of *. Supplier must identify on the Reconciliation Form prices for all NonReusable Materials and NonConsumable Materials (excluding Floor Stock Scrap) for each Restock Item being handled under this Section, which prices shall be *. * Material has been omitted and filed separately with the Commission. 49 CONFIDENTIAL TREATMENT REQUESTED 2.14.6.B. Supplier shall deliver the Reconciliation Form to Applied as required by Section 2.14.6.A. Applied shall audit such form for compliance with the terms of this Section 2.14 and for any NonReusable Materials or NonConsumable Materials with costs in excess of $250.00. The Reconciliation Form shall not be released for processing and payment until Applied has approved same under Sections 2.14.6.B and C. 2.14.6.C. Supplier shall return all NonConsumable and NonReusable Materials to Applied (other than missing parts or materials and NonConsumable MFCs) at Applied's Asset Recovery Management location, or destroy such NonConsumable and NonReusable Materials if so directed by Applied, in writing. 2.14.7. Provisions as to Restocked or Removed Parts. A. Supplier shall identify and return to Applied (for Asset Recovery Management by Applied) all NonReusable Materials removed from any Affected Item and shall scrap or destroy all Floor Stock Scrap. Supplier accepts all Restock Items and all Piece Parts and materials removed or obtained from any other Affected Item (not identified by it, and returned, as NonReusable Materials or scrapped as Floor Stock Scrap) (collectively, "Goods") "AS IS." B. EXCEPT FOR THE WARRANTY IN PARAGRAPH D BELOW, APPLIED MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE GOODS OR ANY PART THEREOF. APPLIED HEREBY DISCLAIMS WITH RESPECT TO THE GOODS ALL IMPLIED WARRANTIES, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND WARRANTIES OF TITLE AND OF NONINFRINGEMENT. C. WITH RESPECT TO SUCH GOODS AND EXCEPT AS TO MATTERS COVERED BY THE WARRANTY OF PARAGRAPH D BELOW, IN NO EVENT SHALL APPLIED BE LIABLE FOR ANY DAMAGES THAT ARE EXCLUDED DAMAGES UNDER ARTICLE 17 OF EXHIBIT 1 TO THIS AGREEMENT FOR ANY REASON, WHETHER OR NOT APPLIED OR SUPPLIER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND APPLIED EXCLUDES AND SUPPLIER WAIVES ANY LIABILITY OF APPLIED FOR ANY SUCH DAMAGES. D. Applied WARRANTS to Supplier: (a) that none of the Goods returned as Reconfigure Items or Restock Items shall have been exposed to toxic or corrosive gases or chemicals; (b) that as to any Items returned to Supplier as a result of a warranty claim of Applied under this Agreement or pursuant to Section 5.2.1, Applied will have decontaminated and prepared for safe handling under all applicable safety and environmental laws and regulations any such Items delivered to Supplier that have been exposed to toxic or corrosive gases or chemicals while in Applied's possession; (c) that all applicable safety and environmental notices and labels shall be affixed to or provided with the delivery of any such Goods or Items; and (d) that none of such Goods have been delivered to any person other than Applied or Supplier following Applied's receipt of 50 CONFIDENTIAL TREATMENT REQUESTED same. The limitations of Paragraph C above do not apply to the warranties set out in this Section 2.14.7.D. 2.14.8. Processing and Payments. Supplier shall calculate the amount payable by it for Restock Items in accordance with the provisions of this Section 2.14, and shall authorize Applied to charge Supplier for the Restock Item by issuing the Reconciliation Form and related NRM BOM. Applied shall review the Reconciliation Form and NRM BOM and shall charge and collect from Supplier the calculated amount payable to Applied for the Restock Item by debit memo or other offset against amounts otherwise payable by Applied to Supplier. If Applied believes that additional amounts are properly payable by Supplier in excess of the calculated amount, it shall promptly advise Supplier of such claim and the parties shall review the determination of the amount payable by Supplier for the affected Restock Item. If the parties do not agree on the proper charge to be made within 30 days after the dispute arises, the parties shall proceed under the Business Review Process as defined in Section 7 below to attempt resolution of the dispute. Applied shall not effect a debit or other offset (in excess of the amount initially calculated by Supplier) until the parties have failed to reach agreement and have failed to reach a resolution within the time allowed for the Business Review Process. 3. PRICING FRAMEWORK 3.1. Contract Prices. 3.1.1. Pricing and Cost Model of Attachment 1. Attachment 1 contains the contract terms agreed upon with respect to the following: (i) the pricing and cost model, which set out the elements and calculations by which Contract Prices are determined on an ongoing basis; * indicated periods during the term of the Agreement. Any modifications to Attachment 1 must be made in accordance with Section 1.3.4 of this Agreement. Supplier shall price and sell, and Applied shall purchase, all Items in accordance with this Agreement, including Attachment 1. Supplier will provide R&D Items at non-discriminatory prices that take into consideration the total value of Applied's business with Supplier. Applied and Supplier have established pricing for certain Services on a rate-per-hour basis as part of Attachment 1 or in other provisions of this Agreement. Unless otherwise agreed at the time, pricing for Services provided by Supplier pursuant to Purchase Order(s) will be determined at applicable rates set out in Attachment 1. The Contract Prices of additional and/or revised Items will be based upon applicable elements of the pricing or cost model set forth in Attachment 1. * Material has been omitted and filed separately with the Commission. 51 CONFIDENTIAL TREATMENT REQUESTED Attachment 1 is sometimes referred to as the "cost model" or "pricing model" for the Agreement. 3.1.2. Application of Prices. On the Effective Date and in accordance with Section 1.3.2.3, the pricing for Items shall be determined pursuant to this Agreement, including Attachment 1; provided that pricing under this Agreement shall not apply to FDSs or other Items for which an SSR or Purchase Order has been accepted (based on the procedures of Section 2.1.5.1 hereof) prior to the Effective Date. Specific circumstances may result in a review of Agreement terms, including Contract Prices. These circumstances include, but are not limited to: a. Volume increases or decreases resulting in an increase or decrease in the value of the Agreement of over 20%; b. Addition or deletion of Items to the Agreement increasing or decreasing the value of the Agreement over 20%; c. Cost increases or reductions exceeding those committed in Supplier's Performance Plan; and d. Reductions or increases in market prices for equivalent materials and services. Any amendment or change in terms shall be made in accordance with Section 1.3.4 of this Agreement. Nothing contained in this Section 3.1 shall require either party to amend or change any term of this Agreement. 3.1.3. Pricing Model. The parties have anticipated that changes will occur in the design, Specifications, Piece Parts, and other elements of Items to be provided pursuant to this Agreement and have negotiated the pricing model shown in Attachment 1 to accommodate such changes and to apply to Items that are affected by such change. The pricing model is agreed to apply appropriately to Items as changed in the future. However, if unanticipated changes not within the contemplation of the parties have a material and adverse impact on the operation of the pricing model, and alternative pricing is not agreed to by the parties at the time, then the Item(s) affected shall be removed from this Agreement. Such removal shall not be classified as a partial termination. 3.1.4. Further Agreements as to Pricing. (a) Upon request made by Applied through the SAT Team Lead for Supplier and delivered to Supplier's Vice President - Sales, Applied and Supplier will review pricing models proposed by Applied from time to time, including by way of example, option based pricing models. The parties may, by mutual written amendment to this Agreement, implement one or more alternative pricing models with respect to those Item(s) identified in or made subject to such alternative pricing model(s) by such amendment. The Items or Piece Parts subject to an alternative pricing model shall not be subject to Section 3.1.5 or 52 CONFIDENTIAL TREATMENT REQUESTED Section 3.1.6 unless the parties expressly so provide in the amendment implementing the relevant alternative pricing model. (b) (i) The prices of Piece Parts sold to Applied, whether incorporated in FDSs or otherwise sold to Applied, shall be as follows: A. Non-Unit MFCs (defined below in Section 3.1.4(b)(ii) shall be *; B. All other Piece Parts *; and C. Adjustments to the foregoing prices shall be made in accordance with Section 3.1.5 and 3.1.6. (ii) * (c) Upon request of Applied or Supplier, the parties shall confer and establish milestones and criteria applicable for the transition of Item(s) from R&D Manufacturing to Pilot Manufacturing, and from Pilot Manufacturing to Volume Manufacturing and further shall develop, based on milestones and criteria established, checklists and procedures appropriate to the transition of the affected Item(s). An illustrative form of NPT checklist is attached to this Agreement as Attachment 23. 3.1.5. * Terms. (a) The "Commodity Classifications" are * "Weldments," and "Unit MFC." Guidelines for determining the Commodity Classification applicable to a particular Commodity for each periodic reclassification are set out in Section 3.1.5.1(d). The * are the periods, denominated periods 1 through 5 and stated as monthly periods from June 1, 2002 and ending on the last date of the indicated month, in the table set out in Section 3.1.5 (d). (b) Prior to each * and in accordance with Sections 3.1.5 and 3.1.6, Supplier will prepare a preliminary table of Commodity Classifications for all Commodities. Supplier and Applied shall review and consult on, and agree to, the actual classification of Commodities for * for purposes of the * Matrix for the *. Each actual classification of Commodities agreed upon by the parties shall be attached to this Agreement as part of Attachment 24. (c) Two weeks prior to each * and in accordance with the table classifying Commodities as agreed upon by the parties and with Sections 3.1.5 and 3.1.6, Supplier shall prepare a * under Section 3.1.5.1 (e) that specifies * for each Piece Part that is to be incorporated in any FDS forecasted to be built during that * and is included in the Commodity Classification to which * in the next * ("Forecasted Piece Part"). The Applied Forecast to be used in preparing a * Matrix shall be the most recent Applied Forecast reflected in Supplier's MRP system as of the date which is * prior to the beginning of the applicable * (the "* Forecast"). Supplier shall then implement such * Material has been omitted and filed separately with the Commission. 53 CONFIDENTIAL TREATMENT REQUESTED pricing for each Forecasted Piece Part used in an Item ordered during the * or that is sold to Applied under this Agreement as a separately purchased Item (excluding in this latter case Unit MFCs). In addition, Supplier shall also * in accordance with Section 3.1.6 for all Piece Parts for which * apply as a result of *. (d) The * and * for each Commodity Classification are as follows:

----------------------------------------------------------------------------------------------------------- * * FOR * * FOR * *% FOR * * COMMODITIES COMMODITIES % FOR * ----------------------------------------------------------------------------------------------------------- #1/* * * * * ----------------------------------------------------------------------------------------------------------- #2/* * * * * ----------------------------------------------------------------------------------------------------------- #3/* * * * * ----------------------------------------------------------------------------------------------------------- #4/* * * * * ----------------------------------------------------------------------------------------------------------- #5/* * * * * -----------------------------------------------------------------------------------------------------------

3.1.5.1 Calculation of New *. (a) Initial Classifications. Attachment 24 to this Agreement is the initial table of Commodity Classifications and *, agreed upon by the parties as of the Effective Date and applicable for * No. 1, classifying all Piece Parts into *:*. (b) Periodic Reclassifications. Not later than * prior to the beginning of each * after the first period, Supplier shall deliver to Applied (to the attention of the Supplier's SAT Team Lead at Applied) Supplier's proposed classification table of all * for the next *. Applied and Supplier shall promptly review and negotiate in good faith to establish the classification table for *, utilizing the classification guidelines set out in Section 3.1.5.1(d) below. If the parties fail to agree upon the classification table to be used within ten (10) Business Days after Supplier's delivery of the proposed classification table, either party may initiate the Business Review Process of Section 7.2.5 with respect to such failure as a "Dispute." (c) Special Provisions. Special provisions related to prices applicable to Piece Parts affected by * (as such term is defined in Section 3.1.6) will be governed by Section 3.1.6, and those provisions shall control over the * provisions of Section 3.1.5 to the extent of any conflict. (d) Commodity Classification Guidelines. In preparing the Commodity Classification table for each *, Supplier and Applied shall utilize the guidelines of this Section 3.1.5(d), subject to the exclusions applicable under Section 3.1.5.2. * Material has been omitted and filed separately with the Commission. 54 CONFIDENTIAL TREATMENT REQUESTED A. Guidelines for * Commodities Classification. * Commodities will include all Commodities that are identified by the parties under any of the following descriptions: (i) Sheet metal, cables, harnesses, and hardware and such other Commodities as are set out as * on the initial table of Commodity Classifications in Attachment 24. (ii) All Commodities for which Supplier has had authority to select the supplier or source of such Commodity, whether as a no-preference choice or because neither Applied nor its customers have required a specific source or supplier provided that the Piece Parts meet Applied design requirements and, if applicable, the provider is a qualified supplier, in at least * of the FDSs which Applied has ordered from Supplier in the 9 month period preceding the start of the applicable *. Examples of Commodities that will be evaluated under this guideline are valves, transducers, filters and similar Commodities. B. Guidelines for * Commodity Classification. * Commodities are Commodities that are not now or hereafter classified as *, and include, by way of example, *. C. Status Change. Once a Commodity is classified as *, that Commodity (to include, as to a commodity group, all Piece Parts in such group) remains classified as * during the remainder of the Agreement and shall not be reclassified in a periodic reclassification process. D. MFCs. MFCs are not treated as *. Unit MFCs shall have pricing adjustments made in accordance with the table set out in Section 3.1.5(d). E. Weldments. Weldment Commodities will include all weldments that are incorporated in an FDS ordered by Applied under this Agreement. After the first *, Supplier may treat the Weldment Commodities and the * Commodities as one Commodity Classification for purposes of calculation of the Total Gross Dollars, the * and new Piece Part pricing applicable pursuant to Sections 3.1.5.1(e) (4), (5) and (6) of this Agreement. * Material has been omitted and filed separately with the Commission. 55 CONFIDENTIAL TREATMENT REQUESTED (e) *. Each * Matrix for a * shall reflect: (1) The Commodity Classification of each Forecasted Piece Part. (2) The pricing then in effect for each Forecasted Piece Part within the Commodity Classification to which the reduction will apply. After the initial price reduction is made with respect to a particular Forecasted Piece Part, whether as a result of the * or application of a Negotiated Price under Section 3.1.6. below, references in this Agreement (including these * terms) to applicable Piece Part prices will mean such prices as then adjusted under Sections 3.1.5 and 3.1.6. (3) The forecasted demand for each Forecasted Piece Part during the applicable * based on the * Forecast. (4) The total gross dollars forecasted for the entire list of Forecasted Piece Parts in the Commodity Classification based on the * Forecast, to which a percentage reduction applies during the applicable * ("Total Gross Dollars"). Total Gross Dollars equals the sum of the then current Forecasted Piece Part pricing (i.e., the prices actually charged to Applied by Supplier immediately prior to the start of the applicable *) multiplied by the respective forecasted demand in the * Forecast. (5) The * dollar amount * which is the product of the * multiplied by the Total Gross Dollars. (6) The new Piece Part pricing which represents Kinetics' allocation of the * across the list of Forecasted Piece Parts. Supplier shall use commercially reasonable methods in its allocation of the * and its selection of new Piece Part pricing. However, the difference between the Total Gross Dollars and the sum of the new Piece Part pricing multiplied by the respective forecasted demand in the applicable * Forecast must equal the * Percentage for the applicable *. 3.1.5.2 Exclusion; Particular Terms. (a) A particular Piece Part shall not be classified or included in the * (either as a Forecasted Part utilized in calculating the * or as a Piece Part to which a price reduction shall apply pursuant to a Pricing Reduction Matrix) until the first * that occurs six (6) months after the time when the Piece Part is first assigned a part number. (b) A particular Piece Part that is a non-recurring purchase resulting from a CES requirement shall not be included as a Forecasted Piece Part and Supplier shall provide a list of such excluded Piece Parts with the affected *. * Material has been omitted and filed separately with the Commission. 56 CONFIDENTIAL TREATMENT REQUESTED (c) Prices of Unit MFCs under a * apply only to purchases of Unit MFC's that are incorporated in an FDS ordered by Applied under this Agreement. (d) Prices of * are not subject to the * terms of this Section 3.1.5. 3.1.6. Adjustment for *. (a) Applied may * (b) The parties shall meet at least once per quarter to coordinate their respective efforts related to existing commitments from, or ongoing negotiations with, * This notice will be given to Supplier's Vice President Sales. (c) The *: (1) If the * for that Piece Part, the price charged to Applied *. (2) If the Negotiated Price for a Piece Part is below Supplier's Current Average Cost for such part, * under this Section 3.1.6. (3) * 3.2. Volume. Applied does not commit to buy a specific volume, quantity, or percentage of any Piece Part or Item from Supplier, and Applied may buy the same or similar Piece Part or Item from multiple sources. 3.3. Export. Applied may require, from time to time, Supplier to ship Items to locations outside of the United States of America. Supplier will prepare the export paperwork and be the exporter of record. Supplier must utilize Applied's preferred carriers for the export of the Items. Applied will pay the freight charges based on Applied's rates with its preferred carriers. Applied will be responsible for importing the goods into the destination country. 3.4. Currency. All prices shall be quoted by Supplier in U. S. dollars; prices for foreign manufactured Items will not be adjusted to reflect changes in the exchange rate. Supplier is encouraged to obtain any necessary currency exchange protection which it deems appropriate. * Material has been omitted and filed separately with the Commission. 57 CONFIDENTIAL TREATMENT REQUESTED 4. TECHNICAL FRAMEWORK. 4.1. Engineering Change Orders. 4.1.1. ECO Procedures. (a) Applied may change its Specifications at any time and generate a proposed ECO with respect to such change. An Applied Supplier Engineer may review with Supplier the Applied proposed ECOs that affect any Item(s). (b) Supplier shall utilize one of the following procedures to initiate or request any engineering change to an Item or a change affecting Specifications (an "Engineering Change"): i) Supplier may prepare and submit for approval a proposed ECO for an Engineering Change if such action is authorized under Supplier's Manufacturing Engineering Authority ("MEA"), as defined in Applied's documentation of its ECO procedures and standards in effect from time to time and provided to Supplier (a "Supplier ECO"); or ii) Supplier may request an ECO to authorize an Engineering Change through a Request for Engineering Action ("REA") if such request is authorized under Supplier's MEA (a "Supplier Request"); or iii) Supplier may initiate the development of an Engineering Change by submitting a Supplier Problem Sheet (Attachment 13) (an "SPS") to the SPS Administrator designated for Supplier. (c) Changes to which an SPS or the ECO process applies shall not be implemented by Supplier (and Supplier shall not ship any Items with any Engineering Change) until written permission to proceed is given by Applied as required by its applicable SPS and ECO procedures. Applied will provide, in writing (to the attention of Supplier's Engineering Manager) or by release on Applied's current ECO database, notice of approved ECOs (Attachment 12), indicating the effective dates of all changes. Unless otherwise notified, Applied's receiving inspection will inspect to the latest revision in effect at the time of receipt of Items. (d) If Applied has not responded to an SPS, REA or proposed ECO within the time period indicated in this Paragraph (d), Supplier may request review of the SPS, REA or proposed ECO by the SMT Supplier Engineer for Supplier. Applied is not obligated to approve any SPS, REA or proposed ECO. The response time for purposes of this Paragraph (d) is eighteen (18) days after initial submission of a proposed ECO or REA or after initial submission of an SPS. (e) Each Supplier ECO and Supplier Request shall be handled in accordance with applicable MEA procedures and shall not modify or eliminate any requirement of the Quality Framework Document (Attachment 15) or the QRD (Attachment 20) for review 58 CONFIDENTIAL TREATMENT REQUESTED and approval by Applied prior to implementation. Each Engineering Change initiated as a Supplier Request or Supplier ECO shall, prior to implementation by Supplier: (i) have been released by Supplier to Applied's assigned organizations for REA or ECO review and approval under the REA and ECO workflow and approval routing requirements of Applied in effect at the time; (ii) have been properly completed and documented under Applied's REA and ECO workflow and preparation requirements, including (a) the document control process, (b) applicable safety checklists, and (c) other safety engineering or information requirements, as in effect at the time; and (iii) have been approved, in writing (to include electronic authorization) as required by Applied's ECO, REA or other applicable approval procedures. 4.2. Tooling. 4.2.1. General Tooling Provisions. (a) Except as otherwise set forth in Section 4.2 or as otherwise agreed by the parties in a separate writing, special dies, tools, patterns, test fixtures, and like equipment (collectively, "Tooling") used in the manufacture of Items shall be furnished by and at the expense of Supplier and shall be owned by Supplier. As to those items of Tooling covered in Sections 4.2.2 and 4.2.3 (the "Test Fixture Hardware" and "Test Fixture Software," such latter term being defined in Section 4.2.3(c)), the terms of Sections 4.2.2 and 4.2.3 shall apply and not the terms of this Section 4.2.1. (b) Supplier agrees that Applied may, at Applied's option, purchase from Supplier Tooling to which this Section 4.2.1 applies that is unique to the Items or is unique to the manufacture of Items, *. Pursuant to such option, Applied may purchase from time to time (but subject to the limitations and requirements of Section 4.2.4(c)) items of such Tooling at the fair market value of such Tooling, as determined at the time of the exercise by Applied of this option. As part of such purchase and without additional consideration, Supplier shall assign to Applied, or if such assignment is not possible, license on a royalty-free, non-terminable basis, all IP Rights associated with such Tooling, including software (if any) associated with such Tooling *. In this regard, Supplier will obtain from its employees, consultants, agents and representatives, as necessary, all assignments necessary for assignment of IP Rights to Applied. * Material has been omitted and filed separately with the Commission. 59 CONFIDENTIAL TREATMENT REQUESTED (c) Prior to acquisition of an item of Tooling that is unique to the Items or is unique to the manufacture of Items, Supplier will provide a separate line item quote for any such item of Tooling (excluding, however, Tooling subject to provisions of Sections 4.2.2 or 4.2.3) that Supplier will acquire for use in the manufacture of Items after the Effective Date. If Applied accepts such quote under such procedures, Applied will pay the cost of such Tooling separately, title to the Tooling shall be held by Applied, and the parties shall execute and deliver a Tooling Loan Agreement (or a supplement or schedule to an existing Tooling Loan Agreement) as to such Tooling. Supplier will establish appropriate accountability and tracking of any Tooling owned by Applied. (d) Supplier shall not at any time use Tooling owned by Applied ("Applied Tooling") for the production of goods for persons other than Applied or in any manner other than in performance of Supplier's obligations under this Agreement, without Applied's written approval. Applied and Supplier shall execute a tooling loan agreement of even date with this Agreement in the form of Attachment 19 (the "Tooling Loan Agreement") for any Applied Tooling in Supplier's possession, or a supplement or schedule to include such Applied Tooling under an existing Tooling Loan Agreement. 4.2.2. Current FDS Test Fixtures. (a) The FDS test fixtures (including, for purposes of this Section 4.2, *) identified on Schedule 4.2.2(a) to this Agreement (the "Purchased FDS Test Fixtures") were purchased by Supplier from Applied. Each Purchased FDS Test Fixture (i) shall be located only at premises approved, in writing and in advance, by Applied (subject to the provision below as to changes of location among facilities of Supplier), and (ii) shall be used by Supplier solely to perform its obligations under this Agreement for manufacturing Applied FDSs to be sold to Applied pursuant to this Agreement. Further, Supplier grants and extends to all Purchased FDS Test Fixtures a security interest in favor of Applied to secure performance by Supplier of its obligations in respect of repurchase of the Purchased FDS Test Fixtures by Applied pursuant to Section 4.2.2(b) below. Supplier may, upon at least ten (10) calendar days prior notice to Applied given to Applied's Supply Account Team Lead as specified under Section 1.2.2 above, relocate any of the Purchased FDS Test Fixtures from their current locations to any manufacturing facility of Supplier in Milpitas, California, Austin, Texas or Round Rock, Texas. (b) Supplier grants to Applied the right, exercisable from time to time by Applied, at its option, whether or not default has occurred under this Agreement but subject to the requirements of Section 4.2.4(c) below, to purchase from Supplier any or all of the Purchased FDS Test Fixtures(s) and all then existing hardware modifications and improvements to such fixture(s). The purchase price for such Purchased FDS Test Fixture(s) shall be equal to the following percentages of the purchase price initially paid by Supplier to Applied for such Purchased FDS Test Fixtures and modifications and improvements: *. Upon payment of such purchase price Supplier shall convey to * Material has been omitted and filed separately with the Commission. 60 CONFIDENTIAL TREATMENT REQUESTED Applied, and Applied shall be the owner of, such test fixture(s) and all IP rights in or to such test fixture(s) (*). Supplier agrees to assign to Applied as part of such purchase and without additional consideration, and to obtain from its employees, consultants, agents and representatives, as necessary, all assignments of, all IP Rights it or they may have relating to the Purchased FDS Test Fixture(s) (*). (c) The FDS test fixtures identified on * to this Agreement are owned by Applied (the "Applied Test Fixtures") *. (d) The FDS test fixtures identified on * are owned by Supplier (the "Supplier Test Fixtures"). *. Improvements, additions and alterations to the Supplier Test Fixtures (excluding Improved Software, as defined below) shall be procured, purchased, funded and owned by Supplier. 4.2.3. Future FDS Test Fixtures. (a) Capacity FDS Hardware. Supplier shall regularly consult with Applied's SPM regarding such new FDS test fixture hardware and any modifications to existing FDS test fixture hardware (excluding modifications to the *) that Supplier will need within the following six (6) month period either (i) to meet manufacturing capacity and flexibility requirements under the Supplier Performance Plan then in effect, (ii) to achieve production levels established pursuant to its capacity planning under Section 2.5.1, or (iii) to achieve increases in manufacturing capacity and flexibility, production volumes or operating levels to accommodate changes in quantities of Items under Section 2.5.2 (the "Capacity FDS Hardware"), and to develop operational requirements for the Capacity FDS Hardware and a schedule for the acquisition and installation of such hardware, together with any related software. Applied shall provide or purchase all items of Capacity FDS Hardware that are, in its commercially reasonable judgment, necessary and appropriate for the purposes set out above in this Section 4.2.3(a). All Capacity FDS Hardware purchased or provided by Applied shall be owned by Applied and shall be subject to the Tooling Loan Agreement and this Agreement and upon request by Applied shall be identified by a supplement to * as Applied Test Fixtures. Whether or not default has occurred under this Agreement but subject to the requirements and limitations of Section 4.2.4(c) below, Applied shall have the right to remove or otherwise take possession of such Capacity FDS Hardware. * Material has been omitted and filed separately with the Commission. 61 CONFIDENTIAL TREATMENT REQUESTED (b) Product Change Hardware and Improved Software. Supplier shall regularly consult with the Applied SAT Lead regarding (i) any new or modified hardware for test fixtures that will be used to manufacture or test any FDS, Module, or other Item for Applied, which new or modified hardware will be needed as a result of new Applied products, modifications of existing Applied products, or new or modified testing requirements or Specifications for Applied products that Supplier may be selected to manufacture or supply Items for (the "Product Change Hardware") and (ii) any new or modified software for test fixtures that will be used to manufacture or test any FDS, Module or other Item for Applied, which new or modified software will be needed as a result of new Applied products, modifications of existing Applied products, or new or modified testing requirements or Specifications for Applied products that Supplier may be selected to manufacture or supply Items for, or changes in Supplier's manufacturing capacities, equipment or volumes (the "Improved Software"). Applied (including its SAT Lead and the Tooling and Test Organization) shall regularly consult with Supplier as to new Applied FDS products and modifications of existing Applied FDS products that Supplier may be selected to manufacture and as to changes in Applied's FDS test requirements. Supplier will use commercially reasonable efforts to identify and advise the SAT Lead of Product Change Hardware and Improved Software, the need for which is known to Supplier, that will result from such new or modified products, testing, manufacturing requirements, or Specifications. Applied shall have the option to provide or purchase all items of Product Change Hardware and Improved Software that, in its commercially reasonable judgment, are necessary and appropriate for the manufacture and testing of FDSs, Modules or other Items for Applied, but shall not be required to provide or purchase Product Change Hardware or Improved Software. Supplier will not acquire or install Improved Software not purchased or provided by Applied. All Product Change Hardware and Improved Software purchased or provided by Applied shall be owned by Applied and, in the case of Product Change Hardware and Improved Software, be subject to the Tooling Loan Agreement and this Agreement and upon request by Applied shall be identified by a supplement to * as Applied Test Fixtures. Whether or not default has occurred under this Agreement, but subject to the requirements of Section 4.2.4(c) below, Applied shall have the right to remove or otherwise take possession of such Product Change Hardware. (c) Right to Remove or Copy Software. Applied owns, has provided to Supplier and has paid the cost of the software currently used in the testing operation of all test fixtures listed on Schedules 4.2.2(a)-(d) (the "Current TF Software"). (The Current TF Software, the software for Capacity FDS Hardware and the Improved Software are the "Test Fixture Software.") Any Test Fixture Software in Supplier's possession may be copied by Applied at any time or times, upon reasonable notice to Supplier, to the attention of Supplier's Engineering Manager. Test Fixture Software in Supplier's possession may also be removed by Applied at any time or times; provided that as to removal of Test Fixture Software, Applied shall give the notice * Material has been omitted and filed separately with the Commission. 62 CONFIDENTIAL TREATMENT REQUESTED and comply with the other requirements of Section 4.2.4(c) below. Applied shall have the right to hold all source code and original documentation of Test Fixture Software. Applied shall have the obligation to maintain the Test Fixture Software, and Supplier shall cooperate with Applied in such maintenance. 4.2.4. General Application. (a) Supplier shall not at any time use Test Fixture Hardware or the Test Fixture Software (other than the Supplier Test Fixtures and hardware or software that, in each instance (i) are not provided or purchased by Applied under Sections 4.2.3(a)-(c) or (ii) do not constitute Applied IP) for the production of goods for persons other than Applied or in any manner other than in performance of Supplier's obligations under this Agreements without Applied's written approval. Any such Test Fixture Hardware in Supplier's possession shall be subject to this Agreement, the IPA, and also the Tooling Loan Agreement; the Test Fixture Software shall be subject to this Agreement, the Tooling Loan Agreement, and also the IPA. (b) If Applied fails to provide or delays providing (after notice by Supplier, given to Applied's SMT Operations Manager, that the failure or delay will affect Committed Delivery Dates), items of Capacity FDS Hardware, Product Change Hardware or Improved Software that are required for the manufacture and testing of new FDSs, Modules or other Items for Applied Systems, modifications of existing Applied Systems, or new or modified testing requirements or Specifications for Applied Systems that Supplier is selected to manufacture or to supply Items for, or changes in Supplier's manufacturing capacities, equipment or volumes, after the Effective Date, then, to the extent of delays in testing and delivery that result directly from such failure of Applied after notice under this Section 4.2.4(b), the Committed Delivery Date of the Items(s) so delayed shall be extended for a period equal to the period of Applied's failure or delay in providing such hardware or software. (c) Applied may exercise any of its options or rights to purchase, repossess, or remove any Tooling or Test Fixture Hardware and Test Fixture Software, to the extent provided for in this Section 4.2, at any time, without the occurrence or continuance of a default by Supplier, but only in connection with a termination or cancellation of this Agreement, in whole or in part. If exercised in connection with a partial termination or cancellation, the right of Applied shall extend only to such items of Tooling, Test Fixtures and Test Fixture Software that are reasonably required for or in connection with the manufacture and testing of those Items (including Applied System product lines) as to which the termination or cancellation relates. Applied shall give Supplier prior notice under Section 1.2.2 of Applied's intent to purchase, repossess or remove any Tooling, Test Fixtures or Test Fixture Software or other items which it owns or may acquire hereunder, which shall be given at a time reasonably in advance of acquisition or relocation to allow Supplier to complete production of Items affected by the cancellation or termination and for which an Authorized Demand Signal has been issued, provided that notice given at least eight (8) weeks (or a period equal to such lesser product cycle time as may be applicable to the affected Items at the time) prior to the repossession, removal or purchase shall be deemed reasonable. 63 CONFIDENTIAL TREATMENT REQUESTED 4.3. Design Changes and Resolution. (a) Supplier will not make changes to the Specifications, form, fit, function or manufacturing process of Item(s), without having first complied with the applicable requirements of Sections 4.1, 4.3, 4.4, and 4.5 of this Agreement. (b) Supplier shall not subcontract any Design Service or Development Service except as permitted by and in compliance with the IPA and shall not utilize in any Services any consultant, contractor, or employee for whom an executed joinder in the confidentiality provisions of the IPA has not been delivered to Applied. Supplier shall implement changes affecting Items and resulting from Design Services or Development Services only upon obtaining prior written approval required under applicable ECO, Applied Product Definition Form, and other procedures from Applied's Supplier Engineer designated for Supplier and, as applicable, as required by the DSA or DVA. 4.4. Process Changes and Resolution. Supplier shall be responsible for its compliance and compliance by its sub-tier suppliers, subcontractors, providers and special process suppliers with manufacturing requirements, Specifications and provisions of the QRD and Quality Framework and shall inform Applied of any special process or other sub-tier supplier, provider or subcontractor changes to Items, including any changes in the manufacturing process of Supplier or of a sub-tier supplier, special process supplier, subcontractor or provider, even when Specifications are being met (excluding changes in physical layout of Supplier's manufacturing plant or in Supplier's manufacturing line design). Supplier must receive approval in writing from Applied with respect to the implementation of each such change. As required by the QRD, Supplier must use special process suppliers from the list set forth in Attachment 14. 4.5. QRD and Special Process Requirements. 4.5.1 Critical and Source Specific Materials. The manufacture, processes, Specifications, manufacturing processes and requirements of and for, and the providers of, Piece Parts, Modules, assemblies or Subassemblies designated as "Critical" or "Source Specific" pursuant to the QRD, and any Subassemblies transitioned to a sub-tier supplier or subcontractor (the "Critical and Source Specific Materials") shall comply with Applied's QRD, Quality Framework, and Special Process Supplier requirements in or pursuant to Attachments 14, 15 and 20 to this Agreement and documents or procedures referred to therein, all as revised from time to time. Supplier shall not make or authorize any change in any of the foregoing without prior written approval by Applied pursuant to the Quality Framework, QRD and Special Process Supplier requirements and related documents and procedures. 4.5.2 Supplier's Subcontractors. Supplier will ensure that all sub-tier suppliers, providers and subcontractors of Supplier who have access (directly or indirectly) to Applied's Specifications or Internal Applied Data or other Confidential Information sign and are governed by a confidentiality 64 CONFIDENTIAL TREATMENT REQUESTED agreement with Supplier that is similar in form and substance to the confidentiality provisions of the IPA applicable to Supplier, and Sections 2.9.1 and 2.9.2 of this Agreement. Approval by Applied of a sub-tier supplier, provider, or subcontractor selected by Supplier shall not alter Supplier's obligations to Applied. 4.5.3. Costs of Supplier Change. The party initiating a change in a subcontractor, provider or sub-tier supplier to Supplier for Source Specific Parts shall bear the costs of qualifying the new sub-tier supplier, provider or subcontractor for the affected Piece Part, material or other element. 4.5.4. Waivers. In addition to the provisions of Section 9.4 of this Agreement, if Applied waives any drawing, Specification or other requirement for one or more of the Items, it will not constitute a waiver as to remaining Items to be delivered, unless stated by Applied in writing. 4.6. First Articles and Source Inspections. First Article and Source Inspections shall be conducted in compliance with the QRD and Quality Framework and the documents and procedures referred to therein. 4.7. Applied's Right to Subcontract. Applied may at its discretion elect to contract with a manufacturer, integrator or outsource provider of Subassemblies (a "Subassembler"), which Subassemblies will incorporate or include Item(s) Applied may purchase under this Agreement. Applied will advise Supplier of the new Subassembler and of the Items affected. Supplier understands that the selection and sourcing of any Items to be incorporated or included in Subassemblies to be provided by the Subassembler will be made by the Subassembler, and that, pursuant to Article 17 of Exhibit 1, Applied may assign this Agreement, in whole or in part, in connection with its contract with the Subassembler. 4.8. Product Support 4.8.1. Global Technical Support and Product Support. (a) Technical Support. Supplier shall provide a telephone support system for global technical assistance to Applied, seven days a week, 24 hours a day, at no additional charge. Supplier shall include as part of its technical support hot pager contact for access at times outside Supplier's normal operating periods. Supplier is expected to use commercially reasonable efforts to provide a resolution to Applied's requests for technical assistance. (b) Product Support. In addition to support, repair and replacement services covered by other provisions of this Agreement and in addition to the above technical support, Supplier will, upon request by Applied, provide support globally to Applied (and at the direction of Applied, to Applied's customers) for all Items that Supplier provides to 65 CONFIDENTIAL TREATMENT REQUESTED Applied, to include repair, replacement or correction of Items. Supplier agrees to have an established and, at Applied's request, deployable global product support service capability. Supplier may utilize one or more affiliates of Supplier, Supplier distributor(s) or other qualified entities designated by Supplier and acceptable to Applied to meet this requirement. If support services provided by Supplier are not covered as warranty obligations to be provided pursuant to Section 7 of this Agreement, Supplier will be compensated for the services so provided as agreed by the parties on a case by case basis or under standard pricing as agreed. Except as required for those requests, if any, for global support covered by Section 2.4, when Applied has not been able to resolve a defect, failure or problem affecting an Item through the above technical support process, Kinetics shall respond to each request for global support from Applied and propose a plan for the correction, solution, repair or replacement within forty-eight (48) hours (as to requests initiated by Applied's Customer Engineer), and as to all other requests from Applied, within a period that is prompt under commercially reasonable standards considering the nature and urgency of the request. 4.8.2. Product Support Period. Supplier agrees to maintain the capability to provide Items and to provide the same types and level of global product service and technical support to Applied described in Section 4.8.1 above, for all of the Items, for a minimum of ten years from the date of the last shipment of an Item to Applied under this Agreement to Applied for its manufacturing operations (the "Post Term Support"), in addition to meeting Supplier's warranty obligations. Upon Applied's request, Supplier shall provide Post Term Support on a time and materials basis, at rates and cost determined as set out in Section 4.8.1 above. 4.8.3. Product Post Term Support Options. (a) If Supplier desires to modify or reduce its Post Term Support obligation, Supplier agrees, as a condition of such a reduction or modification, that Supplier shall have prepared a transition and support plan for Post Term Support and shall have obtained Applied's approval, not to be unreasonably withheld, of such plan. As part of such plan, Supplier shall have negotiated (and obtained such approval from Applied of) a contract for Post Term Support (including capability to provide Items and the provision of global product support and technical support) to be provided by a financially responsible entity with established capability and expertise and a license to such third party of IP Rights to meet the requirements for Post Term Support, to the extent Supplier desires to reduce or modify its obligations for Post Term Support. (b) If, after the use of commercially reasonable efforts, Supplier has not located a third party to provide Items as required for modification or reduction of Post Term Support obligations of Supplier or to negotiate a contract for the provision of Items under Post Term Support as described in Section 4.8.3(a), then Supplier shall provide in good faith all assistance reasonably required by Applied for Applied to provide or obtain the Items for which Supplier has Post Term Support obligations and, for such purpose, Applied shall have and may exercise the license in respect of cover pursuant to Section 3.13 of the IPA. If Supplier fails in any respect (other than as to arrangements for the provision of Items) to provide Post Term Support, or to have obtained approval of a 66 CONFIDENTIAL TREATMENT REQUESTED transition and support plan under Section 4.8.3(a), then Supplier shall provide in good faith all assistance reasonably required by Applied for Applied to provide or obtain the affected Post Term Support and, for such purpose, Applied shall have and may exercise the license in respect of cover pursuant to Section 3.13 of the IPA. 4.9. Periodic Business Review. Applied and Supplier shall periodically review their activities and agreements through a formal business review process. As part of such business review process during any Wind Down Period, the parties shall determine if Supplier holds any documentation of a Future Modification (as defined in the IPA) in which Applied holds any rights as owner or licensee pursuant to the IPA or any DSA or DVA, which documentation Supplier is required to deliver to Applied pursuant to the IPA, but which documentation has not been delivered to Applied (the "Deliverable Documentation"). Supplier shall promptly deliver to Applied, upon identification of same, upon subsequent request by Applied, any Deliverable Documentation. 4.10. [Omitted]. 4.11. Wind Down Provisions. (a) The "Wind Down Period" is the period preceding expiration or termination of this Agreement that is applicable under the following provisions: (i) With respect to the expiration of this Agreement, a period of up to * that is designated by Applied as the Wind Down Period, which period shall commence on the date specified in a notice by Applied (given under Section 1.2.2) that a Wind Down Period shall apply in connection with the expiration of this Agreement. If the otherwise applicable term of this Agreement would expire prior to the end of such designated Wind Down Period, Applied shall extend the term of this Agreement to the last day of the Wind Down Period by an extension pursuant to Section 1.5, so that the term of the Agreement shall automatically be extended to and expire upon the last day of the designated Wind Down Period. (ii) If Applied terminates this Agreement pursuant to Article 25 of Exhibit 1 to this Agreement or Article 26 of Exhibit 1 to this Agreement, the Wind Down Period shall be a period of up to * that is designated by Applied in its notice (given under Section 1.2.2) exercising such right of termination, which period commences on the date the notice of termination is issued and ends on the date termination is effective, which effective date of termination shall be set out in the notice of termination and shall comply with the requirements of this Section 4.11 and of Article 25 or 26 (as applicable) of Exhibit 1. If Supplier * the Wind Down Period shall be a period of at least * that is designated by Supplier in its notice *, which period commences on the date the notice * is issued and ends on the date * is effective, which effective date * shall be set out in the notice * and shall comply with the requirements of this Section 4.11 and of *. * Material has been omitted and filed separately with the Commission. 67 CONFIDENTIAL TREATMENT REQUESTED If termination is in part and not in whole, the Wind Down Period shall apply with respect to that portion of the Agreement affected by the termination. During the Wind Down Period, Supplier shall continue to supply all Items for which an Authorized Demand Signal is issued and accepted or deemed accepted under this Agreement. The parties shall use commercially reasonable efforts and cooperate so that Items for which Authorized Demand Signals are issued and accepted during or prior to commencement of the Wind Down Period will have Committed Delivery Dates on or before the end of the Wind Down Period. Supplier and Applied each shall perform its agreements and obligations regarding the Wind Down Period under the IPA and this Agreement. The Wind Down Period continues from the date it commences until the date termination or expiration is effective. (b) The provisions of Section 4.8 shall apply during, and continue in effect after, the Wind Down Period, without limitation of other survival provisions of this Agreement. (c) No later than the conclusion of the Wind Down Period (and, when applicable for a partial termination, then as to the portion affected): (i) Supplier shall convey its title, if any, to, and shall deliver to Applied, *. In the event of Termination for Default or an expiration of the term of this Agreement, Applied shall have the option, but not an obligation, to purchase from Supplier the Remaining Consumable Materials. *. Prices for partially completed Items shall be determined by applying the cost model (Attachment 1) to actual materials consumed or installed in the partially completed Item, and by a charge for actual Services performed and actual manufacturing labor (at the rate for work in Supplier's facility). The price payable by Applied for Remaining Consumable Materials shall be determined under Section 4.11(d) below. Supplier shall not charge for documentation of or relating to, Applied IP. (ii) Supplier and Applied shall have performed and discharged their respective obligations under the IPA and this Agreement. (iii) Supplier will return all Tooling, capital or other equipment (including any Tooling and capital equipment that Applied has acquired ownership rights in as a result of exercising its rights under this Agreement) and material owned by Applied. Supplier will be responsible for the packaging and transportation costs associated with the return of these items if the termination is for default; Applied shall be responsible for such packaging and transportation costs in all other events. (iv) Applied and Supplier shall each have paid the other all amounts then due and payable under this Agreement and any Related Agreement, except for amounts in bona fide dispute. * Material has been omitted and filed separately with the Commission. 68 CONFIDENTIAL TREATMENT REQUESTED (d) "Remaining Consumable Materials" shall be determined as follows: Supplier shall record and report to Applied, within 10 days after the date notice of termination is given, * following the date on which notification is given, * affected by the notification over the following *. The "Remaining Consumable Materials" is the quantity of * that were actually on hand, or for which Supplier had issued noncancellable purchaser orders, that were not used or consumed in the course of operations under the Agreement. The charge or price for Remaining Consumable Materials is determined * for the * at the date of notification. (e) During the period after notification and prior to termination, Applied and Supplier shall negotiate the terms of and charges for Restock or Reconfigure Items, and the formula provisions of Sections 2.14.4 and 2.14.6 shall not apply. Supplier shall not be required, during a Wind Down Period relating to termination, to accept Restock Items or Reconfigure Items that are first designated as such during such a Wind Down Period. The provisions of this Agreement as to cancellation of Items and as to *s, however, are not modified during a Wind Down Period. 5. NONCONFORMANCE. 5.1. Nonconformance and Corrective Action. 5.1.1. [Omitted.] 5.1.2. Supplier Corrective Action Request. Applied will complete a "Supplier Corrective Action Request" (Attachment 10) pursuant to ISO 9000 processes to record and request corrective action for recurring nonconformities. Upon receipt of a Supplier Corrective Action Request, Supplier will promptly respond as appropriate and use best industry practices to cure the nonconformities and the cause of nonconformity. A corrective action process to resolve nonconformance will be documented and used by the parties. In addition, Supplier will participate in continuous improvement plans and programs as defined by Applied and Supplier. 5.2. Applied Nonconformance and Corrective Action. 5.2.1. Items Affected. Applied will, at its option, return Items at Applied's expense that do not conform to Applied's requirements due to Applied's errors or damage caused by Applied. These Items will be returned to Supplier for repair or potential rework. Applied may, at its option, require Supplier to repair a Subassembly at Applied's facility. If Applied returns an Item to Supplier under this Section 5.2.1, Applied shall deliver to Supplier with such Item, when returned, certification of decontamination and preparation for safe handling if the Item has been exposed to toxic or corrosive gases or chemicals, in compliance with Section 2.14.7.D. * Material has been omitted and filed separately with the Commission. 69 CONFIDENTIAL TREATMENT REQUESTED 5.2.2. Standard Repair Costs. Except for instances for which the parties have established "standard" repair costs (labor, Items and freight) for Items not covered under warranty, Supplier shall charge, and Applied shall pay, for non-warranty repair or correction of Items on a time and materials basis. Materials shall be charged at the *; Supplier's labor charges for repairs performed at Supplier's facilities shall not exceed *. If Supplier is required to provide labor at Applied facilities to meet repair times for Production Issue Items, the labor cost will not exceed *. Supplier will assess repair and rework costs and timing and quote same to Applied before work is performed. Upon approval of Supplier's quote, Applied will issue its Purchase Order for such costs. Applied may at its option elect (a) to have the Item repaired or reworked, or (b) to purchase a new Item at pricing determined under Attachment 1. Supplier shall prepare its quotation based on the completion terms of Section 5.2.3 and shall advise Applied as part of its quotation if more than five (5) Business Days will be required. 5.2.3. Time for Repair. Supplier shall repair, replace, or correct defects or defective Items resulting from Applied's error or damage within * after Applied notifies Supplier of the defect or damage (unless a longer period is required in the use of best professional practices), or at such other time as is agreed by the parties as part of the issuance of Applied's Purchase Order, except for Items Applied identifies as a Production Issue in its initial notice under Section 2.4, as to which Supplier shall respond and act in accordance with Section 2.4.2. Costs and pricing for repair of damages or defects caused by Applied error will be established under Section 5.2.2 above. 5.2.4. Return of Items. Items repaired or reworked by Supplier will be shipped in accordance with generally applicable transportation and packaging requirements. Supplier will deliver such Items to Applied at the times determined under Section 5.2.3 above. Prior to Supplier's return of a repaired or reworked Item to Applied, Supplier will mark such Item with Applied's part number, serial number, range and gas (if applicable). Applied shall pay costs of transportation and bear the risk of loss or damage during transit of repaired or reworked Items, whether or not such Items meet warranty or other requirements. 6. SUPPLIER PERFORMANCE PLAN. As part of this Agreement, Applied and Supplier have prepared a Supplier Performance Plan, which is Attachment 16 to this Agreement. Supplier's performance and compliance with the applicable Supplier Performance Plan shall be reviewed in periodic business review meetings * Material has been omitted and filed separately with the Commission. 70 CONFIDENTIAL TREATMENT REQUESTED conducted by Applied's SPM. A recurring failure of Supplier to perform at (or to achieve) the standards set, or to comply with terms of, the Supplier Performance Plan will be deemed a Dispute for purposes of Section 7.2.5, as to which either party may initiate the Business Review Process and, if such recurring failure is material, may be the basis of an action by Applied under Article 25(a)(iii) of Exhibit 1. A recurring failure for purposes of this Section 6 and of the Supplier Performance Plan is a failure that occurs in at least *. 7. WARRANTIES AND REMEDIES. 7.1. Supplier Warranty. 7.1.1. Basic Warranty. Subject to the limitations set out in Section 7.1.4 below, Supplier warrants to Applied, for the warranty period set out in Section 7.1.3 below, that each Item delivered to Applied (excluding Services separately warranted under Section 7.1.2 below): (a) will be free from defects in materials, workmanship and manufacture, and will be of good title; (b) will conform to (i) all Specifications, and (ii) those requirements of (or made applicable through) the following documents and Sections of this Agreement applicable to such Item: the Quality Requirements Document (Attachment 20); the Process Qualification Program in effect at the time of manufacture under the QRD and applicable to the Item; the Quality Framework (Attachment 15); Special Process Suppliers (Attachment 14); and Sections 4.4 and 4.5 of this Agreement; (c) will have been manufactured in compliance with those provisions of the Quality Requirements Document (Attachment 20), Process Qualification Program in effect at the time of manufacture under the QRD and applicable to the Item, Quality Framework (Attachment 15), the Supplier Performance Plan (Attachment 16), and Sections 4.4 and 4.5 of this Agreement, applicable to the manufacture of such Item and with manufacturing standards suitable for the manufacture of high quality, process sensitive components of Applied Systems ("Suitable Manufacturing Standards"); and will consist of new materials and Piece Parts; (d) will be of merchantable quality and fit for the intended purpose of use with or incorporation in Applied Systems for semiconductor wafer fabrication, flat panel display fabrication, thin film application processes or manufacturing, toxics abatement or recycling, or wafer inspection and metrology, as applicable; and * Material has been omitted and filed separately with the Commission. 71 CONFIDENTIAL TREATMENT REQUESTED (e) will, to the extent of Configuration Engineering Services, CES Services, CCR Services, NPT Services and Design Services or Development Services, provided by Supplier, be free from defect in such Services excluding, however, any defects caused by error in the applicable product design that was not itself caused by Supplier or its Services. 7.1.2. Services. As to Services, for the warranty period set out in Section 7.1.3 below and subject to the limitations set out in Section 7.1.4 below, Supplier warrants to Applied that its Services have been performed in a competent, professional and workmanlike manner, and are free from defect and in accordance with the best professional practices of the industry. 7.1.3. Warranty Period. The warranty period applicable under this Agreement commences on the date of delivery to Applied of the Item (and, as to Services, commences upon completion of the Service and delivery of the completed work product and any other deliverables to Applied) and extends for a period of * after such date *; subject, however, to applicable limitations under Section 7.1.4(iii), and provided that Supplier's warranty period as to a Third Party OEM Component (as defined in Section 7.1.5. below) extends *. If Applied's warranty to the Applied customer by whom the Item is used or purchased expires during Supplier's stated 24 month warranty period, *. If Applied's warranty to the Applied customer by whom the Item is used or purchased does not have a stated period or term, *. 7.1.4. Limitations on Warranty. Supplier's warranties under this Agreement are subject to the following limitations: (i) Supplier makes NO WARRANTIES under this Agreement, whether express, implied, statutory or otherwise, except those warranties provided in this Agreement. The remedies provided for in or through this Agreement (and as to Services, where applicable, provided for in or through the IPA, DSAs, or DVAs) constitute the sole and exclusive remedies of Applied with respect to Items that fail to conform to such warranties. EXCEPT FOR THE WARRANTIES EXPRESSLY SET FORTH IN THIS SECTION 7.1 AND THOSE EXPRESSLY PROVIDED IN THE IPA AND ANY DSAs OR DVAs, (a) SUPPLIER DISCLAIMS ALL OTHER WARRANTIES, EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE WITH RESPECT TO ITEMS (INCLUDING SERVICES) INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF TITLE, NON-INFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND (b) THE ITEMS ARE PROVIDED "AS IS." * Material has been omitted and filed separately with the Commission. 72 CONFIDENTIAL TREATMENT REQUESTED (ii) In determining whether an Item is of a quality that is merchantable (Section 7.1.1(d) above), an Item must be of a quality at least equal to the standards of minimum acceptability for the same or like Items that are employed by Applied at the time of its manufacture; however, such standards shall not limit application of, or excuse compliance with, specific warranty requirements of Section 7.1.1 above applicable to the specific Item. In determining whether an Item is of a quality that is merchantable, the standards for merchantable quality of the Item shall be those that are currently applied at the time of its manufacture. In determining whether an Item is fit for its intended purpose, such warranty shall extend to use or incorporation in semiconductor wafer fabrication, flat panel display fabrication, thin film application processes or manufacturing, toxics abatement or recycling, or wafer inspection and metrology systems, as applicable, employed in processes (a) that are customary or generally contemplated within the industries using such systems, or (b) that are specifically identified by Applied to Supplier, in writing (including e-mail, facsimile and posting of information on the Applied website designated for Supplier's access) as an intended use. (iii) Supplier's warranties do not extend to defects, failure or malfunction of an Item to the extent such failure, defect or malfunction (a) results from conformance by Supplier with Specifications prepared by Applied, provided that this exclusion shall not alter or limit Supplier's warranties of its Services; (b) is caused by accident, negligence, misuse, alteration, modification or tampering of or caused by any person other than Supplier, or (c) is caused by use or operation in environments or for processes that are not customary or generally contemplated in those industries using semiconductor wafer fabrication, flat panel display fabrication, thin film application processes or manufacturing, toxics abatement or recycling, or wafer inspection and metrology systems, as applicable, or not specifically identified by Applied to Supplier as intended uses or environments. 7.1.5. Third Party OEM Components. (a) A "Third Party OEM Component" is any product (i) that is identified by an Applied Commodity Code (under Applied's Commodity Code Document 0250-10856) with an initial designator equal to or greater than "0500" and (ii) for which the original manufacturer's warranty is for a period of at least thirteen (13) months from the date of Supplier's purchase and expressly runs to Applied or has been validly assigned to Applied by Supplier. The foregoing provision as to products with an initial Commodity Code designator equal to or greater than "0500" includes products: (i) that are identified by Applied Commodity Codes with initial designators between "0220" and "0229" but that would otherwise be assigned Applied Commodity Codes with an initial designator greater than "0500"; and also, (ii) that are new products to which a Commodity Code initial designator greater than "0500" would be assigned under the terms of Applied Document Commodity Code Document 0250-10856 as in effect on the Effective Date. 73 CONFIDENTIAL TREATMENT REQUESTED (b) * (c) Effective on the shipment by Applied to its customer of the Item or Applied System containing a Third Party OEM Component, Supplier assigns to Applied, to the fullest extent permitted by applicable law and agreements, all of Supplier's warranties, warranty rights and recoveries from or against each manufacturer and supplier of each Third Party OEM Component installed or incorporated in the Item or Applied System that may not be enforced by Applied, unless so assigned. Supplier will cooperate with Applied in Applied's enforcement of and recovery under such assigned or available warranties of Third Party OEM Components, including the execution and delivery of such further instruments as Applied may reasonably request to perfect and protect the foregoing assignment or rights of Applied, provided that Supplier shall not be required to bear costs and expenses of such cooperation that are not reasonable under the circumstances. If, following the date of assignment to Applied of the warranty and warranty rights and recoveries, Supplier is sued and such warranty and warranty rights or recoveries are reasonably required for Supplier's defense of, or for the assertion of counterclaim against, the claims against Supplier, Applied will cooperate with Supplier with respect to such warranty and warranty rights and recoveries and, upon reasonable terms and indemnification, assign back to Supplier, to the extent so required, the warranty and warranty rights or recoveries. 7.1.6. Debit Recoveries. (a) Prior to Applied's initiation of a debit or other offset under Section 2.11.3 to effect a recovery for a warranty claim of Applied against Supplier, Applied shall advise Supplier, to the attention of Supplier's Customer Service Manager - Warranty Claims (in addition to the notice to Supplier's Finance Manager as provided by Section 2.11.3) of the expected debit or offset amount and shall ship to Supplier for inspection the Item for which Applied proposes to effect a debit or offset based on its warranty claim (the "Warranted Part"). Supplier shall cooperate in arranging for delivery and shall provide, promptly upon request by Applied and without prejudice to Supplier as to warranty coverage, Supplier's Return Materials Authorization ("RMA") for the return of the Warranted Part under this Section 7.1.6. Applied shall not use debits or offsets to recover amounts for warranty claims as to Services only. (b) If a Warranted Part has been destroyed or is not available to Applied for delivery for purposes of the debit process under this Section, Applied will not initiate a debit process for the warranty claim. If Applied fails to effect delivery of the Warranted Part to Supplier under Section 7.1.6 (a), the debit or offset shall be recredited in full. If Applied does not proceed under this Section, Applied * Material has been omitted and filed separately with the Commission. 74 CONFIDENTIAL TREATMENT REQUESTED retains and may pursue all its other remedies. Applied is not required to proceed under this Section to assert or recover for its warranty claims against Supplier; this Section only applies to debits or offsets relating to warranty claims. (c) If, after Supplier's examination of a Warranted Part, Supplier disputes the debit, offset or warranty coverage, Supplier shall notify its assigned Supplier Quality Engineer ("SQE") at Applied and shall specify the amount Supplier requests to be re-credited ("Disputed Amount"). This notification and specification of the Disputed Amount must in any event be given to Applied within thirty (30) days after the RMA delivery of the Warranted Part to Supplier. If the SQE approves the Supplier's request, the Disputed Amount shall be recredited. (d) If the SQE and Supplier do not agree on the amount to be re-credited, or on the disposition of the claim, Supplier may (i) accept the determination of the SQE or (ii) initiate the Business Review Process for resolution of the dispute as described in Section 7.2.5. 7.1.7. Survival of Warranties. Supplier's warranties shall survive any delivery, acceptance, inspection, or payment by Applied, except as expressly provided otherwise in this Section 7.1. Applied's approval of Supplier's material or design will not relieve Supplier of the warranties established in this Agreement. 7.2. Applied's Remedies. This Section 7.2 sets out obligations of Supplier and provides remedies of Applied for Supplier's failure to make timely delivery of Item(s) and for breach of Supplier's warranties as to Items. In addition to the remedies for such failure of delivery and for breach of warranty provided for in this Section 7.2, Applied has the remedies and rights provided under Articles 22 and 25 of Exhibit 1 (subject to the limitations and requirements of such Articles and of Article 21 of Exhibit 1). Provisions for recovery of damages by Applied in this Section 7.2 or in Article 25 are subject to applicable limitations under Article 21 of Exhibit 1. 7.2.1. Failure to Deliver. If Supplier fails to deliver one or more Items (or to provide Services with completed work product and deliverables) on the Committed Delivery Date or otherwise at the times provided by the applicable Authorized Demand Signal or as agreed by the parties: (a) Supplier shall initiate all actions necessary to complete and deliver the Items (or provide Services, work product and deliverables) promptly, without notice or demand by Applied. All increased costs and expenses for completion and delivery that result from Supplier's failure to timely deliver Items (or provide Services, work product and deliverables) shall be paid by Supplier. Supplier shall use the most expeditious manner commercially available to effect completion and delivery of Item(s), Services, work product and deliverables. 75 CONFIDENTIAL TREATMENT REQUESTED (b) If the failure constitutes or results in a Production Issue under Section 2.4, Supplier shall comply with that Section of this Agreement. (c) If Supplier fails to comply with Section 2.4, where applicable, or if Supplier otherwise fails to cure the late delivery promptly after the applicable Committed Delivery Date or repudiates, Applied may recover its damages resulting from the failure to comply or deliver, from late delivery or from repudiation and may exercise all remedies available pursuant to the UCC and, as to Services and related deliverables, may recover its damages and exercise all remedies provided by law or equity. Where applicable, the procedures and limitations of (or, provided for through) Section 7.1.6, 7.2.1(d), or 7.2.1(e) and of Article 21 of Exhibit 1 will apply to exercise, enforcement and recovery by Applied. (d) Prior to effecting cover under the preceding paragraph (c), Applied shall give notice of its intent to cover, which notice shall be given to Supplier's Customer Service Manager in Austin or Milpitas, as applicable by e-mail or facsimile transmission and by voice message (telephone, pager, or voice mail). The notice of intent to cover shall identify the Item(s) for which cover is intended, and shall specify the Cover Period (defined below). Within 24 hours (measured during Business Days and under prevailing Pacific Time) from the time notice is so given, Supplier shall notify Applied (in the same manner as provided for the notice to Supplier) by e-mail or facsimile notice to the Supply Account Team Lead specified in Section 1.2.1 if Supplier will provide to Applied the Item(s) within the Cover Period or if Supplier declines to proceed. If Supplier elects to provide such Item(s), Supplier shall provide such Item(s) on or before the expiration of the Cover Period at the original Contract Price. The "Cover Period" is that period which is reasonable under the circumstances for the Item(s), or equivalent(s), to be completed and delivered (but not to exceed the period within which the Item(s), or equivalent(s), can be obtained from a source other than Supplier). (e) (i) Prior to effecting cancellation through termination for default, in part, with respect to the particular affected Item(s), as a remedy pursuant to clause (c) above, Applied shall give notice of intent to cancel to Supplier's Customer Service Manager in Austin or Milpitas, as appropriate, and may (but shall not be required to) initiate the Business Review Process under Section 7.2.5. This cancellation through termination for default as to particular Item(s) shall not be limited by or conducted under Article 25 of Exhibit 1, but Applied may proceed to exercise such right by notice to Supplier. If Applied does elect to utilize the Business Review Process and the failure is not resolved by the Business Review Process, when applicable, or if Supplier fails to perform in a material respect under a resolution developed by the Business Review Process, Applied may give notice of default and cancel this Agreement as to the particular Item(s) without compliance with Article 25 of Exhibit 1. 76 CONFIDENTIAL TREATMENT REQUESTED (ii) If Applied intends to effect cancellation as to more than the particular affected Item(s) through termination for default (which may be in part or in whole), Applied shall proceed in accordance with Article 25 of Exhibit 1 and the Business Review Process. 7.2.2 Defective Items. If Supplier delivers Items (or provides Services) that do not conform to the warranty terms applicable to the Item(s) or Service(s) (a "Defective Item"), Applied shall give written notice (including notice by e-mail, facsimile or other electronic record) to Supplier's Customer Service Manager in Austin or Milpitas, as appropriate, of the Defective Item, and thereafter: (a) Supplier shall promptly correct, repair or replace, at Supplier's cost and expense, the Defective Item(s) without further notice from or demand by Applied. As to Services, Supplier's obligations include the prompt correction or re-performance of the Services and any work product or other deliverables. Supplier shall use the most expeditious commercially available means to effect repair, replacement or correction, including the provision of a new Item in lieu of repair. Applied may require repair, replacement or correction at Applied's facility. (b) If the failure constitutes or results in a Production Issue under Section 2.4, Supplier shall comply with that Section. If the failure is subject to Section 5.1.2, as applicable under this Agreement, Supplier shall comply with that Section of this Agreement. (c) If Supplier fails to comply with Section 2.4, where applicable, or if Supplier otherwise fails to promptly repair, replace or correct any Defective Item(s) or if Supplier repudiates, Applied may recover its damages resulting from such failure and may exercise all remedies available pursuant to the UCC (to include revocation of acceptance) and, as to Services and related deliverables, may recover its damages and exercise all remedies provided by law or equity. Applied may, as part of its recovery, include premium costs for expedited delivery. Where applicable, the procedures and limitations of (or, provided for through) Section 7.1.6, 7.2.2(e) and (f), and Article 21 of Exhibit 1 will apply to exercise, enforcement and recovery by Applied. (d) (i) Applied will utilize the procedures of this Section 7.2.2(d) to make repair, replacement or correction of a Defective Item in those instances in which (a) Supplier fails to comply with Section 2.4, if applicable, (b) Supplier fails to correct, repair or replace the Defective Item within the period requested by Applied or otherwise established by the parties or this Agreement, or (c) the Defective Item has been shipped to or is installed at an Applied customer location. (ii) When Applied effects repair, replacement or correction of a Defective Item under this Section 7.2.2(d), Applied shall be entitled to recover, and Supplier shall pay to Applied each of the following that applies: 77 CONFIDENTIAL TREATMENT REQUESTED 1. The cost of goods obtained or used by Applied to make the repair, replacement or correction of the Defective Item, and of any necessary engineering or similar services relating to such goods. 2. The cost of freight or shipping and of taxes for the goods obtained for the repair, replacement or correction, and for the return of any Defective Item(s). 3. The cost of labor required to remove, repair, replace and reinstall a Defective Item (if repaired) and remove and reinstall other Piece Parts necessary to the repair, correction or replacement. Costs of labor shall be determined at Applied's then standard labor rates; if labor is provided at facilities of Applied's customers or through the Applied CPS organization, the labor charge by Applied to Supplier shall be equal to the field service labor charge calculated at Applied's CPS rates (not to exceed *). Costs of engineering services shall be determined by Applied at its customary rates, then in effect, not to exceed *. This Section 7.2.2(d) shall not limit Applied's other remedies or recoveries provided for in (but subject to the limitations of) other provisions of this Agreement. (e) Prior to effecting replacement under paragraph (d) above of a Defective Item that is an FDS, Applied shall give notice of its intent to make such a replacement, which notice shall be given to Supplier's Customer Service Manager in Austin or Milpitas, as appropriate, by e-mail or facsimile transmission and by voice message (telephone, pager, or voice mail). The notice of intent to replace shall identify the Item(s) for which such replacement is intended, and shall specify the Replacement Period (defined below). Within 24 hours (measured during Business Days and under prevailing Pacific Time) from the time notice is so given, Supplier shall notify Applied (in the same manner as provided for the notice to Supplier) by e-mail or facsimile notice to the Supply Account Team Lead specified in Section 1.2.1 if Supplier will replace the Item(s) within the Replacement Period or if Supplier declines to proceed. If Supplier elects to replace such Item(s), Supplier shall replace such Item(s) on or before the expiration of the Replacement Period. The "Replacement Period" is that period which is reasonable under the circumstances for the Item(s), or equivalent(s), to be replaced (but not to exceed the period within which the Item(s), or equivalent(s), can be obtained from a source other than Supplier). (f) If Applied intends to cancel the Agreement as to more than the particular affected Item(s) through termination for default (which may be in part or in whole) as a result of Supplier's breach or default under this Section, Applied shall proceed in accordance with Article 25 of Exhibit 1 and the Business Review Process. * Material has been omitted and filed separately with the Commission. 78 CONFIDENTIAL TREATMENT REQUESTED (g) If Applied makes a warranty claim with respect to an Item that has been modified or repaired, Applied shall include as part of the documentation of such claim the maintenance and service record relating to the modification or repair. 7.2.3. Cumulative Remedies. The remedies of Applied and Supplier shall be cumulative, and no election of remedies shall occur. 7.2.4. Remedies for Other Breach or Default. 7.2.4.1. Subject to the exclusions provided in this Section 7.2.4 or provided in Article 25 of Exhibit 1 to this Agreement, if Supplier or Applied fails to comply with, observe or perform any term, provision or condition of this Agreement, or otherwise defaults under or breaches any term, provision or condition of this Agreement, the other party shall initiate the Business Review Process prior to proceeding to enforce or exercise its rights, remedies and actions available to it under this Agreement or under applicable law. 7.2.4.2. The requirement in Section 7.2.4.1 of initiation of the Business Review Process shall not apply: (a) to the enforcement or exercise of equitable rights or remedies, and actions seeking equitable relief; or (b) to claims, matters, remedies, and actions that are provided for in Section 7.2.1 or Section 7.2.2 with respect to particular Item(s). 7.2.4.3. If Supplier or Applied has failed to comply with, observe or perform, or otherwise has defaulted under or breached, any term, provision or condition of this Agreement, then (after any applicable period of notice or consultation applicable under this Agreement and after conclusion of the Business Review Process, where applicable) the other party may proceed to enforce or exercise its rights and remedies as provided under this Agreement or as provided by law or equity (subject to procedural requirements of this Agreement and, where applicable, to the limitations of Article 21 of Exhibit 1 to this Agreement), all as it may elect, concurrently and in the alternative, without waiver or election by the pursuit of any one or more right, remedy or action. 7.2.4.4. In this Agreement, the phrase "term, provision or condition" shall include any term, provision, condition, covenant, agreement, representation, warranty, obligation, indemnity, undertaking, requirement, or other part of this Agreement or of another indicated agreement, and such phrase shall be so construed unless the context clearly requires otherwise. 7.2.5 Business Review Process. 7.2.5.1. With respect to any dispute, issue, controversy or claim of breach arising under this Agreement (a "Dispute"), either party may initiate the process described in this Section 7.2.5 (the "Business Review Process") to seek resolution of the Dispute. Except as specifically provided to the contrary in this Agreement, 79 CONFIDENTIAL TREATMENT REQUESTED compliance with the Business Review Process is not a condition or requirement to the exercise of any legal remedies or proceedings, to the exercise of rights or remedies provided by or under this Agreement, or to other action by a person. 7.2.5.2. The Business Review Process is initiated by a Notice from Applied or Kinetics to the other of a Dispute, which notice shall be given under Section 1.2.2, and a request for review of the Dispute under the Business Review Process. Upon such Notice and request, Applied shall designate a representative at its director level or higher, and Kinetics shall designate a representative at its director level or higher, to constitute their representatives for this Business Review Process. These representatives shall promptly confer and use commercially reasonable efforts in good faith to resolve the Dispute. The Business Review Process shall continue for twenty (20) Business Days after the date on which the party initiating the process designates its representative, unless otherwise agreed by the two representatives. If the Dispute is not resolved through the Business Review Process or a party fails to comply with, perform or observe the terms for cure, correction or waiver of the breach, default or Dispute established through the Business Review Process, then all parties shall be free to pursue all rights, remedies and relief as may be available, without further application of the Business Review Process or other provision for cure or correction. 8. AMENDMENTS AND MODIFICATIONS; CAPTIONS AND CONSTRUCTION; INTERPRETATION. 8.1 Amendments and Modifications. Subject to Section 1.3 above, amendments or modifications to this Agreement must be in writing, signed by a duly authorized representative for each of Supplier and Applied, traced by revision or amendment numbers and attached to this original Agreement. The master copy of this Agreement and any revisions are to be maintained by Applied. 8.2 Captions and Construction. Headings and captions in this Agreement are for the convenience of the parties only and shall not affect the interpretation or construction of this Agreement. The provisions of this Agreement (including Exhibits and Attachments) shall be construed as a whole, each supplementing the other, except for instances of conflict which shall be governed by Section 1.3.2.2 as to precedence. This Agreement, including also any Purchase Order issued for Items, shall control over any invoice, delivery ticket, or other document issued by Supplier. References to a party's internal business organization shall refer to such organization and successor organizations performing similar functions. 8.3 Interpretation. Supplier and Applied have each participated fully in the negotiation and preparation of this Agreement. Each party has engaged its own legal counsel and has relied upon its own representatives, employees and counsel, and not the other party or its counsel, in the negotiation and preparation of this Agreement. The rule that a contract shall be construed against the party 80 CONFIDENTIAL TREATMENT REQUESTED drafting the agreement and statutes of like effect, including California Civil Code Section 1654, shall not apply to the construction or interpretation of this Agreement. 9. PROVISIONS OF GENERAL APPLICATION. 9.1. Independent Contractor. Throughout the term of this Agreement, the relationship between Applied and Supplier shall be that of independent contractors. Nothing set forth herein or in any Related Agreement shall be deemed or construed to render the parties joint venturers, partners, or employer and employee, and under no circumstances may either party hold itself out to be a partner, employee, franchisee, representative, servant or agent of the other party. Neither party is authorized to make any commitment or representation on the other's behalf. Neither party may create any obligations or responsibilities on behalf of or in the name of the other party. Throughout the term of this Agreement, if the term "partnership," "partner," or "development partner" or the like is used to describe the parties' relationship, Applied and Supplier agree to make it clear to third parties that these terms refer only to the spirit of cooperation between them and neither describe, nor expressly or implicitly create, the legal status of partners or joint venturers. Each party also agrees not to make false or misleading statements, claims or representations about the other party, its products or the relationship of the parties. 9.2. No Third Party Beneficiary. Each and all of the agreements, covenants, obligations, duties, conditions, terms, warranties, representations and benefits in or arising under this Agreement, whether express or implied by law, are and shall be solely for the benefit of the parties to this Agreement and the respective permitted successors, assigns, and legal representatives of each party hereto. It is the express intention and agreement of Applied and Supplier that no entity not a party to this Agreement (including any customer of Applied) shall be or shall be deemed a third-party beneficiary of this Agreement, or of any of its agreements, covenants, obligations, duties, conditions, terms, warranties, representations and benefits. 9.3. Severability. Any provision or provisions of this Agreement or of any Related Agreement that are determined by a final judgment or order of a court of competent jurisdiction to be invalid or unenforceable in any jurisdiction or as to any person or circumstance shall be reformed, as permitted by law, so as to be valid and enforceable, and, if (or to the extent) not so reformed, shall be severed, and the remainder of the affected agreement or agreements shall continue in effect and be enforced, construed and applied without such severed provision(s). 9.4 Waiver. Any provision, right, remedy or requirement of this Agreement may be waived by the party entitled to the benefit thereof by written waiver, signed by such party. A waiver so made or given shall extend only to the specific matter or event, and shall be effective only to the extent, specifically provided for in such waiver. A waiver of any breach or default under this Agreement shall not be construed as a continued waiver of other breaches of the same, or of any 81 CONFIDENTIAL TREATMENT REQUESTED other, provision of this Agreement, nor as a bar to, or waiver of, any right or remedy as to any subsequent event, occurrence, default or breach. Except as provided above as to written waivers, no act, omission, or course of conduct or of performance shall be deemed to constitute a waiver hereunder. In furtherance of the preceding provision, if Applied or Supplier delays or fails to insist on strict performance of any of the terms, conditions, provisions, requirements, covenants or obligations set forth in this Agreement, such delay or failure shall not constitute a waiver. 9.5. Successors and Assigns. This Agreement shall be binding upon, and shall inure to the benefit of, each party and its respective permitted successors and assigns. 9.6. Execution. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts shall constitute one and the same instrument. Each Party shall receive a duplicate original of the counterpart copy or copies executed by it. For purposes hereof, a facsimile copy of this Agreement, including the signature pages hereto, shall be deemed to be an original. Notwithstanding the foregoing, the Parties shall deliver original execution copies of this Agreement to one another as soon as practicable following execution thereof. 10. REPRESENTATIONS AND WARRANTIES OF THE PARTIES. Each party (the "Warranting Party") warrants and represents to the other party that: (a) the Warranting Party is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction in which it is organized, with full corporate power and authority to carry on its business as it is now being conducted; (b) the Warranting Party has full power and corporate authority to enter into this Agreement; (c) the execution, delivery and performance of this Agreement has been duly authorized by the Warranting Party, and does not and will not violate any other agreement, any provision of the charter or organizational documents of the Warranting Party or any applicable law, regulation, decree, judgment or order of any regulatory government agency or any court of competent jurisdiction, which violation would have a material adverse effect on the Warranting Party; (d) except as provided herein, the Warranting Party will not enter into any agreement, the execution and/or performance of which violates any term of this Agreement; (e) the Warranting Party is not a party to any agreement calling for the payment to, or receipt from, any third party by the Warranting Party of any commission, gratuity, or other similar thing or amount in consideration of the other party's entry into this Agreement; 82 CONFIDENTIAL TREATMENT REQUESTED (f) this Agreement has been duly executed and delivered by the Warranting Party and constitutes a valid and binding obligation of the Warranting Party, enforceable against the Warranting Party in accordance with its terms, except that such enforceability may be subject to bankruptcy, insolvency, reorganization, moratorium, or similar laws now or hereafter in effect relating to creditors' rights and to general equitable principles (whether enforcement is sought through legal or equitable proceedings). 11. ACCEPTANCE AND EXECUTION. This Agreement is executed and delivered by each of the undersigned parties, acting through its officer or other representatives, duly authorized to act for and on behalf of the indicated party, and is effective on and as of the Effective Date. Accepted: Applied Materials, Inc. Kinetics Fluid Systems, Inc. BY: /s/ Paul Hohlstein BY: /s/ Dan Rubin ------------------------------ ------------------------------ Name: Paul Hohlstein Name: Dan Rubin -------------------- -------------------- Title: Vice President Title: President -------------------- -------------------- Date: 5/21/02 Date: 5/21/02 -------------------- -------------------- 83 LIST OF EXHIBITS AND ATTACHMENTS

------------------------------------------------------------------------------------------------------- EXHIBITS ------------------------------------------------------------------------------------------------------- Exhibit 1: Applied's Standard Terms & Conditions ------------------------------------------------------------------------------------------------------- * INDICATES ATTACHMENTS THAT HAVE ATTACHMENTS NOTIFICATION REVISION PROCESS ON WEB SITE ------------------------------------------------------------------------------------------------------- * ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- * ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- * -------------------------------------------------------------------------------------------------------

* Material has been omitted and filed separately with the Commission. 84 ------------------------------------------------------------------------------------------------------- * * ------------------------------------------------------------------------------------------------------- 18. On-site Representative Agreement * ------------------------------------------------------------------------------------------------------- 19. Tooling Loan Agreement ------------------------------------------------------------------------------------------------------- * ------------------------------------------------------------------------------------------------------- * ------------------------------------------------------------------------------------------------------- * ------------------------------------------------------------------------------------------------------- * ------------------------------------------------------------------------------------------------------- * ------------------------------------------------------------------------------------------------------- * ------------------------------------------------------------------------------------------------------- * UPDATES AND CURRENT VERSIONS OF THESE ATTACHMENTS ARE POSTED ON APPLIED'S WEBSITE WHICH IS AVAILABLE TO SUPPLIER FOR PURPOSES OF SECTION 1.3. * Material has been omitted and filed separately with the Commission. 85 CONFIDENTIAL TREATMENT REQUESTED TABLE OF CONTENTS DEFINITIONS..................................................................................................... 1 1. SCOPE.................................................................................................. 8 1.1. Description of Agreement...................................................................... 8 1.2. Addresses and Contact Persons; Notices........................................................ 8 1.2.1. Contact Persons...................................................................... 8 1.2.2. Notices..............................................................................10 1.3. Entire Agreement; Related Agreements; Modification; Prior Transactions........................11 1.3.1. Certain Related Agreements...........................................................11 1.3.2. Entire Agreement.....................................................................12 1.3.3. Provisions Continuing in Effect......................................................13 1.3.4. Modification.........................................................................14 1.4. Items Covered.................................................................................14 1.5. Duration of Agreement.........................................................................15 2. LOGISTICS, ORDERING AND OPERATIONAL FRAMEWORK..........................................................15 2.1. Operation and Management of Orders............................................................15 2.1.1. Operating Calendar & Holidays........................................................15 2.1.2. Monthly Volume Summaries.............................................................15 2.1.3. Manufacture and Delivery.............................................................16 2.1.4. Change in Delivery Date..............................................................16 2.1.5. Orders for Items.....................................................................17 2.1.6. Electronic Commerce..................................................................26 2.1.7. Pro Forma............................................................................27 2.2. Definition of Terms for Certain Provisions Affecting Prices or Charges........................28 2.3. Cancellation of Items.........................................................................30 2.3.1. Items Subject to Cancellation........................................................30 2.3.2. Deferral.............................................................................30 2.3.3. Cancellation.........................................................................30 2.3.4. Applicability; Payment...............................................................31 2.3.5. Other Rights.........................................................................31 2.3.6. Services.............................................................................31 2.4. Response Time, Turnaround and Implementation Time.............................................31 2.4.1. Production Issues....................................................................31 2.4.2. Turnaround and Implementation Time...................................................32 2.5. Capacity Planning and Flexibility Requirements................................................32 86 CONFIDENTIAL TREATMENT REQUESTED 2.5.1. Capacity Planning....................................................................32 2.5.2. Flexibility..........................................................................33 2.5.3. Acceptance; Delivery.................................................................33 2.6. On-Site Support Requirements..................................................................34 2.7. [Omitted].....................................................................................34 2.8. *.............................................................................................34 2.8.1. Modifications and *s.................................................................34 2.8.2. Scope of *s..........................................................................34 2.8.3. Charges for *s.......................................................................35 2.9. Information...................................................................................35 2.9.1. Applied Internal Databases...........................................................35 2.9.2. Applied New Product Plans............................................................39 2.9.3. Compliance with Securities Laws......................................................39 2.10. Packaging and Transportation..................................................................40 2.10.1. Packaging and Shipment...............................................................40 2.10.2. Bar Coding...........................................................................40 2.10.3. Transportation Requirements..........................................................40 2.11. Payment.......................................................................................41 2.11.1. Invoices; Certain Acceptance Terms...................................................41 2.11.2. *....................................................................................43 2.11.3. Offsets, Debits......................................................................44 2.11.4. Effect of Payment....................................................................44 2.11.5. Reconciliation of Payment Discrepancies..............................................44 2.12. Disaster Recovery Plan........................................................................44 2.13. Performance Constraints.......................................................................45 2.13.1. Constraints..........................................................................45 2.14. Provisions for Reconfiguration or Restocking..................................................45 2.14.1. "Affected Items."....................................................................45 2.14.2. Categories...........................................................................45 2.14.3. "Relabel Items.".....................................................................46 2.14.4. "Reconfigure Items.".................................................................46 2.14.5. "Restock Items.".....................................................................49 2.14.6. Restocking Process and Charges.......................................................49 2.14.7. Provisions as to Restocked or Removed Parts..........................................50 2.14.8. Processing and Payments..............................................................51 * Material has been omitted and filed separately with the Commission. 87 CONFIDENTIAL TREATMENT REQUESTED 3. PRICING FRAMEWORK......................................................................................51 3.1. Contract Prices...............................................................................51 3.1.1. Pricing and Cost Model of Attachment 1...............................................51 3.1.2. Application of Prices................................................................52 3.1.3. Pricing Model........................................................................52 3.1.4. Further Agreements as to Pricing.....................................................53 3.1.5. * Terms..............................................................................53 3.1.6. Adjustment for *.....................................................................57 3.2. Volume........................................................................................58 3.3. Export........................................................................................58 3.4. Currency......................................................................................58 4. TECHNICAL FRAMEWORK....................................................................................59 4.1. Engineering Change Orders.....................................................................59 4.1.1. ECO Procedures.......................................................................59 4.2. Tooling.......................................................................................60 4.2.1. General Tooling Provisions...........................................................60 4.2.2. Current FDS Test Fixtures............................................................61 4.2.3. Future FDS Test Fixtures.............................................................62 4.2.4. General Application..................................................................64 4.3. Design Changes and Resolution.................................................................65 4.4. Process Changes and Resolution................................................................65 4.5. QRD and Special Process Requirements..........................................................65 4.5.1 Critical and Source Specific Materials...............................................65 4.5.2 Supplier's Subcontractors............................................................65 4.5.3. Costs of Supplier Change.............................................................66 4.5.4. Waivers..............................................................................66 4.6. First Articles and Source Inspections.........................................................66 4.7. Applied's Right to Subcontract................................................................66 4.8. Product Support...............................................................................66 4.8.1. Global Technical Support and Product Support.........................................66 4.8.2. Product Support Period...............................................................67 4.8.3. Product Post Term Support Options....................................................67 4.9. Periodic Business Review......................................................................68 4.10. [Omitted].....................................................................................68 4.11. Wind Down Provisions..........................................................................68 * Material has been omitted and filed separately with the Commission. 88 CONFIDENTIAL TREATMENT REQUESTED 5. NONCONFORMANCE.........................................................................................70 5.1. Nonconformance and Corrective Action..........................................................70 5.1.1. [Omitted.]...........................................................................70 5.1.2. Supplier Corrective Action Request...................................................70 5.2. Applied Nonconformance and Corrective Action..................................................70 5.2.1. Items Affected.......................................................................70 5.2.2. Standard Repair Costs................................................................71 5.2.3. Time for Repair......................................................................71 5.2.4. Return of Items......................................................................71 6. SUPPLIER PERFORMANCE PLAN..............................................................................71 7. WARRANTIES AND REMEDIES................................................................................72 7.1. Supplier Warranty.............................................................................72 7.1.1. Basic Warranty.......................................................................72 7.1.2. Services.............................................................................73 7.1.3. Warranty Period......................................................................73 7.1.4. Limitations on Warranty..............................................................73 7.1.5. Third Party OEM Components...........................................................74 7.1.6. Debit Recoveries.....................................................................75 7.1.7. Survival of Warranties...............................................................76 7.2. Applied's Remedies............................................................................76 7.2.1. Failure to Deliver...................................................................76 7.2.2 Defective Items......................................................................77 7.2.3. Cumulative Remedies..................................................................79 7.2.4. Remedies for Other Breach or Default.................................................80 7.2.5 Business Review Process..............................................................80 8. AMENDMENTS AND MODIFICATIONS; CAPTIONS AND CONSTRUCTION; INTERPRETATION................................81 8.1 Amendments and Modifications..................................................................81 8.2 Captions and Construction.....................................................................81 8.3 Interpretation................................................................................81 9. PROVISIONS OF GENERAL APPLICATION......................................................................81 9.1. Independent Contractor........................................................................81 9.2. No Third Party Beneficiary....................................................................82 9.3. Severability..................................................................................82 9.4 Waiver........................................................................................82 9.5. Successors and Assigns........................................................................83 9.6. Execution.....................................................................................83 89 CONFIDENTIAL TREATMENT REQUESTED 10. REPRESENTATIONS AND WARRANTIES OF THE PARTIES..........................................................83 11. ACCEPTANCE AND EXECUTION...............................................................................84 90 CONFIDENTIAL TREATMENT REQUESTED APPLIED MATERIALS CONFIDENTIAL EXHIBIT 1 APPLIED MATERIALS STANDARD TERMS AND CONDITIONS OF PURCHASE Table of Contents 1. ACCEPTANCE............................................................................................. 1 2. CONFIDENTIAL INFORMATION............................................................................... 1 3. INTELLECTUAL PROPERTY RIGHTS AND OWNERSHIP THEREOF..................................................... 1 4. [OMITTED].............................................................................................. 1 5. PRESS RELEASES/PUBLIC DISCLOSURE NOT AUTHORIZED........................................................ 1 6. PRICING................................................................................................ 2 7. DUTY DRAWBACK AND COUNTRY OF MANUFACTURE............................................................... 3 8. OZONE DEPLETING CHEMICAL ("ODC")....................................................................... 3 9. COMPLIANCE WITH LAWS................................................................................... 4 10. EQUAL EMPLOYMENT OPPORTUNITY........................................................................... 4 11. APPLICABLE LAW, CONSENT TO JURISDICTION AND VENUE...................................................... 4 12. NOTICE OF LABOR DISPUTES............................................................................... 5 13. TAXES.................................................................................................. 5 14. [OMITTED].............................................................................................. 5 15. INSURANCE.............................................................................................. 5 16. CERTAIN EVENTS AND NOTICES; FINANCIAL INFORMATION...................................................... 6 17. ASSIGNMENT AND SUCCESSION..............................................................................11 18. GRATUITIES.............................................................................................14 19. [OMITTED]..............................................................................................14 20. [OMITTED]..............................................................................................14 21. DISCLAIMERS AND LIMITATIONS OF LIABILITY AS TO EXCLUDED DAMAGES........................................14 22. INDEMNITY..............................................................................................15 23. FORCE MAJEURE..........................................................................................18 24. CHANGES................................................................................................18 25. TERMINATION FOR DEFAULT; OTHER REMEDIES................................................................19 26. TERMINATION FOR CONVENIENCE............................................................................22 27. POST-TERMINATION OBLIGATIONS...........................................................................24 91 CONFIDENTIAL TREATMENT REQUESTED Exhibit 1 APPLIED MATERIALS STANDARD TERMS AND CONDITIONS OF PURCHASE 1. Acceptance. The terms and conditions stated in these Applied Materials Standard Terms and Conditions of Purchase are an integral part of the Global Supply Agreement between the parties to which this Exhibit 1 is attached ("Agreement") and which covers the purchase of Items, as defined in such Agreement. Defined terms used herein shall have the meanings ascribed to them in other provisions of the Agreement unless otherwise defined in this Exhibit 1. Additional or different terms or conditions of purchase will not be applicable unless accepted in writing by a duly authorized representative of each of Supplier and Applied. 2. Confidential Information. (a) Supplier and Applied, respectively, will comply with each NDA executed by Supplier or Applied, as applicable, with or for the benefit of the other, whether now or hereafter in effect; subject, however, to the provisions of the Agreement as to priority among conflicting agreements. (b) The obligations of the parties with respect to Confidential Information under and for purposes of the Agreement are governed by the IPA. Such obligations include those arising pursuant to Sections 2.9.1.1.D and 2.9.2 of the Agreement and Article 5(a) of this Exhibit 1. 3. Intellectual Property Rights and Ownership Thereof. Rights of the parties in, ownership of, and other matters relating to intellectual property under and for purposes of the Agreement shall be governed by the IPA. 4. [Omitted] 5. Press Releases/Public Disclosure Not Authorized. (a) The Agreement and Related Agreements contain Confidential Information of Applied and Supplier, and such Confidential Information is protected as set out in the IPA. As part of their respective obligations under the IPA as to Confidential Information, neither Supplier nor Applied shall disclose to any third party, including any governmental authority, or publicly release the terms of the Agreement or of any Related Agreement without the prior written approval of the other party; provided, however, that subject to its compliance with this Article 5(a), either party may make any public disclosure (which shall include disclosure in the course of litigation, as well as under other applicable law, rule or regulation) it believes in good faith that it is required to make by applicable law, rule or regulation. The disclosing party: shall notify the other party in advance of such a disclosure or release; shall take commercially reasonable efforts (at least equal to the efforts such party takes to protect the confidentiality of its own information) to protect the confidentiality of the Confidential Information of the other party in the Agreement, which shall include deleting the financial terms and other Confidential Information of the other party in the Agreement from (or requesting such deletion or equivalent protection or confidential 92 CONFIDENTIAL TREATMENT REQUESTED treatment where approval by a court or governmental authority is required) disclosure or public release when permitted by applicable law, rule or regulation. Section 4.1(v) of the IPA may also apply in regard to disclosures. (b) Further, and without limiting the foregoing provision, Supplier and Applied, respectively, will not, without the prior written approval of the other, issue any press release, advertising, publicity or public statement or in any way engage in any other form of public disclosure that indicates the relationship of the parties (except for disclosures as may be made under, and in compliance with, requirements applicable under Article 5(a) and disclosure of the existence of the Agreement), or implies any endorsement by Applied of Supplier or Supplier's products or services. (c) Any requests or notices under this Article 5 must be made in writing and submitted to the person(s) designated to receive notices under Section 1.2.2 of the Agreement. 6. Pricing. (a) * (b) In no event shall Supplier quote, or shall Applied receive, prices that would be unlawfully discriminatory under any applicable law. * (c) A "Covered Product" is a good sold by Supplier (i) that is not an * form, fit and function to an Item under this Agreement. 7. Duty Drawback and Country of Manufacture. (a) Duty Drawback Supplier will provide Applied, or any agent designated by Applied for this purpose, with all U.S. Customs entry and shipment data concerning applicable Items that Applied determines is necessary for Applied to qualify for duty drawback ("Duty Drawback Information"). Such data shall include information and receipts for duties paid, directly or indirectly, on all Items that are either imported or contain imported Piece Parts. Such data shall further include serial numbers, unique part numbers, lot numbers and any other data that will assist Applied in identifying imported Items sold to Applied. This data will be provided to Applied within thirty (30) days after the end of each calendar quarter and shall be accompanied by a completed Certificate of Delivery of Imported Merchandise or Certificate of Manufacture and Delivery of Imported Merchandise (Customs Form 331) as promulgated pursuant to U. S. 19 CFR 191. (b) Country of Manufacture Supplier shall provide Applied with country of manufacture data for each Item Supplier provides to Applied. This data shall identify each Item by Applied part number and shall list the corresponding country of manufacture for the Item. This data shall be provided to Applied * Material has been omitted and filed separately with the Commission. 93 CONFIDENTIAL TREATMENT REQUESTED within fifteen (15) days after the end of each month and as requested by Applied. If Supplier is a United States manufacturer of any Item supplied to Applied, as defined by United States Customs regulations, Supplier shall, on an annual basis and in accordance with Applied's written instructions, provide Applied with a signed manufacturer's affidavit. (c) All information to be provided to Applied under this Article 7 shall be sent to the attention of: Manager, Customs Compliance Applied Materials 2881 Scott Blvd. M/S 2041 Santa Clara, CA 95050 or any agent designated by Applied in writing to Supplier. 8. Ozone Depleting Chemical ("ODC"). In the event that the Items are manufactured with or contain Class I ODCs, as defined under Section 602 of the Federal Clean Air Act (42 USC Section 7671a) and implementing regulations, or if Supplier believes that such a condition exists with respect to any one or more Items, Supplier shall notify Applied prior to performing any further work with respect to such Items pursuant to the Agreement. Applied shall have the right to: (a) terminate the Agreement as to such Items, upon notice and without penalty, and without application of the termination procedures of Articles 25 and 26; and, in addition, (b) return any and all Items delivered that are found to contain or have been manufactured with Class I ODCs. Supplier shall pay (or if already paid by Applied, then reimburse Applied for) all costs of shipping, special handling, and returning, for labor to remove and replace, and for the purchase price paid by Applied as to such Items. 9. Compliance With Laws. Supplier represents and warrants that no law, rule or ordinance of the United States, any state, any other governmental agency, or any country has been or will be violated in manufacturing or supplying the Items purchased, or to be purchased, under the Agreement. 10. Equal Employment Opportunity. Supplier represents and warrants that it is in compliance with Executive Order 11246, any amending or supplementing Executive Orders and implementing regulations, unless exempted. 11. Applicable Law, Consent to Jurisdiction and Venue. (a) THE AGREEMENT SHALL BE GOVERNED BY, SUBJECT TO, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, EXCLUDING CONFLICTS OF LAW RULES. THE PARTIES AGREE THAT ANY SUIT ARISING OUT OF THE AGREEMENT FOR ANY CLAIM OR CAUSE OF ACTION, WHETHER IN CONTRACT, IN TORT, STATUTORY, AT LAW OR IN EQUITY, SHALL EXCLUSIVELY BE 94 CONFIDENTIAL TREATMENT REQUESTED BROUGHT IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA, THE SUPERIOR COURTS OF SANTA CLARA COUNTY, CALIFORNIA, THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS, AUSTIN DIVISION, OR THE TEXAS STATE DISTRICT COURTS OF TRAVIS COUNTY, TEXAS, PROVIDED THAT SUCH COURT HAS JURISDICTION OVER THE SUBJECT MATTER OF THE ACTION. EACH PARTY AGREES THAT EACH OF THE NAMED COURTS SHALL HAVE PERSONAL JURISDICTION OVER IT AND CONSENTS TO SUCH JURISDICTION. EACH PARTY FURTHER AGREES THAT VENUE OF ANY SUIT ARISING OUT OF THE AGREEMENT IS PROPER AND APPROPRIATE IN ANY OF THE COURTS IDENTIFIED ABOVE. (b) WITH RESPECT TO TRANSACTIONS TO WHICH THE 1980 UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS WOULD OTHERWISE APPLY, THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THE AGREEMENT, INCLUDING THESE TERMS AND CONDITIONS, SHALL NOT BE GOVERNED BY THE PROVISIONS OF THE 1980 UNITED NATIONS CONVENTION OF CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS. APPLICABLE LAWS OF THE STATE OF CALIFORNIA, INCLUDING THE UNIFORM COMMERCIAL CODE AS ADOPTED THEREIN (BUT EXCLUSIVE OF SUCH 1980 UNITED NATIONS CONVENTION), SHALL GOVERN THE AGREEMENT AND ALL TRANSACTIONS RELATED TO THE AGREEMENT (EXCEPT TO THE EXTENT THE PROVISIONS OF SUCH APPLICABLE LAWS HAVE BEEN MODIFIED OR SUPERSEDED BY EXPRESS PROVISIONS OF THIS AGREEMENT). 12. Notice of Labor Disputes. Whenever an actual or potential labor dispute, or any government embargo or regulatory or tribunal proceedings relating thereto, is delaying or threatens to delay the timely performance of the Agreement, Supplier will immediately notify Applied of such dispute and furnish all relevant details, regardless of whether said dispute arose directly or indirectly as a result of an actual or potential dispute within the Supplier's sub-tier supply base or Supplier's own operations. 13. Taxes. (a) Supplier shall not charge or collect sales or use tax for Items for which an applicable sales and use tax exemption or resale certificate is provided by Applied. For all other Items, Supplier will include all applicable federal, state, and local taxes, where applicable, on Supplier's invoices, or (when payment is made under Applied's ERS Program) in Pro Formas, stated as a separate item. (b) Supplier may request from Applied information or documentation of facts relating to Supplier's periodic application for property tax abatement or tax reduction under rules regarding a "Texas Freeport Exemption"; Applied will provide reasonable cooperation and assistance to Supplier in responding to requests by Supplier for this purpose through provision of information or completion of documentation to support Supplier's application(s) for such tax benefits. 14. [Omitted] 15. Insurance. 95 CONFIDENTIAL TREATMENT REQUESTED (a) Supplier shall maintain (i) comprehensive general liability insurance covering bodily injury, property damage, contractual liability, products liability and completed operations, (ii) Worker's Compensation and employer's liability insurance, and (iii) auto insurance, all in such amounts as are necessary to insure against the risks to Supplier's operations. (b) *, Supplier will obtain and keep in force, insurance of the types and in the amounts set forth below: Insurance * Worker's Compensation * Employer's Liability * Automobile Liability * per occurrence Comprehensive General Liability (including Products Liability) * per occurrence Umbrella/Excess Liability * per occurrence All policies must be primary and non-contributing and shall include Applied as an additional insured. Supplier will require, and will use commercially reasonable efforts to verify, that each of its subcontractors carries at least the same insurance coverage and minimum limits of insurance as Supplier is required to carry pursuant to the Agreement. Supplier shall notify Applied at least thirty (30) days prior to the cancellation or implementation of any material change in the foregoing policy coverage that would affect Applied's interests. Upon request, Supplier shall furnish to Applied as evidence of insurance a certificate of insurance stating that the coverage would not be canceled or materially altered without thirty (30) days prior notice to Applied or, as to cancellation for failure to pay premiums, without ten (10) days prior notice to Applied. 16. Certain Events and Notices; Financial Information. 16.1 Certain Events and Notices. (a) As used in this Exhibit 1, a "Notice Event" means any of the following: (i) a change in the person or persons with power to direct, or to cause the direction of, management or policies of Supplier or of any Guarantor; (ii) a change, however such occurs (including, by way of example, sale, purchase, merger, or business combination), in the ownership of capital stock of Supplier or of any Guarantor for which notice is to be given under Article 16.1(b) below; (iii) a sale or disposition of all or substantially all of the assets of Supplier, or sale or disposition of a line of business of Supplier or of all or substantially all of the assets of Supplier relating to or used in a line of business, whether or not the Agreement is assigned; or (iv) a sale or disposition of all or substantially all of the assets of a Guarantor, or a sale or disposition of a line of business of a Guarantor or of all or substantially all the assets of a Guarantor relating to or used in a line * Material has been omitted and filed separately with the Commission. 96 CONFIDENTIAL TREATMENT REQUESTED of business, which sale or disposition results in (or will result in) a material change in the nature of the business of such Guarantor or in a material adverse change in the financial condition of the Guarantors as a whole. (1) A Notice Event may result from a single transaction or from a series of related transactions. Transactions with a single person, with a group of persons covered by Section 13(d)(3) of the Securities Exchange Act of 1934 (the "Exchange Act"), or with persons under common control shall be considered a single transaction. (2) A "Public Offering Event" is the issuance by Supplier or any Guarantor of capital stock to the public in an underwritten public offering of capital stock registered pursuant to a registration statement on Form S-1 with the federal Securities and Exchange Commission. (b) Supplier shall provide (and shall cause an affected Guarantor to provide) notice to Applied in accordance with Section 1.2.2 of the Agreement as to matters provided for by this Section 16.1(b). (1) If a Notice Event will result from a transaction to which Supplier or any Guarantor is a party, Supplier shall give (and shall cause the affected Guarantor to give) notice to Applied, in accordance with Section 1.2.2 of the Agreement, (i) except when such notice would violate applicable securities laws or regulations or another obligation of confidentiality, (x) at least five (5) Business Days prior to the date of actual public disclosure of the transaction or, if earlier, the date such public disclosure should have been made if Supplier or the affected Guarantor, as applicable, were a company with publicly traded securities, but (y) in any event no later than twenty-one (21) calendar days prior to the closing or consummation of such transaction, and (ii) of the consummation or closing of such transaction, at the time of such closing or consummation. The Notice Event shall not occur, however, until the closing or consummation of the transaction(s) or event(s) that cause or will result in the Notice Event. If the giving of notice to Applied under this Article 16.1(b)(1) is restricted by an obligation of confidentiality, Supplier (or such Guarantor) shall make a good faith effort to obtain approval or consent to give the notice provided for in this Article 16.1(b)(1). (2) If securities of Supplier or any Guarantor are or are to be the subject of a Public Offering Event, Supplier shall give (and shall cause an affected Guarantor to give) Applied notice of (and concurrently with) each of the following: the filing of a registration statement with respect to any such securities; and a registration statement becoming effective as to any securities of Supplier or any Guarantor. (3) Supplier shall, in addition to notices provided for in Article 16.1(b)(1) and (2), give (and shall cause an affected Guarantor to give) notice to Applied in accordance with Section 1.2.2 of the Agreement of each of the following events, occurrences or transactions, each of which is a Notice Event: 97 CONFIDENTIAL TREATMENT REQUESTED (i) Notice shall be given promptly upon the occurrence of any Notice Event of a type covered by Article 16.1(a)(i), (iii) or (iv) above. (ii) If Supplier or a Guarantor does not have capital stock registered with the federal Securities and Exchange Commission, a Notice Event occurs upon, and the affected company shall give Applied notice promptly upon (a) the acquisition of ownership of ten percent (10%) or more of the outstanding capital stock of such company by any person that is a Competitor (as defined below) of Applied, and also promptly upon (b) the acquisition of ownership of twenty-five percent (25%) or more of the outstanding capital stock of such company by any person, whether or not a Competitor of Applied. (iii) If any class of capital stock of Supplier or any Guarantor is registered with the federal Securities and Exchange Commission, a Notice Event occurs (with respect to the company having registered stock) upon, and the affected company shall give Applied notice promptly upon, (a) the acquisition of ownership of five percent (5%) or more of the outstanding capital stock of each such a class by a person that is a Competitor of Applied in a transaction to which Supplier, any Guarantor, or any Affiliate of Supplier or a Guarantor is a party, and (b) (x) receipt of a Schedule 13D pursuant to the Exchange Act, or (y) Supplier or any Guarantor having actual knowledge of, any acquisition of ownership of five percent (5%) or more of the outstanding capital stock of such a registered class. Notice under this clause (b) shall be given (where notice is received by Supplier or the affected Guarantor through the receipt of a Schedule 13D) by forwarding a copy of such schedule to Applied. (iv) If any capital stock of any class of Supplier or any Guarantor is registered with the federal Securities and Exchange Commission, the affected company shall give Applied notice of the occurrence of any event reportable pursuant to Item 1 of Form 8-K as in effect pursuant to the Exchange Act by notice given concurrently with filing of the report or announcement of such event. (c) The following provisions and definitions are part of this Article 16.1: (1) In addition to notices provided for above, Supplier shall give (and shall cause each Guarantor to give) to Applied, on the 15th day of each January and July during the term of this Agreement, a schedule showing the name of each owner of five percent (5%) or more of the ownership of capital stock of Supplier or any Guarantor as of January 1 and July 1 of such year. This requirement shall apply only to those companies that do not have publicly traded securities. (2) In compliance with the confidentiality obligations of the IPA, Supplier shall not provide Confidential Information of, or received from, Applied to any third party in connection with a Notice Event or the negotiation or evaluation of same, without Applied's prior written consent (and upon such conditions as Applied may require). Information received by Applied from Supplier or a Guarantor pursuant to Article 16.1(b) and Article 16.1(c)(1) shall be deemed Confidential 98 CONFIDENTIAL TREATMENT REQUESTED Information of Supplier under Article 4 of the IPA, subject to the exclusions of Section 4.1 of the IPA. (3) References to "capital stock" shall include any equity interest, ownership interest or like right or interest, such as interests of members in a limited liability company. References to "ownership" shall include legal or beneficial ownership or the right to vote. (4) A "Competitor" of Applied means (I) any person identified to Supplier by Applied as a competitor in any of the Fields of Use (as specified below) through written notice given in accordance with Section 1.2.2 of the Agreement, if Applied elects to provide such a notice or (II) any person that an executive officer of Supplier knows is a competitor of Applied in any Field of Use. The information in a notice from Applied under this Article 16.1(c)(4)(I) is Confidential Information of Applied, subject to the exclusions of Section 4.1 of the IPA. The "Fields of Use" applicable to this definition of Competitor are the design, manufacturing and marketing of: (a) semiconductor wafer fabrication equipment, (b) wafer inspection and metrology equipment, (c) flat panel display fabrication equipment, (d) wafer fabrication factory control software, (e) toxics abatement or recycling equipment, or (f) thin film application processes. (5) "Affiliate" means any person that directly or indirectly controls, is under common control with, or is controlled by, Supplier or any Guarantor. (6) "Promptly" means, for purposes of this Article 16.1 only, not later than the third Business Day after the occurrence of the event or transaction for which notice is to be given. (7) The following are excluded from "Notice Event": a) The acquisition of ownership of capital stock by a person that, on the Effective Date, owns 5% or more of the outstanding capital stock of any class of Supplier or of the affected Guarantor, unless such acquisition constitutes or results in another Notice Event. b) A change in corporate form of Supplier or a Guarantor that does not alter the ownership, management or control of the Supplier or Guarantor, such as conversion from a corporation to a limited liability company through a transaction in which ownership and control are maintained as such existed in a corporate form prior to the conversion. c) A distribution of all outstanding capital stock of Supplier or KGI to the shareholders of KHC in proportion to their ownership in KHC. d) A merger, consolidation or business combination of Supplier with or into, or a sale of all outstanding stock of Supplier to, another 99 CONFIDENTIAL TREATMENT REQUESTED entity that is wholly owned (directly or indirectly) by KHC that does not cause or result in a material change in the nature of the business conducted by Supplier prior to such event or in a material adverse change in the management or operations of Supplier. e) A merger, consolidation or business combination of KGI with or into, or a sale of all outstanding stock of KGI to, another entity that is wholly owned (directly or indirectly) by KHC that does not cause or result in a material change in the nature of the business conducted by KGI prior to such event or in a material adverse change in the financial condition of the Guarantors as a whole. 16.2 Financial Information of Supplier and Guarantors. (a) Supplier will provide Applied with financial information, and shall cause KHC to provide to Applied financial information, as follows: (i) within 90 days after the end of each fiscal year, and within 45 days after the end of each fiscal quarter, financial statements for such year or period as to KHC, to include the balance sheet, statement of income, and statement of cash flow (on a consolidated basis with its subsidiaries) of KHC, such annual (but not quarterly) financial statements to have been audited by independent certified public accountants of recognized national standing; and (ii) from time to time such additional financial information as Applied may reasonably request. All financial statements of KHC shall be prepared on the basis of generally accepted accounting principles in effect in the United States of America ("GAAP"), consistently applied. Applied's request for financial information from Supplier or from KHC to be provided through Applied's Form F-15 shall be deemed a reasonable request under clause (ii) of this Article 16.2(a) when Applied has determined that it requires information in addition to that contained in the KHC financial statements referred to in Article 16.2(a)(i). Information on Form F-15 is not required to be presented in compliance with GAAP. (b) Supplier agrees to keep true, complete and accurate books and records, of Supplier's costs and other information relevant to price and cost reduction provisions of the Agreement and billings by Supplier to Applied under the Agreement. Supplier will provide: (1) upon request by Applied's Supply Chain Management organization or successor organization of Applied performing the functions of such organization ("SCM"), made on a case by case basis, a complete costed bill of materials for those FDS(s) delivered to Applied that are specified in the applicable request(s), to include detailed Piece Part costs at Supplier's Standard Cost of Materials, Current Average Cost of Materials, or other Piece Part price, in each case as applicable to the Piece Parts in such bill of materials, to be provided to Applied's SCM organization or to such other recipient at Applied as specifically identified in instructions given to Supplier by Applied's SCM through the Supply Account Team Lead; (2) upon request by Applied's SCM, access to Supplier's books and records (at Supplier's facilities and during regular business hours) to determine the accuracy of Supplier's Piece Part prices charged to Applied and, as applicable, Supplier's 100 CONFIDENTIAL TREATMENT REQUESTED adjustments thereto under cost reduction provisions of the Agreement (including Sections 3.1.5 and 3.1.6); and (3) copies of its books and records (or access to its books and records), upon request and upon reasonable notice, for review or audit during regular business hours (to include access to original records or data) to reconcile differences between the parties as to billings and payments. At the conclusion of a review or audit as to billing and payment differences, Applied shall provide to Supplier a report with reasonably detailed supporting information from Applied's books and records to support the conclusions reached with respect to such differences. (c) Upon mutual agreement of the parties after request by Applied, Applied (or independent nationally recognized accountants designated by Applied and reasonably acceptable to Supplier) shall have the right, at Applied's expense and upon reasonable notice, to conduct audits of all of Supplier's books and records and of any financial statements or other information provided by Supplier. This Article 16.2(c) does not limit Applied's rights under Article 16.2(b). 17. Assignment and Succession. (a) The Agreement shall be binding upon, and inure to the benefit of, each of the parties and its respective successors and permitted assigns. Neither Supplier nor Applied shall assign, transfer to or permit to vest in another person the Agreement, or its rights, interests and obligations under the Agreement, in whole or in part, whether voluntarily or by operation of law, (i) without the express, prior written consent of the other party, or (ii) except as permitted by the following provisions of this Article 17, as applicable. (b) Applied may assign the Agreement in whole or in part to any other person(s), as follows: (i) Assignment in whole or in part is permitted if Applied remains obligated, either primarily or equally with the assignee, for performance of the obligations assigned by Applied; (ii) Assignment in whole or in part is permitted in connection with, or to effect, a change in manufacturing operations resulting from an agreement between Applied and a Subassembler under Section 4.7 of the Agreement, or to accomplish a change in manufacturing of any Applied Systems relating to such an agreement; (iii) Assignment in whole or in part is permitted in connection with, or to effect, a sale or transfer of assets used in manufacturing operations of Applied Systems, where such occurs to facilitate or as part of any bona fide change in the organization or structure of the manufacturing or integration of Applied Systems, which may include manufacture or integration by a third party, and which may be related to changes as to any product line(s), type(s) or model(s) of Applied System(s), line(s) of business of Applied, or geographic or other reorganization; or 101 CONFIDENTIAL TREATMENT REQUESTED (iv) Assignment in whole or in part is permitted in connection with, or to effect, arrangements or agreements for outsourcing, contract, turnkey or similar manufacturing, or for modular build, of Applied Systems or assemblies or subassemblies, where such occurs to facilitate (or as part of) any bona fide change in the organization or structure of the manufacturing or integration of Applied Systems, which may include manufacture or integration by a third party, and which may be related to changes as to any product line(s), type(s) or model(s) of Applied System(s), line(s) of business of Applied, or geographic or other reorganization. An assignee from Applied under an assignment made by Applied pursuant to this Article 17(b) may not further assign, either in whole or in part, the Agreement (or the portion of the Agreement assigned to the assignee) without the prior written consent of Supplier to such subsequent assignment. (c) A transfer or vesting of the Agreement, and rights and obligations hereunder, in whole but not in part, in another person in the event of or incident to a merger, consolidation or business combination to which Applied is a party shall be permitted. (d) Supplier may assign the Agreement, in whole or in part, to any other person, and the Agreement may be transferred to, or vest in, another person, in whole but not in part, by reason of a merger, consolidation or business combination to which Supplier is a party, as follows: (i) Assignment, in whole or in part, is permitted if, after notice from Supplier under Article 17(f), Applied (x) has determined, in the reasonable discretion of Applied, that: (A) such person is reasonably likely to qualify, or is then qualified, as a "preferred" supplier under the then-current standards of Applied, without prejudice to subsequent assessments during the term of the Agreement; (B) such person and the terms of the assignment do not present an adverse risk to Applied with respect to: manufacturing process, delivery cycle time, product pricing, quality, or financial responsibility or condition; (C) such person and the terms of the assignment do not present an adverse risk to Applied with respect to protection, confidentiality, misuse or misappropriation of, access to, or control over confidential or proprietary information, trade secrets and like property of Applied (or in which it has an interest); (D) such person and the terms of the Assignment do not present an adverse risk to Applied that a Competitor of Applied (or an Affiliate of such a Competitor (as the terms Competitor and Affiliate are defined in Article 16.1(c)) would be or become a party to, or in control of a party to, the Agreement or the Related Agreements; and (y) has issued its written consent based on such determination. In its assessment as to financial responsibility and condition under Clause B above, Applied may consider whether the Performance Guaranty Agreement will continue in effect as to the Agreement (or portion assigned). (ii) Transfer or vesting, in whole but not in part, is permitted in the event of a merger, consolidation or business combination of Supplier with or into, or a sale of all 102 CONFIDENTIAL TREATMENT REQUESTED outstanding stock of Supplier to, another entity that is wholly owned (directly or indirectly) by KHC, or as part of a transfer of a substantial part of the assets of Supplier to a third party that is wholly owned (directly or indirectly) by KHC, provided that a transaction under this Article 17(d)(ii) does not cause or result in a material change in the nature of the business conducted by Supplier prior to such transaction or a material adverse change in the management or operations of Supplier. (e) Any assignee or successor of Applied or Supplier shall also assume, be bound by and be (or become) a party to and obligated under this Agreement, the IPA and other Related Agreements (as such agreements are then in effect), either in whole (if the permitted assignment or other transaction is as to the Agreement in whole), or in part (if in part). (f) Each party shall endeavor to provide the other with prior written notice and, if applicable, a request for consent with respect to a transaction to which this Article 17 applies, and a brief description of the transaction and of the assignee or transferee at least seventy-five (75) days before the closing of such transaction. Further, each party shall give the other party, at least fifteen (15) days prior to the closing of such a transaction, written notice of, and, if applicable, a request for consent as to, any proposed or permitted transaction to which this Article 17 applies and a brief description of the transaction and of the assignee or transferee of such transaction, if not previously provided. Failure to give such notice shall not, by itself, affect the validity of such assignment or transfer as between the parties thereto. (g) In the event of, and to the extent of, an assignment, merger or other transaction to which Supplier is a party with respect to the Agreement of a type described in Article 17(d), Supplier shall maintain during the period prior to the assignment, merger or such other transaction becoming effective the supply of Item(s) without interruption or delay and without breach of other provision of the Agreement. An assignment or transfer of this Agreement, or of obligations hereunder, shall not apply to, or relieve an assigning or transferring party of, the obligations, liabilities and debts accrued, incurred or existing at the date of assignment or transfer or subsequently accruing, arising, or existing under or in connection with transactions between the parties prior to such date, but the assigning or transferring party shall remain primarily and directly obligated and liable for such obligations, liabilities and debts. (h) Any assignment, merger or other transaction subject to this Article 17 that is not made in compliance with this Article 17, shall, at the option of the party (Applied or Supplier, as the case may be) that is not a party to such assignment, merger or other transaction, be deemed a breach of and a default under the Agreement and not be binding upon that party. The party, Applied or Supplier, exercising such option to declare breach and default shall give written notice of such exercise to the other party, and shall not be required to proceed with any period of review or cure under Article 25, however, the party so in breach shall continue to be bound by, and shall perform and observe all its obligations applicable under this Agreement through the conclusion of a Wind Down Period, if applicable, and thereafter under provisions that survive. (i) Assignment of this Agreement in part shall mean that all rights, interests and obligations of the party assigning and all terms, provisions and conditions of the Agreement shall be assigned to and assumed by (or apply to) the assignee with respect to the Item(s), product 103 CONFIDENTIAL TREATMENT REQUESTED line(s), type(s) or model(s) of Applied System(s) or FDSs, or line(s) of business to which the assignment applies (the "Assigned Products"). Notwithstanding the foregoing, (i) only those pricing provisions (whether set forth in Attachment 1 or elsewhere in the Agreement) applicable to Assigned Products affected by the assignment shall be assigned to the assignee and (ii) the liability of Supplier to Applied and any assignee(s) of Applied * below shall be apportioned pursuant to the assignment among Applied and each assignee * liability of Supplier to Applied and such assignee(s) *. In the event of an assignment, the parties shall cooperate in the implementation of operational processes and procedures to effect the assignment. 18. Gratuities. Supplier represents and warrants that it has not offered or given and will not offer or give any gratuity to induce any person or entity to enter into, execute or perform the Agreement or any other agreement between Supplier and Applied. Upon Applied's written request, an officer of Supplier shall certify in writing that Supplier has complied with and continues to comply with this Article. Any breach of this representation and warranty shall be a material breach of the Agreement and any other agreement between Applied and Supplier. 19. [Omitted] 20. [Omitted] 21. Disclaimers and Limitations of Liability as to Excluded Damages. (a) As used in this Article 21, "Excluded Damages" means all special, indirect, punitive, consequential or contingent damages that arise from or relate to the Agreement. (b) The exclusions and limitations of this Article 21 as to the liabilities of Applied * for Excluded Damages are expressly made a part of the Agreement and are accepted by each party. (c) Subject to the exceptions provided in Article 21(e), Applied EXCLUDES all liability to Supplier for Excluded Damages, whether or not Applied has been advised of the possibility of such Excluded Damages. (d) *: (e) An exclusion or limitation, as applicable, that is provided by this Article 21 shall only apply to Excluded Damages and further shall not apply to damages of any type, obligations of a party, or claims or liabilities against a party that: (i) arise from or relate to matters covered by an indemnity under Article 22 of this Exhibit 1; (ii) arise from or relate to the IPA, or matters covered by an indemnity under the IPA; or * Material has been omitted and filed separately with the Commission. 104 CONFIDENTIAL TREATMENT REQUESTED (iii) arise from or relate to, or are for, personal injury, death, or damage to or loss of tangible property. 22. Indemnity. (a) Supplier's Indemnity Obligation. In the event a third party brings a claim or asserts liability against Applied alleging that Items or the work product of Services ("Work Product"), as provided by Supplier under this Agreement, or the manufacture, use, sale or offer for sale of such Items or Work Product by Applied or the use of same by Applied's customers infringes, misappropriates or otherwise violates third party IP Rights (an "Applied Third Party Claim"), SUPPLIER SHALL DEFEND, INDEMNIFY AND OTHERWISE HOLD HARMLESS APPLIED against such Applied Third Party Claim, including the payment of reasonable fees and expenses of any attorneys and other professionals employed by Applied in accordance with Article 22(f) in defending the Applied Third Party Claim and the payment of any judgment finally awarded against Applied or the payment of any settlement amount agreed to by Supplier to settle such Applied Third Party Claim. Supplier will not be liable for any settlement of an Applied Third Party Claim made by Applied without Supplier's consent, except as provided in Article 22(h) below. (b) Exceptions to Supplier's Indemnity Obligation. Supplier's obligations pursuant to Article 22(a) will not apply to any claims or assertions of liabilities if: (x) Supplier would not otherwise be liable for inducing or contributing to infringement, misappropriation or other violation; and (y) the infringement, misappropriation or other violation: (1) was unavoidably caused by Supplier's compliance with specifications or designs furnished and required by Applied or by Applied's non-compliance with Supplier's prior written advice or warning of a possible and likely infringement, misappropriation or other violation relating to such compliance, or (2) arises from a combination not performed by Supplier of Items and/or Work Product with other equipment, hardware, software, materials or components not provided by Supplier and any such claim or assertion of infringement, misappropriation or other violation would not arise but for such combination, or (3) is a direct result of Supplier's combination of components mandated by Applied. (c) * (d) Reduction of Indemnification Amounts. The amount that any party is or may be required to pay to or on behalf of any other person pursuant to an indemnity under this Article 22 shall be reduced (including retroactive reduction or reimbursement) by (i) any amounts received by an indemnified party from an insurance carrier or paid and resolved by an insurance carrier on behalf of the insured indemnified party (in a manner that results in no further liability to the indemnified person), in either case net of any applicable premium adjustment, retrospectively rated premium, deductible, retention, cost or reserve paid or held by or for the benefit of the insured, or (ii) any other amounts or tax benefits actually recovered by or on behalf of such indemnified person in reduction of such payment. If an indemnified person shall have received the payment required by this Article 22 from an indemnifying party and shall subsequently actually receive insurance proceeds or other amounts or tax benefits in respect of such payment * Material has been omitted and filed separately with the Commission. 105 CONFIDENTIAL TREATMENT REQUESTED as specified above, then such indemnified person shall pay to such indemnifying party a sum equal to the amount of any such double recovery actually received. This provision shall not, however, operate to relieve a party of liability to an insurer subrogated to the rights of the insured. (e) Indemnified Party's Obligations. A party seeking indemnification (i) shall give the other party prompt written notice of any Applied Third Party Claim or Supplier Third Party Claim, as applicable (each a "Third Party Claim"), that may give rise to any indemnification obligation under this Article 22, together with the estimated amount (if reasonably available) of such Third Party Claim, and (ii) shall provide reasonable cooperation and assistance to the indemnifying party in the defense and/or settlement of such claim, including, to the extent reasonably requested, the retention, and the provision to the indemnifying party (which shall pay the reasonable costs incurred in providing or collecting such records) of records and information reasonably relevant to such Third Party Claim. Failure to give such notice or to provide the cooperation provided for herein shall not affect the indemnification obligations hereunder in the absence of material prejudice to the indemnifying party. Except for the foregoing obligation to pay the reasonable costs incurred in providing or collecting records, the indemnifying party shall not be liable under this Article 22 for any internal personnel costs or expenses (including opportunity costs) suffered or incurred by the indemnified party in connection with a Third Party Claim. (f) Selection of Counsel. The indemnifying party shall have the right to conduct and control the defense and, as herein provided, settlement (at its own expense) of any such Third Party Claim through counsel of its own choosing by so notifying the party seeking indemnification within thirty (30) calendar days of the indemnifying party's first receipt of notice of the Third Party Claim; provided, however, that any such counsel shall be reasonably satisfactory to the party seeking indemnification. If the indemnifying party assumes such defense, the party seeking indemnification shall have the right to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by the indemnifying party. If, under applicable standards of professional conduct, a conflict with respect to any significant issue between any indemnified party and the indemnifying party exists in respect of such Third Party Claim, the indemnifying party shall also pay the reasonable fees and expense of such additional counsel as may be required to be retained by reason of such conflict. (g) Indemnified Party's Consent to Settlement. The indemnifying party shall not, without the prior written consent of the indemnified party: (i) agree to the settlement, compromise or discharge of such Third Party Claim unless, by its terms, such settlement, compromise or discharge actually, fully and finally discharges the indemnified party from the full amount of liability in connection with such Third Party Claim; nor (ii) agree to the entry of any judgment or enter into any settlement that: (1) provides for injunctive or other non-monetary relief adversely affecting the indemnified party, or (2) does not include as an unconditional term thereof the giving of a release for all liability with respect to such claim by each claimant or plaintiff to each indemnified party that is the subject of such Third Party Claim. (h) Consequences of Breach by Indemnifying Party. In the event that the indemnifying party does not assume and conduct the defense of a Third Party Claim in 106 CONFIDENTIAL TREATMENT REQUESTED accordance with this Article 22, or fails to perform any of its other obligations under Article 22(a), (c), (f) or (g), and therefore is in breach of its obligations under this Article 22: (i) the indemnified party may defend such Third Party Claim in any manner it reasonably may deem appropriate (and the indemnified party need not consult with, or obtain any consent from, the indemnifying party in connection therewith); (ii) the indemnified party may consent to the entry of any judgment or enter into any settlement with respect to such Third Party Claim, provided that, before so consenting to entry of judgment or entering into a settlement : (1) the indemnified party gives the indemnifying party written notice of the terms of the proposed consent judgment or settlement, and (2) the indemnifying party does not thereafter comply with its obligations under this Article 22 in respect of the Third Party Claim and, within three Business Days after receipt of such notice, give to the indemnified party a signed written statement acknowledging that the indemnifying party is liable under this Article 22 in respect of the Third Party Claim and undertakes to comply promptly with its obligations under this Article 22; and (iii) subject to compliance by the indemnified party with the foregoing obligations, as applicable, the indemnifying party will remain liable to the fullest extent provided in this Article 22. (i) IPA Indemnity Obligations. The indemnities and related obligations under this Article 22 are in addition to the indemnities and related obligations provided in the IPA; however, this Article 22 shall not apply to any Third Party Claim that is also subject to an indemnity provided in the IPA. Accordingly, the indemnity provisions in the IPA shall supersede the provisions of this Article 22 in respect of any Third Party Claim to which the IPA indemnity applies, to avoid any double indemnity liability or conflicting indemnity liability. The parties' indemnity obligations as to matters covered by the IPA shall be as provided in the IPA, except as to Excluded Damages that are limited by Article 21(d). (j) Relation to Warranty Terms. Limitations or disclaimers of warranties shall not be construed or applied to alter or affect the obligations and liabilities of Applied or Supplier, as the case may be, that arise under or are provided for by the indemnity provisions of this Article 22 or of the IPA. 23. Force Majeure. (a) A failure by either party to perform its obligations under the Agreement due to causes, events or conditions beyond its control and without the fault or negligence of the party shall be deemed excusable during the period in which the cause of the failure persists. Such causes may include, but not be limited to, acts of God or the public enemy, acts of the government in either sovereign or contractual capacity, fires, floods, epidemics, strikes, freight embargoes and unusually severe weather. If the failure to perform by Supplier is caused by the default of a sub-tier supplier of Supplier, and such default arises out of causes beyond the control of both Supplier and sub-tier supplier, and without the fault or negligence of either of them, Supplier will not be liable for any excess cost for failure to perform, unless the supplies or services to be furnished by the sub-tier supplier were obtainable from other sources in sufficient time to permit Supplier to meet the required delivery releases of Items. When Supplier or Applied becomes aware of any potential force majeure condition as described above, that party shall immediately notify the other of the condition and provide relevant details. 107 CONFIDENTIAL TREATMENT REQUESTED (b) A failure by Supplier to perform its obligations under this Agreement will be deemed excused to the extent caused by Applied's failure to timely perform its obligations under the FUAs or under the IS&T Agreement (as such is modified by the Agreement), each as in effect from time to time, including but not limited to, an interruption in services or failure to provide or maintain services that Applied is obligated to provide under an FUA or such IS&T Agreement, which interruption or failure is not timely cured by Applied, adversely affects Supplier's ability to perform under the Agreement, and Supplier is unable to perform through use of available alternative services. 24. Changes. Applied may at any time, by a written order and without notice to Guarantors, make changes within the general scope of the Agreement to any one or more of the following: (a) Specifications; (b) method of shipment or packing; (c) place and date of delivery; or (d) place and date of inspection or acceptance. Changes in costs, pricing or other terms resulting from changes made pursuant to this Article shall be determined pursuant to the Agreement. If any such change not otherwise provided for under the Agreement causes an increase or decrease in the cost of or time required for performance of the Agreement, an equitable adjustment shall be made in the Contract Price or delivery schedule, or both, and the Agreement shall be modified in writing accordingly. No claim by Supplier for adjustment under this Article 24 shall be valid unless in writing and received by Applied within sixty (60) days from the date of receipt by Supplier of the notification of change, provided, however, such period may be extended upon the written approval of Applied. However, nothing in this Article shall excuse Supplier from proceeding with the Agreement as changed or amended. 25. Termination for Default; Other Remedies. (a) Any of the following events, failures, occurrences or breaches and, when applicable with respect to an event, failure, occurrence or breach to which Article 25(a)(i) or (a)(iii) applies, the failure of Supplier, after notice by Applied under Article 25(b), to cure or correct same, if curable, during the Business Review Process under Section 7.2.5 of the Agreement (or such period as is established by the Business Review Process) shall constitute a "Default" under the Agreement: (i) the recurring material failure by Supplier to deliver Items on time and in compliance with the warranty provisions of the Agreement; (ii) Supplier's becoming insolvent; the filing by Supplier of a voluntary petition under any bankruptcy, insolvency or like law; the filing against Supplier of an 108 CONFIDENTIAL TREATMENT REQUESTED involuntary petition under any bankruptcy, insolvency or like law (which is not dismissed within 45 days after its filing); the making of an assignment by Supplier for the benefit of creditors; and/or any material adverse change in the business, properties, operation or condition (financial or otherwise) of Supplier; (iii) other than those failures to which Article 25(a)(i) applies, the material failure by Supplier to perform, observe, or comply with any term, provision, or condition of the Agreement, including recurring failures that together constitute a material failure, or the occurrence of any event or condition constituting a default or breach in a material respect under any term, provision or condition of the Agreement; or (iv) (a) the occurrence of any event or condition constituting a material default under or breach of any provision of (i) the Performance Guaranty Agreement, as in effect from time to time, or (ii) the APA or an FUA, as in effect from time to time, without cure or correction after notice pursuant to the APA or an FUA, as applicable, or (b) the exercise by Applied of a right of termination of the IPA in accordance with its terms pursuant to Section 5.2 of the IPA. Upon the occurrence of a Default, Applied shall have the right, at its option, to terminate the Agreement, either in whole or in part. A termination in part for Default shall apply to the Items, product line(s), type(s) or model(s) of Applied Systems or FDSs, or line(s) of business affected by the Default and as to which Applied exercises its right to terminate for Default (the "Terminated Products"). A termination of the Agreement in part for a default or the exercise of other rights and remedies pursuant to Section 7.2.1 or Section 7.2.2 with respect to the particular Item(s) affected shall not be subject to the procedural requirements of this Article 25. A default as to which Section 7.2.1 or Section 7.2.2 applies may, however, also become an element of a Default under this Article 25. In addition to its rights of termination for Default as to the Agreement under this Article 25, Applied shall have the rights provided by the UCC as to transactions governed by such statute (and by other law of the State of California where the UCC does not apply) to terminate for default (or cancel) or revoke acceptance with respect to any particular Item(s) and to recover its damages in connection with such Item(s), without the application of the procedures of this Article 25 or the Business Review Process. (b) Following the occurrence of an event, failure, occurrence or breach that constitutes or may constitute a Default under Article 25(a), Applied may, at its sole option, initiate and proceed with termination of the Agreement, as follows: (i) Applied shall give initial notice to Supplier, in accordance with Section 1.2.2 of the Agreement, which shall include the following: notice of the Default or potential Default and of Applied's intent to terminate the Agreement; notice that the parties shall proceed with the Business Review Process as referred to in Article 25(a) with respect to an event, failure, occurrence or breach to which Article 25(a)(i) or 25(a)(iii) applies, (except that a breach as to the 15 day notice under Article 17(f) shall not be subject to the Business Review Process); notice of 109 CONFIDENTIAL TREATMENT REQUESTED any event, occurrence, failure or breach which is determined by Applied to be an incurable or uncorrectable Default; and notice of the period of cure or correction for any event, occurrence, failure or breach (that is curable or correctable but not otherwise subject to the Business Review Process) established by Applied in such notice (such a period to be not less than ten (10) days). (ii) If (x) the event, occurrence, failure, or breach has not been cured to Applied's reasonable satisfaction at or before the expiration of the Business Review Process (where applicable) or of such period for cure or correction as is established by such process, or at the expiration of such other period (of not less than ten (10) days) established by Applied for matters not otherwise subject to the Business Review Process, or (y) the event, occurrence, failure or breach is incurable, Applied may at such time or at any time thereafter issue a written or electronic notice of termination (a "Notice of Termination for Default"), and the Agreement shall terminate on and as of the date for termination specified in the Notice of Termination for Default. (c) * (d) * (e) (i) The rights and remedies of each party pursuant to this Article 25 or any other provision of the Agreement for any purpose are in addition to and shall not limit or preclude resort to any other rights and remedies provided by agreement, by law (subject to procedural requirements of the Agreement) or in equity. With respect to equitable relief, a party may proceed to seek and obtain such relief, where authorized under applicable law, without the declaration of a Default * or compliance with other procedural requirements of the Agreement. (ii) In the event of a Default *, the non-defaulting party shall retain, and may exercise, all rights and remedies provided for by this Agreement or other applicable law for the recovery of damages and/or other relief or remedies with respect to the failure, breach, default or other event (subject, however, to applicable limitations of the Agreement as to damages and to procedural requirements of the Agreement). Termination of the Agreement for Default * shall constitute "cancellation" under the UCC. (f) Damages shall not be recoverable with respect to Items for which no Authorized Demand Signal has been accepted by Supplier prior to the effective date of termination. 26. Termination for Convenience. (a) Applied may terminate the Agreement with respect to some or all of the Items at any time for Applied's convenience (to "terminate for convenience" or a "Termination for Convenience"), by giving Supplier written or electronic notice of such Termination for Convenience in accordance with Section 1.2.2 of the Agreement, which notice shall state the extent of the termination and the conduct requested of Supplier in connection therewith as to * Material has been omitted and filed separately with the Commission. 110 CONFIDENTIAL TREATMENT REQUESTED matters described in Article 27 below, but excluding Article 27(v) (a "Notice of Termination for Convenience"). Upon the effective date of the Notice of Termination for Convenience, the Agreement shall terminate to the extent indicated in the Notice of Termination for Convenience, and Applied shall pay to Supplier the Termination Charges as determined in accordance with paragraphs (c) and (d) below. (b) Each Notice of Termination for Convenience shall: (i) Specify the Item(s), product lines, types of Applied Systems, or other method by which the Item(s) or scope of the Termination for Convenience will be determined, if less than all. (ii) Specify the effective date of the Termination for Convenience, which shall be at least three (3) months after the date of issuance of the Notice of Termination for Convenience. (iii) Provide such instructions or procedures as shall in Applied's commercially reasonable judgment be appropriate to implement Section 4.11 of the Agreement as to the Termination for Convenience. Upon a Termination for Convenience of the Agreement in whole or in part by Applied, Supplier shall promptly follow Applied's directions as set forth on the Notice of Termination for Convenience, and the parties shall implement the Wind Down Procedures of Section 4.11, as applicable. (c) Within ninety (90) days from the effective date of termination pursuant to a Notice of Termination for Convenience, Supplier shall deliver to Applied a written statement setting forth all of Supplier's claims in connection with the Termination of Convenience (the "Termination Charges"), in the form and containing such documentation as required by Applied. Failure by Supplier to deliver such claim for Termination Charges within said ninety (90) day period shall constitute a waiver by Supplier of all claims against Applied for such Termination for Convenience and a release of all Applied's liability arising out of such Termination for Convenience. (d) If Applied does not agree with the amount specified in Supplier's claim for Termination Charges, Applied and Supplier will attempt to agree upon a reasonable amount for Termination Charges. If Applied and Supplier fail to agree upon such an amount within * after receipt by Applied of the claim for Termination Charges from Supplier, then the Termination Charges will be conclusively presumed to be the sum of the following (provided that no costs shall be duplicated): * * Material has been omitted and filed separately with the Commission. 111 CONFIDENTIAL TREATMENT REQUESTED (c) The provisions of this Article 26 apply solely to a Termination for Convenience by Applied and shall not affect or impair any right of Applied to terminate the Agreement due to the default or breach of Supplier as provided in Article 25 or to seek any remedies in the event of such breach or default of Supplier as otherwise permitted. (d) Applied shall have the right to initiate Termination for Convenience, in whole or in part, based on the occurrence of a Notice Event. Such right to terminate for convenience shall not limit Applied's right to terminate for convenience, in whole or in part, at any other time. 27. Post-termination Obligations. On the date termination of the Agreement becomes effective as specified in the applicable Notice of Termination for Default or for Convenience, Supplier shall (i) stop work being performed by Supplier pursuant to the Agreement, (ii) cancel orders for parts and/or materials with Supplier's sub-tier suppliers and cease ordering any such parts and/or materials, (iii) cancel work being performed by Supplier's sub-tier suppliers for Supplier for the Agreement, (iv) assign to Applied Supplier's interests in contracts with Supplier's sub-tier suppliers (to the extent such contracts are assignable, are for goods used in the manufacture of Items, and any required consents to assignment are obtained), (v) (except in the case of Termination for Convenience) make commercially reasonable efforts to furnish Applied with releases of claims from Supplier's sub-tier suppliers resulting from orders and/or work canceled by Supplier, (vi) protect all property in which Applied has or may acquire an interest, and (vii) comply with the provisions of this Agreement, and of the TLA as to Tooling, Test Fixtures and Wind Down. 112 CONFIDENTIAL TREATMENT REQUESTED ATTACHMENT 18 FORM OF ON-SITE REPRESENTATIVE AGREEMENT This On-Site Representative Agreement ("Agreement") is made this day of ____, by and between Applied Materials, Inc. ("Applied") and Kinetics Fluid Systems, Inc. ("Supplier") (collectively referred to as the "Parties"). Whereas, Supplier provides parts or services to Applied or desires to sell parts or services to Applied under the terms of, and pursuant to, a Global Supply Agreement effective as of June 1, 2002 ("GSA"); and Whereas, the Parties agree that if certain duties and functions were to be performed by an employee of Supplier on Applied's premises or at an Applied facility it would facilitate Supplier's performance and benefit both Supplier and Applied; Now, therefore the Parties agree as follows: 1. Statement of Work Supplier will assign, at no cost to Applied, an individual on-site representative ("OSR") to perform, on Applied's premises, functions ("OSR Functions") described in the Statement of Work attached hereto as Exhibit No. 1 (the "SOW"). Supplier agrees to notify Applied immediately of any changes in its staffing assignments involving the OSR, or in the OSR Functions, whereby access to Applied's facilities or IS&T systems may no longer be essential to performing the OSR Functions. 2. Status of OSR The OSR is an employee of Supplier, subject to its right of direction, control and discipline. The OSR is not an employee of Applied, nor shall he or she be entitled to any rights, benefits, or privileges of an Applied employee. Prior to the commencement by the OSR of an assignment at Applied, Supplier represents that it will review this Agreement with the OSR, inform the OSR of the obligations under this Agreement and the "Joinder" required under this Agreement, and have the OSR enter into a "Kinetics Employee Joinder" in the form set out in Schedule 4.4 ("Joinder") to the Restated and Amended Intellectual Property Agreement between Applied and Supplier of even date with the GSA (the "IPA"). 3. Confidentiality and Performance Applied shall inform the OSR of hours of access to Applied's premises, pertinent safety regulations, and all other requirements which Applied deems necessary. The OSR shall comply with any applicable policies and regulations of Applied. Compliance with all policies and regulations of Applied is mandatory and is the responsibility of both the 113 CONFIDENTIAL TREATMENT REQUESTED OSR and Supplier; failure to comply with these policies and regulations will be cause for immediate removal of the OSR from the premises. Supplier agrees that the OSR Functions to be performed by the OSR will comply with this Agreement, including Attachments 1 and 2 to this OSR Agreement, and will also comply with any purchase, confidentiality, supplier-planner access, nondisclosure, intellectual property, joint design, joint development or other agreements that may be in effect between Supplier and Applied and including the Amended and Restated Intellectual Property Agreement with an Effective Date of June 1, 2002 (the "Related Agreements") at the time this Agreement is executed by the Parties or that is subsequently in effect. 4. OSR Associated Expenses All salary, benefits, and travel and business expenses for OSR will be the sole responsibility of Supplier. 5. Access Subject to Applied's approval and the completion of the security background check, the OSR may be granted access to the following: - Only those specific Applied facilities to which the OSR requires access in order to perform the tasks stated in the SOW - Telephone and fax lines (for matters related to Applied only) - Computer/modem and/or database or system information access as deemed necessary by Applied in order for the OSR to perform the tasks stated in the SOW. If a Joinder is attached to this Agreement and executed by the OSR, then such Joinder shall apply to all "Confidential Information" (as therein defined), and all Applied databases, applications and servers, that the OSR obtains, accesses or is exposed to as a result of the OSR Functions under this Agreement. If a Joinder is not attached and executed by the OSR, the OSR shall not have access to any information that is confidential, proprietary, or sensitive or to any Applied databases, applications or servers. 114 CONFIDENTIAL TREATMENT REQUESTED 6. Termination of Agreement This Agreement may be terminated immediately by either Party at any time without penalty; if not earlier terminated, this Agreement shall terminate upon completion of the tasks identified in the SOW. 7. Entire Agreement This Agreement, including its Attachments, and together with all Related Agreements constitutes the entire agreement between Supplier and Applied Materials with respect to OSR Functions, and with respect to OSR Functions it supersedes all preexisting agreements or arrangements, except for (a) the GSA and any Facilities Use Agreement as in effect for Applied facilities which the OSR may access, (b) any Supplier-Planner Access Agreement now or hereafter in effect, (c) any claims or causes of action of Applied relating to breach of a pre-existing OSR agreement or arrangement, and (d) any ongoing duty or obligation(s) of Supplier under a pre-existing OSR agreement or arrangement. In the event of any conflict between the terms of this Agreement and the terms of a Related Agreement, the GSA or any Facilities Use Agreement as in effect for Applied facilities which the OSR may access, precedence shall be given in accordance with Section 1.3.2.2 of the GSA. Kinetics Fluid Systems, Inc. Applied Materials, Inc. ("Supplier") ("Applied") By: By: ------------------------------ ----------------------------- Its: Its: ----------------------------- ----------------------------- Date: Date: ---------------------------- --------------------------- 115 CONFIDENTIAL TREATMENT REQUESTED Exhibit 1 - Statement of Work (On-site Representative Agreement) This Attachment describes the activities and services included in the OSR Functions of the Supplier's OSR. Changes in the OSR Functions may be made by agreement of Applied and Supplier. The OSR Functions include - Daily consultation with Applied's representatives concerning Supplier performance, production or project scheduling, and resolution of problems or errors. - Evaluation and reporting of problems or errors, and of anticipated problems, and constraints or delays. - Consultation with Applied's engineering and production representatives concerning product quality, product delivery, and product technical problems and revisions. - [To be added and revised by Applied's representatives.] - [To be added and revised by Applied's representatives.] i CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 2 On-Site Representative Agreement The "Joinder" required by this On-Site Representative Agreement is the "Kinetics Employee Joinder" set out in Schedule 4.4 to the Amended and Restated Intellectual Property Agreement of the Parties identified in this On-Site Representative Agreement. i ATTACHMENT 19 TOOLING LOAN AGREEMENT This Tooling Loan Agreement, is dated as of June 1, 2002 (the "Effective Date"), and made by and between Applied Materials, Inc., a Delaware corporation ("Applied"), and Kinetics Fluid Systems, Inc., a California corporation ("Supplier"). This Tooling Loan Agreement, together with all Attachments hereto, is referred to herein as the "Agreement." This Agreement is entered into in connection with the Global Supplier Agreement between Applied and Supplier, which itself has an effective date of June 1, 2002 ("GSA"), and is the Tooling Loan Agreement referred to in Sections 4.2.1 through 4.2.4 of the GSA. Solely for Supplier's use in fulfilling its obligations to Applied under the GSA, under Design Services Agreements and Development Services Agreements entered into from time to time as contemplated by the GSA (the terms "Design Services Agreement" and "Development Services Agreement" being used herein as defined in the GSA), and under the Amended and Restated Intellectual Property Agreement of even date ("IPA"), Applied has agreed to loan to Supplier, on the terms and conditions contained herein, the property identified in the Attachments to this Agreement (collectively, the "Tooling"), which Attachments will be updated from time to time. The Tooling includes * identified in Schedule 4.2.2.(c) to the GSA, the * provided under the "IS&T Agreement" identified in Section 2.9.1.1 of the GSA, and * in or used in the operation of *. The GSA, Design Services Agreements, Development Services Agreements, and the IPA, all as amended from time to time, are collectively called the "Operational Agreements." In consideration of the premises, the agreements of the parties set forth herein and in the Operational Agreements, and Applied's lending the Tooling to Supplier, Applied and Supplier agree as follows: 1.0 Ownership. (a) Title to and ownership of the Tooling (other than * "Third Party Applications", as such term is defined in the IPA) shall remain exclusively in Applied at all times, and Supplier shall have no ownership or beneficial interest therein, except as provided in Section 1.3 (b) as to Supplier Provided Improvements. Title to and ownership of * Third Party Applications shall remain exclusively in the owner of same, and Supplier shall have no ownership or beneficial interest therein. Supplier shall affix and maintain prominently on each item of Tooling a label indicating that the Tooling is owned by Applied or the other owner thereof. All additions, attachments, alterations, and modifications to the Tooling (except for *) shall become part of the Tooling and the exclusive property of Applied or the other owner thereof. * Material has been omitted and filed separately with the Commission. 1 CONFIDENTIAL TREATMENT REQUESTED (b) Supplier authorizes Applied to file this Agreement or any copy hereof, as well as to make any other filings, in any jurisdiction as Applied may deem appropriate to protect its interests or those of any other owner of Tooling. Upon Applied's request, Supplier shall execute or obtain from third parties and deliver to Applied such statements or other instruments as Applied deems necessary or advisable to confirm or perfect the interests of Applied or other owner in the Tooling, including filings under the Uniform Commercial Code and landlord or mortgagee waivers, and Supplier hereby grants to Applied the right to execute Supplier's name thereon where permitted by law. (c) Supplier shall, at its expense, protect and defend title to the Tooling of Applied or other owner against all persons claiming against or through Supplier, at all times keeping the Tooling free from any legal process or encumbrance whatsoever including but not limited to liens, attachments, levies, executions and other claims by third parties, and shall give Applied immediate written notice of any such third party claim and shall indemnify Applied against any cost, liability or loss caused thereby. (d) The Tooling is, and shall at all times be and remain, personal property notwithstanding that the Tooling or any part thereof may now be, or hereafter become, in any manner affixed or attached to real property or any improvements thereon. 1.1 Delivery. Applied shall package the Tooling for shipment to Supplier to provide for handling and protection of the Tooling sufficient to comply with the carrier's requirements and consistent with the manner in which Applied packages shipments of a like nature for its own use. Absent Applied's agreeing otherwise in writing, Applied shall arrange shipping as it deems appropriate to the applicable destination specified in the Attachment applicable to the item of Tooling. Upon delivery of the Tooling to Supplier, Supplier shall inspect the Tooling. If Supplier believes the Tooling is not in good working order and repair, it shall notify Applied promptly in writing. If such notice is not received by Applied within five business days after installation of the Tooling by Supplier, then Supplier shall be deemed to have accepted the Tooling, and the Tooling shall be deemed in good working order and repair. 1.2 Risk of Loss. Supplier shall bear all risks of loss, damage or destruction to the Tooling from and after the date the Tooling is delivered to Supplier until Applied accepts return of the Tooling. During such period, Supplier shall maintain, in addition to any other insurance required under its other contracts with Applied, all risk insurance with respect to the Tooling, comprehensive general liability insurance covering bodily injury, property damage, contractual liability, products liability and completed operations and workers compensation and employer's liability insurance with financially sound and reputable insurers in amounts and on terms customarily insured against in similar circumstances (or in such greater amounts or on such different terms as may be requested by Applied). Supplier shall furnish evidence of such insurance to Applied prior to execution of this Agreement, and such insurance shall require the insurer to give at least 30 days' advance notice to Applied of any material alteration or cancellation thereof (at least 10 days' prior notice as to cancellation for nonpayment of premiums). In the event of any loss or damage 2 CONFIDENTIAL TREATMENT REQUESTED to the Tooling, Supplier shall pay Applied within 45 days following the event of loss or damage the amount of loss or damage to the Tooling, which, in the event of a total loss shall be the value of the item of Tooling. Applied shall have the discretion to determine whether to replace any item of Tooling that is lost, damaged or destroyed. 1.3 Use, Maintenance and Alteration. (a) Supplier shall cause each item of Tooling to be installed and used at the applicable location set forth in the Attachment applicable to the item, and shall not copy, remove, reinstall or modify any software, and shall not relocate any Tooling to any other location (except as provided in Section 4.2.2 (a) of the GSA) without Applied's prior written permission. Except as otherwise agreed in writing by Applied, Supplier shall use the Tooling solely to fulfill its obligations to Applied under one or more of the Operational Agreements, all in compliance with this Agreement and the Operational Agreements. Supplier shall operate, protect, maintain and calibrate the Tooling in compliance with all applicable laws, rules and regulations (including those relating to safety), the conditions of all applicable insurance policies and best industry practices (including any maintenance schedules delivered by Applied or furnished by the Tooling manufacturer or distributor). Supplier shall obtain training for the Supplier personnel who will operate the Tooling, and Supplier shall operate the Tooling in compliance with such training. Under no circumstances shall Supplier operate the Tooling in a manner which could cause injury or death to any person or damage or injury to any property, including the Tooling. If Applied or the Tooling manufacturer or distributor specifies certain parties who are authorized to service the Tooling or special equipment required to maintain or calibrate the Tooling, Supplier shall use such authorized parties and/or special equipment. Supplier shall maintain logs and reports of the maintenance and operation of the Tooling and permit Applied, on reasonable prior notice, to inspect the Tooling to determine whether the Tooling is being used, protected, maintained and calibrated in accordance with this Agreement and to make copies of such logs and reports. Supplier shall correct immediately any deficiencies disclosed by such inspection upon notice from Applied. No such inspection or lack of inspection by Applied shall in any way diminish the sole responsibility of Supplier for the proper use, protection, maintenance and calibration of all Tooling. If an item of Tooling becomes inoperable, Supplier shall (subject to the limitations of Section 1.3(b) below) make immediate reasonable attempts to restore it to operating condition before requesting assistance from Applied's * Department. (b) Without the prior written consent of Applied, Supplier shall not make any alterations, modifications or additions to the Tooling except as provided in this Section 1.3(b). Further, Supplier shall comply with the IPA, as such applies to all Tooling or to the use of or rights in Tooling. Modifications or improvements to Tooling that constitute Capacity FDS Hardware or Product Change Hardware provided or purchased by Applied pursuant to Section 4.2.3 of the GSA shall be owned by Applied as part of the Tooling. Supplier may acquire and install on the Tooling, * those alternations, modifications, improvements or additions to Tooling that are items of Capacity FDS Hardware or Product Change Hardware that have been proposed by Supplier and Applied does not provide or procure under the procedures of Section 4.2.3 of the GSA and * (the "Supplier Provided Improvements"). * Material has been omitted and filed separately with the Commission. 3 CONFIDENTIAL TREATMENT REQUESTED (c) Costs associated with Applied approved or directed alterations, modifications, improvements or additions, as well as any third-party calibration services required to keep the Tooling within specified dimensional or sampling tolerances, shall be borne by Applied. Supplier shall not undertake, or incur any costs associated with, such activity until an authorizing purchase order has been received from the Applied organization ordering the Items that require usage of the Tooling. (d) Routine care, maintenance, and calibration performed by Supplier as part of normal operations shall be done at no cost to Applied. (e) Supplier shall comply with the requirements of the * Support Work Instruction (Form *) which can be found at http:// *. 1.4 Reserved Rights; Return of Tooling. (a) Applied may at its discretion, which discretion is to be reasonably exercised, access, inspect, modify, upgrade, replace, or remove from use any Tooling. Applied may also direct Supplier to allow Applied or its representatives to use Tooling at Supplier's location on a temporary basis as part of Applied's efforts to review and develop its products and processes. Supplier agrees to accept, subject to the terms of this Agreement, and incorporate into its manufacturing, testing and other processes any item of Tooling designated and furnished by Applied. (b) To the extent practicable, Applied will give Supplier reasonable advance notice of any action by Applied under the preceding Section 1.4 (a) or that would otherwise make the Tooling unavailable for use by Supplier on a temporary or permanent basis. If Applied requires a temporary or permanent cessation of use of any Tooling and such results in delays in Supplier's testing or delivery of Items under the GSA, then the extension period provided to Supplier under Section 4.2.4(b) of the GSA shall apply until Tooling required for testing or completion of Items is returned to use or replaced by Applied, unless otherwise agreed at the time. (c) At the time of termination or expiration of the GSA, in whole or in part, and also as provided in Section 4.2.4 of the GSA, Applied may exercise rights to purchase, repossess or remove Tooling in accordance with the GSA and this Agreement and the procedures of Section 4.2.4 of the GSA. In the event of Termination for Default pursuant to the GSA, Applied may require that Supplier return any or all items of Tooling to Applied, and in that event Supplier shall return such item(s) of Tooling, labeled and shipped in accordance with Applied's then current policies and specifications, which Supplier shall obtain from Applied. Supplier shall deliver each such item of Tooling at the appropriate location (which may be Supplier's facility in those instances in which Applied is proceeding under Section 4.2.4 of the GSA) in proper operating order, free from any legal process or encumbrance whatsoever. As to items of Tooling to which the IPA applies, Supplier shall also comply with Section 5.3 of the IPA upon * Material has been omitted and filed separately with the Commission. 4 CONFIDENTIAL TREATMENT REQUESTED termination or expiration of the IPA. If Supplier shall fail to deliver, as required, any item of Tooling in good working order and condition (reasonable wear and tear excepted), Supplier shall be responsible for all costs and expenses incurred by Applied in replacing the Tooling or in returning the Tooling to such required condition or any reduction in the value as a result thereof. (d) Upon receipt of notice from Applied that Applied will purchase, repossess or remove Tooling, Supplier shall remove from the affected Tooling all Supplier Provided Improvements. If Supplier has not removed such Supplier Provided Improvements at the time Applied takes possession of the Tooling pursuant to the notice, Applied shall be entitled to remove such improvements, using commercially reasonable procedures, and shall tender possession of such removed Supplier Provided Improvements to Supplier. 2.0 Exclusions of Warranties. SUPPLIER ACCEPTS EACH ITEM OF TOOLING "AS IS" AND "WITH ALL FAULTS." SUPPLIER ACKNOWLEDGES THAT IT HAS HAD AN OPPORTUNITY TO INSPECT THE TOOLING, AND THAT SUPPLIER IS EXPERIENCED IN THE OPERATION AND MAINTENANCE OF SUCH TOOLING. APPLIED MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE TOOLING OR ANY PART THEREOF. APPLIED HEREBY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF TITLE, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND WARRANTIES OF NONINFRINGEMENT; PROVIDED, THAT THE EXCLUSION AND DISCLAIMERS OF THIS AGREEMENT ARE, HOWEVER, SUBJECT TO, AND SHALL NOT ALTER, IMPAIR OR MODIFY, ANY WARRANTIES MADE BY APPLIED IN THE IPA OR GSA THAT ARE APPLICABLE TO TOOLING. 2.1 Exclusion of Certain Damages. IN NO EVENT SHALL APPLIED BE LIABLE FOR ANY SPECIAL, INDIRECT, PUNITIVE, CONSEQUENTIAL OR CONTINGENT DAMAGES ("EXCLUDED DAMAGES") THAT ARISE FROM OR RELATE TO THIS AGREEMENT FOR ANY REASON, WHETHER OR NOT APPLIED HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND APPLIED EXCLUDES AND SUPPLIER WAIVES ANY LIABILITY OF APPLIED FOR ANY SUCH EXCLUDED DAMAGES; PROVIDED, THAT THIS EXCLUSION AS TO EXCLUDED DAMAGES IS, HOWEVER, SUBJECT TO AND SHALL NOT ALTER, IMPAIR OR MODIFY ANY INDEMNITY OBLIGATION OF APPLIED PURSUANT TO THE IPA OR GSA THAT IS APPLICABLE TO TOOLING OR THIS AGREEMENT. 3.0 [Omitted.] 3.1 Intellectual Property. (a) Nothing in this Agreement shall be deemed to grant to Supplier any license or other right under any of Applied's intellectual property (including, without limitation, Applied's patents, copyrights, trade and service marks, trade secrets and Confidential Information, such 5 CONFIDENTIAL TREATMENT REQUESTED latter term being used as defined in the IPA) for Supplier's own benefit or to provide or offer Items or other products or services to any party other than Applied. (b) The IPA shall apply to and govern the rights and obligations of Applied and of Supplier with respect to "IP Rights" and "Confidential Information" (as such terms are defined in the IPA) in or relating to Tooling, including *, *, and * in or used in the operation of * or *. 3.2 Injunctive Relief; Reports. Supplier acknowledges and agrees that Applied would suffer immediate and irreparable harm for which monetary damages would be an inadequate remedy if Supplier were to breach its obligations under Sections 1.4 or 3.1. Supplier further acknowledges and agrees that equitable relief would be appropriate to protect Applied's rights and interests if such a breach were to arise, or were threatened, or were asserted. 4.0 Entire Agreement; Amendments. (a) This Agreement (including the Attachments hereto and provisions incorporated herein by reference), provisions of the GSA applicable to Tooling (including Section 4.2 of the GSA), those provisions of the IPA applicable to Tooling (including related software) and the IS&T Agreement (such term being used as defined in the GSA), all as amended, set forth the entire understanding and agreement of the parties as to the loan of the Tooling and supersede all prior agreements, understandings, negotiations and discussions between the parties as to such subject matter. The parties may be, or may become, parties to other agreements relating to the manufacture or sale of products to Applied or the provision of services to Applied, which other agreements shall govern their respective subject matters. (b) No amendment to, modification of or waiver of any provision of this Agreement will be binding unless in writing and signed by a duly authorized representative of the party sought to be bound. * Material has been omitted and filed separately with the Commission. 6 CONFIDENTIAL TREATMENT REQUESTED 4.1 Notices. Revisions, updates or other amendments or modifications to this Agreement (including Attachments) shall be effective only if in set out in a writing (or other record) executed (or authenticated) by each of Applied and Supplier, and communications hereunder may be given by mail, fax or e-mail to the individuals listed below. Supplier: ---------------------------------------------------------------- (Name) Joe Foster, Senior Vice President ---------------------------------------------------------------- (Address 1) 2805 Mission College Blvd. ---------------------------------------------------------------- (Address 2) Santa Clara, California 95054 ---------------------------------------------------------------- (Phone) (408) 935-4570 ---------------------------------------------------------------- (FAX) (408) 934-6302 ---------------------------------------------------------------- (E-mail) jfoster@kineticsgroup.com ---------------------------------------------------------------- Applied: Applied Materials, Inc. 9700 U.S. Hwy 290 East M/S 3300 Austin, Texas 78724 Phone: 512-272-2535 Fax: 512-272-3908 Attn: Mr. Craig Romick (email address is: Craig_A_Romick@AMAT.com) Each party shall advise the other in writing of any change to such party's contact persons. 4.2 Applicable Law; Consent to Jurisdiction; Venue. This Agreement shall be governed by, subject to and construed in accordance with the internal laws of the State of California, excluding conflicts of law rules. The parties incorporate by reference Article 11 of Exhibit 1 of the GSA and agree that the provisions of such Article apply to this Agreement. 4.3 Assignments. 7 CONFIDENTIAL TREATMENT REQUESTED The parties incorporate by reference Article 17 of Exhibit 1 of the GSA and agree that the provisions of such Article apply to this Agreement. 4.4 Waiver. In the event Applied delays or fails to insist on performance of any of the terms and conditions set forth herein or delays or fails to exercise any of its rights or privileges under this Agreement, such delay or failure shall not constitute a waiver of such terms, conditions, rights or privileges. 4.5 Indemnity by Supplier. SUPPLIER SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS APPLIED FROM AND AGAINST, AND SHALL SOLELY AND EXCLUSIVELY BEAR AND PAY, ANY AND ALL CLAIMS, SUITS, LOSSES, PENALTIES, DAMAGES (WHETHER ACTUAL, PUNITIVE, CONSEQUENTIAL OR OTHERWISE) AND ALL LIABILITIES AND THE ASSOCIATED COSTS AND EXPENSES, INCLUDING ATTORNEY'S FEES, EXPERT'S FEES, AND COSTS OF INVESTIGATION (ALL OF THE FOREGOING BEING COLLECTIVELY CALLED "INDEMNIFIED LIABILITIES"), WHICH ARISE FROM OR RELATE TO, OR ARE FOR, PERSONAL INJURY, DEATH, OR DAMAGE TO OR LOSS OF TANGIBLE PROPERTY RESULTING (IN WHOLE OR IN PART) FROM THE USE OR OPERATION OF THE TOOLING BY SUPPLIER, OTHER THAN (a) AS A RESULT OF DEFECTS IN THE TOOLING EXISTING AT THE TIME OF DELIVERY TO SUPPLIER OR (b) FOR INFRINGEMENT OR OTHER MATTERS AS TO WHICH APPLIED HAS WARRANTY OR INDEMNITY OBLIGATIONS TO SUPPLIER. THIS INDEMNITY IS SUBJECT TO, AND SHALL NOT ALTER, IMPAIR OR MODIFY, ANY WARRANTY OR INDEMNITY BY APPLIED OR SUPPLIER TO OR FOR THE BENEFIT OF THE OTHER UNDER THE IPA OR GSA. 4.6 Supplier's Expense and Risk; Taxes. Supplier shall perform all of its obligations hereunder at its own expense and risk, including without limitation those specified herein as being at Supplier's expense. Supplier shall be responsible for paying any use tax assessed in connection with the loan of Tooling contemplated by this Agreement. 4.7 Captions and Severability. Captions in this Agreement are for the convenience of the parties only and shall not affect the interpretation or construction of this Agreement. In the event any provision of this Agreement is held to be invalid or unenforceable, such provision shall be severed from the remainder of this Agreement, and such remainder will remain in force and effect. 4.8 Counterparts and Attachments. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Particular items of Tooling subject to this Agreement may be added or deleted by the parties from time to time; as items are added or deleted, a new Attachment (or an amendment to a current Attachment) to this Agreement shall be executed by the parties to identify changes in Tooling. 8 CONFIDENTIAL TREATMENT REQUESTED [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 9 CONFIDENTIAL TREATMENT REQUESTED IN WITNESS WHEREOF, the parties hereto have caused their names to be signed hereto by their respective duly authorized officers, all as of the Effective Date. APPLIED: SUPPLIER: APPLIED MATERIALS, INC. KINETICS FLUID SYSTEMS, INC. By: /s/ Paul Hohlstein By: /s/ Dan Rubin ------------------------------- ------------------------------- Name: Paul Hohlstein Name: Dan Rubin ----------------------------- ----------------------------- Title: Vice President Title: President ---------------------------- ---------------------------- 10 CONFIDENTIAL TREATMENT REQUESTED ATTACHMENT 1 The * Attachment 1 consists of: (a) Schedule 4.2.2(c) to the GSA as of the Effective Date; (b) The Test Fixture Software (as defined in Section 4.2.3(c) of the GSA, and which is not required to be scheduled); (c) The * identified on Addendum * to the * Agreement and all * the Third Party Applications set out on Schedule 2.3.8 to the IPA and the * identified under * in Schedule 2.8 to the IPA; and (d) The * identified under * in Schedule 2.8 to the IPA. * Material has been omitted and filed separately with the Commission. 11 CONFIDENTIAL TREATMENT REQUESTED As to Tooling delivered *, the following form shall be used: Supplement to Attachment 1 Applied Materials, Inc. ("Applied") and the below named Supplier ("Supplier") agree that the property described below to Supplier has been delivered to Supplier as "Tooling" under, and is subject to, that certain Tooling Loan Agreement dated as of _________ __, _____ between Applied and the Supplier: Place of Delivery for Tooling and any Packaging or Shipping Instructions: [Enter "Deliver To" Address]

Detailed Description of Each Item of Tooling Identification Number Agreed Value - -------------------------------------------- --------------------- ------------ - -------------------------------------------- --------------------- ------------ - -------------------------------------------- --------------------- ------------

TOTAL VALUE OF TOOLING $ TBD Dated: --------------------- * Material has been omitted and filed separately with the Commission. 12 CONFIDENTIAL TREATMENT REQUESTED APPLIED MATERIALS, INC. KINETICS FLUID SYSTEMS, INC. By: By: -------------------------------- -------------------------------- Name: Name: ------------------------------ ------------------------------ Title: Title: ----------------------------- ----------------------------- 13 EX-10.16 11 f82015a1exv10w16.txt EXHIBIT 10.16 Exhibit 10.16 CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, has been marked with an asterisk to denote where omissions have been made. The confidential material has been filed separately with the Commission. AMENDED AND RESTATED INTELLECTUAL PROPERTY AGREEMENT TABLE OF CONTENTS

Page ---- ARTICLE 1 --GENERAL BACKGROUND..................................................................... 1 1.1 Applied's Business............................................................ 1 1.2 Kinetics' Business............................................................ 1 1.3 Existing Business Relationship between the Parties............................ 1 1.4 Renegotiation of the Outsource Relationship................................... 2 1.5 Scope of this Agreement....................................................... 2 1.6 Statement of Agreement........................................................ 2 ARTICLE 2 - DEFINITIONS............................................................................ 3 2.1 Affiliate..................................................................... 3 2.2 Agreement..................................................................... 3 2.3 Applied....................................................................... 3 2.4 Applied FDS or Applied Fluid Delivery System.................................. 3 2.5 Applied FDS Technology........................................................ 3 2.6 Applied Future IP............................................................. 3 2.7 Applied IP.................................................................... 3 2.8 Applied Pre-Existing IP....................................................... 3 2.9 Applied System................................................................ 4 2.10 Component..................................................................... 4 2.11 Confidential Information...................................................... 4 2.12 Current Applied FDS Technology................................................ 4 2.13 Current Applied FDS or Current Applied Fluid Delivery Systems................. 4 2.14 Design IP..................................................................... 4 2.15 Design Services............................................................... 4 2.16 Design Services Agreement or DSA.............................................. 5 2.17 Design SOW.................................................................... 5 2.18 Development Services.......................................................... 5 2.19 Development Services Agreement or DVA......................................... 5 2.20 Documentation................................................................. 5 2.21 Effective Date................................................................ 5 2.22 Existing Component............................................................ 5 2.23 FDS Technology................................................................ 6 2.24 Fluid Delivery System or FDS.................................................. 6

TABLE OF CONTENTS

Page ---- 2.25 Future Applied FDS............................................................ 6 2.26 Future Applied FDS Technology................................................. 6 2.27 Future Modifications.......................................................... 6 2.28 GSA........................................................................... 6 2.29 IP Rights..................................................................... 7 2.30 Kinetics...................................................................... 7 2.31 Kinetics Future IP............................................................ 7 2.32 Kinetics IP................................................................... 7 2.33 Kinetics Pre-Existing IP...................................................... 7 2.34 Manufacturing Process......................................................... 7 2.35 Outsource Relationship........................................................ 8 2.36 Party(ies).................................................................... 8 2.37 Standard Services............................................................. 8 2.38 Third Party Applications...................................................... 8 2.39 Third Party FDS Technology.................................................... 8 ARTICLE 3 - INTELLECTUAL PROPERTY.................................................................. 8 3.1 Pre-Existing IP............................................................... 8 3.2 License to Kinetics for FDS Operations........................................ 8 3.3 Future Modifications - Generally.............................................. 9 3.4 Standard Services............................................................. 9 3.5 Design Services............................................................... 9 3.5.1 Design Services Procedure........................................... 9 3.5.2 Performance of Design Services...................................... 9 3.5.3 Ownership of Design IP..............................................10 3.6 Development Services..........................................................10 3.7 Applied's Approval of Design Services and Development Services................10 3.8 Ownership of Manufacturing Processes..........................................10 3.9 Trademark Rights..............................................................10 3.10 Applications for IP Rights....................................................11 3.11 Existing Third Party FDS Technology...........................................11 3.12 Future Third Party FDS Technology.............................................11 3.13 License to Applied For Cover and Support......................................12

TABLE OF CONTENTS

Page ---- 3.14 Reservation of Rights.........................................................12 ARTICLE 4 - CONFIDENTIALITY........................................................................13 4.1 Definition....................................................................13 4.2 Confidentiality Obligations...................................................15 4.3 Identification As Confidential................................................16 4.4 Need-To-Know Disclosure.......................................................17 4.5 Remedies......................................................................17 4.6 Visual Information............................................................17 ARTICLE 5 - TERM AND TERMINATION...................................................................17 5.1 Term..........................................................................17 5.2 Termination...................................................................18 5.2.1 In Event of a GSA Termination.................................................18 5.2.2 By Either Party in Event of an IPA Default..........................18 5.2.3 By Either Party Immediately Upon Confidentiality Breach.............18 5.2.4 By Either Party of a DSA............................................18 5.2.5 By Either Party of a Development Services Agreement.................19 5.2.6 Effective Date of Termination Upon GSA Termination..................19 5.3 Consequences of Termination or Expiration.....................................20 5.4 Termination of the Amended IPA................................................22 ARTICLE 6 - WARRANTIES AND REPRESENTATIONS.........................................................22 6.1 Kinetics Pre-Existing IP Rights...............................................22 6.2 Applied Pre-Existing IP Rights................................................22 6.3 Future Modifications..........................................................22 6.4 Completeness of Schedules of Pre-Existing IP Rights...........................23 6.5 Disclaimer of Warranties......................................................23 6.6 Limitation of Liability.......................................................23 ARTICLE 7 - INDEMNITIES............................................................................23 7.1 Indemnification - Performance of Agreement....................................23 7.2 Indemnification - Infringement/Misappropriation...............................24 7.3 Indemnification/Duty to Defend Set-Off........................................24 7.4 Indemnified Party's Obligations...............................................25

TABLE OF CONTENTS

Page ---- ARTICLE 8 - GENERAL PROVISIONS.....................................................................25 8.1 Entire Agreement..............................................................25 8.2 Succession and Assignment.....................................................25 8.3 Export Regulation.............................................................26 8.4 Rules of Construction.........................................................27 8.5 Attorneys' Fees...............................................................27 8.6 General Provisions............................................................27

CONFIDENTIAL TREATMENT REQUESTED AMENDED AND RESTATED INTELLECTUAL PROPERTY AGREEMENT This Amended and Restated Intellectual Property Agreement (the "Agreement") is by and between Applied Materials, Inc., a Delaware corporation, having places of business in Santa Clara, California and Austin, Texas, and Kinetics Fluid Systems, Inc., a California corporation, having places of business in Santa Clara, California and Austin, Texas. ARTICLE 1 GENERAL BACKGROUND 1.1 APPLIED'S BUSINESS. Applied, among other activities, designs, manufactures and markets (a) semiconductor wafer fabrication equipment, (b) wafer inspection and metrology equipment, (c) flat panel display fabrication equipment, (d) wafer fabrication factory control software, (e) toxics abatement or recycling equipment, (f) thin film application processes, and (g) parts, components and processes related to any of the foregoing. 1.2 KINETICS' BUSINESS. Kinetics, among other activities, designs, develops, manufactures and markets, for use in semiconductor fabrication equipment and other applications, (a) Fluid Delivery Systems, (b) Components, (c) chemical and slurry delivery systems, (d) process chillers, (e) thermal measurement and control devices, (f) utility infrastructure and delivery systems for semiconductor fabrication facilities, (g) ancillary equipment to connect the utility infrastructure of semiconductor fabrication facilities to semiconductor fabrication equipment, and (h) waste recycling systems for chemicals and slurry. 1.3 EXISTING BUSINESS RELATIONSHIP BETWEEN THE PARTIES. The Parties previously established a business relationship, according to which Kinetics manufactures for Applied fluid delivery systems for incorporation into various systems sold by Applied, including semiconductor fabrication equipment, flat panel display fabrication equipment and thin film application process equipment ("Outsource Relationship"). The Outsource Relationship is - 1 - CONFIDENTIAL TREATMENT REQUESTED defined by a series of agreements, including an "Intellectual Property Agreement" dated June 28, 1999 ("Original IPA.") The Original IPA was amended by a series of three amendments -- (1) First Amendment to Intellectual Property Agreement dated September 20, 1999, (2) Second Amendment to Intellectual Property Agreement dated September 20, 1999, and (3) Third Amendment to Intellectual Property Agreement dated June 25, 2000 (the thrice-amended Original IPA and any of its predecessor agreements, including the Original IPA, are referred to hereinafter as the "Amended IPA"). The Amended IPA defines each Party's intellectual property rights and obligations related to the fluid delivery systems manufactured for Applied by Kinetics until the Effective Date of this Agreement. 1.4 RENEGOTIATION OF THE OUTSOURCE RELATIONSHIP. The Parties have renegotiated the Outsource Relationship to reflect developments since the relationship was initially created. As a part of these renegotiations, the Parties have renegotiated their respective duties, obligations and rights relating to intellectual property in and related to fluid delivery systems, and desire to reflect same in this Agreement. More specifically, the Parties desire that this Agreement supersede the Amended IPA, which terminates on the Effective Date of this Agreement. 1.5 SCOPE OF THIS AGREEMENT. The Parties desire to enter into new agreements, including a new agreement defining their respective intellectual property rights, to reflect more accurately the current business conditions surrounding the Outsource Relationship. 1.6 STATEMENT OF AGREEMENT. Now, therefore, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree to the following terms, conditions and obligations. - 2 - CONFIDENTIAL TREATMENT REQUESTED ARTICLE 2 DEFINITIONS 2.1 AFFILIATE means "affiliate" as defined in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act. 2.2 AGREEMENT means this Amended and Restated Intellectual Property Agreement. 2.3 APPLIED means Applied Materials, Inc. and all of its domestic and international divisions and subsidiaries. 2.4 APPLIED FDS or APPLIED FLUID DELIVERY SYSTEM means Current Applied FDS and Future Applied FDS. 2.5 APPLIED FDS TECHNOLOGY means Current Applied FDS Technology and Future Applied FDS Technology. 2.6 APPLIED FUTURE IP means all IP Rights relating to Future Modifications owned by Applied, including, without limitation, Design IP. Applied Future IP includes any and all IP Rights in and to software for "Capacity FDS Hardware" and "Product Change Hardware" and to "Improved Software" (all as defined in Section 4.2 of the GSA) provided or purchased by Applied in accordance with Section 4.2 of the GSA. 2.7 APPLIED IP means Applied Pre-Existing IP and Applied Future IP. Applied IP includes any and all IP Rights in and to "Test Fixture Software" (as defined in Section 4.2 of the GSA) provided or purchased by Applied in accordance with Section 4.2 of the GSA. 2.8 APPLIED PRE-EXISTING IP means all existing IP Rights relating to the Current Applied FDS or Current Applied FDS Technology that are owned by Applied, or to which Applied otherwise has rights (but only to the extent of such rights), as of the Effective Date, as set forth in Schedule 2.8. Applied Pre-Existing IP, for purposes of the license of Section 3.2, - 3 - CONFIDENTIAL TREATMENT REQUESTED does not include Applied business information (such as sub-tier supplier information and Component pricing information) relating to the Current Applied FDS Technology. 2.9 APPLIED SYSTEM means capital equipment sold by Applied that incorporates a Fluid Delivery System. 2.10 COMPONENT means a component, part or sub-assembly of a Fluid Delivery System, including but not limited to, valves, tubing, mass flow controllers, base plates, brackets, sticks, manifolds (final and SLD), safety sensors, GPLIS, VDS, ozonators, pneumatics, manifolds, filters, cables, transducers, fluid delivery controllers and enclosures. 2.11 CONFIDENTIAL INFORMATION means Confidential Information as defined in Section 4.1. 2.12 CURRENT APPLIED FDS TECHNOLOGY means the FDS Technology currently utilized in connection with the Current Applied Fluid Delivery Systems. 2.13 CURRENT APPLIED FDS or CURRENT APPLIED FLUID DELIVERY SYSTEMS means the Fluid Delivery Systems sold to Applied by Kinetics for incorporation into an Applied System as of the Effective Date. 2.14 DESIGN IP means any and all IP Rights, other than Kinetics Pre-Existing IP or *, relating to a Future Modification created, conceived or first reduced to practice by or for a Party after the Effective Date and during the course of, and as a result of, Design Services. 2.15 DESIGN SERVICES means those services provided by Kinetics to Applied hereunder for the preparation and delivery of a detailed design of a Future Applied FDS or Component, comprised exclusively of Existing Components, implementing Applied's specific requirements * Material has been omitted and filed separately with the Commission. - 4 - CONFIDENTIAL TREATMENT REQUESTED and including one or more of the following activities: (a) the selection and configuration of Existing Components; (b) the preparation or release, or both, of bills of materials, drawings, product definition forms, engineering change orders or other documentation related to the selection and configuration of Existing Components; and (c) the manufacture, testing and delivery of such Future Applied FDS. 2.16 DESIGN SERVICES AGREEMENT OR DSA means an agreement with respect to Design Services entered into and executed by Kinetics and Applied in accordance with Section 3.5 of this Agreement. 2.17 DESIGN SOW means a written statement of work for Design Services agreed to and executed by both Parties, specifying the scope of Design Services to be provided by Kinetics, the related fees payable by Applied and any other related responsibilities of each Party in accordance with Section 3.5.1. 2.18 DEVELOPMENT SERVICES means any services with respect to Future Modifications provided by Kinetics to Applied other than Design Services and Standard Services. 2.19 DEVELOPMENT SERVICES AGREEMENT OR DVA means a written agreement with respect to Development Services entered into and executed by Kinetics and Applied, in accordance with Section 3.6 of this Agreement. 2.20 DOCUMENTATION means all blueprints, drawings, schematics, manuals, flowcharts, specifications, prototypes, specimens, software, manuals and other tangible materials related to the FDS Technology. 2.21 EFFECTIVE DATE means June 1, 2002. - 5 - CONFIDENTIAL TREATMENT REQUESTED 2.22 EXISTING COMPONENT means a Component of a Current Applied FDS, or any other Component that is commercially available to or from Kinetics as of the effective date of the applicable DSA. 2.23 FDS TECHNOLOGY means the technology, both tangible and intangible, related to the design and manufacture of a Fluid Delivery System. 2.24 FLUID DELIVERY SYSTEM OR FDS means a product that distributes or controls fluid (liquid, vapor or gas) to a tool or chamber, including all hardware that is embodied in or that is inside or attached to any such fluid delivery system, including but not limited to Components, but not including the Applied system controller or weldments that connect the fluid delivery system to the tool or chamber. 2.25 FUTURE APPLIED FDS means any future Fluid Delivery System that incorporates a Future Modification. 2.26 FUTURE APPLIED FDS TECHNOLOGY means any Future Modification relating to Standard Services, Design Services, or Development Services. Future Applied FDS Technology also means any Future Modification relating to: (a) the FDS test fixture(s) identified in Schedule 4.2.2(c) of the GSA; and (b) Purchased FDS Test Fixture(s), Capacity FDS Hardware, Product Change Hardware and Improved Software, all as defined in Section 4.2 of the GSA, provided or purchased by Applied in accordance with Section 4.2 of the GSA. 2.27 FUTURE MODIFICATIONS means improvements, enhancements or modifications created, conceived or first reduced to practice by or for a Party pursuant to the provisions hereof after the Effective Date to an Applied FDS or the Applied FDS Technology, or both, and - 6 - CONFIDENTIAL TREATMENT REQUESTED inventions, discoveries, works of authorship, know-how, technical information, work product and/or other information related thereto, but in any case excludes any *. 2.28 GSA means the Global Supply Agreement concurrently entered into by the Parties or any subsequent Global Supply Agreement entered into by the Parties. 2.29 IP RIGHTS means all patent rights, copyrights, trade secret rights, mask work rights and other intellectual or intangible proprietary rights (other than trademarks, service marks and similar rights) in any jurisdiction. 2.30 KINETICS means (a) Kinetics Fluid Systems, Inc.; (b) all unincorporated divisions of Kinetics Fluid Systems, Inc.; and (c) those subsidiaries and affiliates of Kinetics Fluid Systems, Inc. that are approved (through written supplement to this Agreement or the GSA) by Applied as permitted to perform obligations hereunder. Unit Instruments, Inc. shall not be included in the term "Kinetics" unless a written amendment to this Agreement, executed by Unit Instruments, Inc. and by both Parties, so provides. 2.31 KINETICS FUTURE IP means all IP Rights relating to Future Modifications and owned by Kinetics, including all *. 2.32 KINETICS IP means Kinetics Pre-Existing IP and Kinetics Future IP. 2.33 KINETICS PRE-EXISTING IP means all existing IP Rights relating to the Current Applied FDS or Current Applied FDS Technology that are owned by Kinetics, or to which Kinetics otherwise has rights (but only to the extent of such rights), as of the Effective Date, as set forth in Schedule 2.33. * Material has been omitted and filed separately with the Commission. - 7 - CONFIDENTIAL TREATMENT REQUESTED 2.34 MANUFACTURING PROCESS means: (a) each process or apparatus for manufacturing Fluid Delivery Systems, Components or both, developed *, but excluding any process or apparatus owned by * under the specific provisions of the GSA or any "Tooling Loan Agreement" between the Parties; (b) any IP Rights and know-how related to each process or apparatus as defined in paragraph (a), both tangible and intangible; and (c) related documentation, including without limitation assembly procedures, test procedures, operational method sheets, process mapping, product synchronizations and sequence of events documentation; but, in each case, excludes *. 2.35 OUTSOURCE RELATIONSHIP means the business relationship between the Parties, according to which Kinetics manufactures for Applied FDS's for incorporation into Applied Systems. 2.36 PARTY(ies) means Applied, Kinetics or both, depending upon context. 2.37 STANDARD SERVICES shall have the meaning given such term by the GSA. 2.38 THIRD PARTY APPLICATIONS means those computer software applications as set forth in Schedule 2.38. 2.39 THIRD PARTY FDS TECHNOLOGY means FDS Technology owned by a party other than the Parties. ARTICLE 3 INTELLECTUAL PROPERTY 3.1 PRE-EXISTING IP. Each Party's Pre-Existing IP shall remain such Party's sole property. * Material has been omitted and filed separately with the Commission. - 8 - CONFIDENTIAL TREATMENT REQUESTED 3.2 LICENSE TO KINETICS FOR FDS OPERATIONS. Applied grants to Kinetics a non-exclusive, non-transferable (except as provided in Section 3.7 and Section 8.2), royalty-free, worldwide license to reproduce, distribute, create derivative works of, use, make, have made, sell, offer to sell, import, practice, modify and improve Applied IP and, to the extent possible, the Third Party Applications for the limited purposes of fulfilling its obligations under this Agreement, the GSA and each DSA and DVA. With respect to the Third Party Applications, Applied's license of rights is subject to any and all limitations on such license as set forth in Applied's contracts with the applicable vendors. Applied does not represent or warrant that Kinetics requires a license to or that Applied has the right to license the Third Party Applications, notwithstanding Applied's representation and warranty of Section 6.2. 3.3 FUTURE MODIFICATIONS - GENERALLY. Future Modifications may involve Design Services, Development Services or Standard Services. 3.4 STANDARD SERVICES. The Parties have agreed, as part of the GSA, to terms and conditions relevant to the provision by Kinetics of Standard Services. Applied shall own any Fluid Delivery System and FDS Technology, and any IP Rights related thereto, created, conceived or first reduced to practice by or for a Party during the course of, and as a result of, Standard Services, but in no event shall Applied own any *. 3.5 DESIGN SERVICES. 3.5.1 DESIGN SERVICES PROCEDURE. If the Parties agree that Kinetics will perform Design Services for Applied, then the Parties will execute a Design SOW, addressing the issues referred to in Schedule 3.5.1, which shall be part of the Purchase Order (as defined in * Material has been omitted and filed separately with the Commission. - 9 - CONFIDENTIAL TREATMENT REQUESTED the GSA) under which Kinetics will provide the Design Services. Each Design SOW, together with the related Purchase Order, shall form a separate contract (a "Design Services Agreement") between the Parties relating to those Design Services, which contract incorporates the terms of this Agreement, the GSA, the Design SOW and the related Purchase Order. In the event (and to the extent) of conflict between or among this Agreement, the GSA, the Design SOW and the related Purchase Order, precedence shall be given first to this Agreement, second to the GSA, third to the Design SOW and fourth to the Purchase Order. 3.5.2 PERFORMANCE OF DESIGN SERVICES. Kinetics shall provide the Design Services to Applied as specified in the DSA. Applied shall pay Kinetics the fees specified in the DSA for the Design Services in accordance with the GSA. 3.5.3 OWNERSHIP OF DESIGN IP. Applied shall own any and all Design IP, and Kinetics hereby assigns and transfers to Applied any and all rights Kinetics may have in Design IP. Furthermore, Kinetics shall obtain any and all necessary assignments from its employees or subcontractors, as the case may be, to assure that Kinetics and, in turn, Applied receives full and complete ownership of Design IP. 3.6 DEVELOPMENT SERVICES. If the Parties agree that Kinetics will perform Development Services, then the Parties will negotiate in good faith to agree upon and execute a Development Services Agreement. 3.7 APPLIED'S APPROVAL OF DESIGN SERVICES AND DEVELOPMENT SERVICES. Applied has the right to perform services substantially similar to Design Services and Development Services solely, jointly with a third party or jointly with Kinetics. Kinetics may not perform any Design Services or Development Services unless performed jointly with Applied or otherwise approved by Applied; however, Kinetics may subcontract those obligations to perform any - 10 - CONFIDENTIAL TREATMENT REQUESTED agreed-to Design Services or Development Services that Kinetics reasonably determines to be outside Kinetics' core competency or as necessary to efficiently meet Applied's requirements, and sublicense to the subcontractor associated licenses and rights required to perform those obligations, with Applied's prior written approval, such approval not to be unreasonably withheld, delayed or denied. 3.8 OWNERSHIP OF MANUFACTURING PROCESSES. * will own each Manufacturing Process. 3.9 TRADEMARK RIGHTS. Applied grants to Kinetics a non-exclusive, royalty-free, worldwide license to use Applied's trademarks, as defined in Schedule 2.8, in the manner designated by Applied in connection with any Applied Fluid Delivery Systems. Kinetics will not include any of its trademarks on any Applied Fluid Delivery Systems, except that Kinetics may place the Kinetics trademark(s) on Components manufactured by or for Kinetics and utilized in any Applied Fluid Delivery Systems. The Parties acknowledge the importance of maintaining the quality of Applied Fluid Delivery Systems and, accordingly, Kinetics agrees to follow all the quality requirements of Sections 4.1 and 4.3 through 4.7 of the GSA. 3.10 APPLICATIONS FOR IP RIGHTS. Each Party has the sole right to control the process of preparing, filing, prosecuting and/or maintaining an application or applications in relation to any IP Rights allocated to such Party hereunder, and such Party shall bear the costs thereof. Each Party agrees to (i) disclose promptly in writing to the other Party all IP Rights allocated to the other Party hereunder; and (ii) assist the other Party as reasonably necessary to obtain, register or apply for any such IP Rights, including by causing its personnel and contractors to assign such IP Rights, sign or provide documents and render assistance. * Material has been omitted and filed separately with the Commission. - 11 - CONFIDENTIAL TREATMENT REQUESTED 3.11 EXISTING THIRD PARTY FDS TECHNOLOGY. In the event that Applied has a license to Third Party FDS Technology which is necessary for Applied Fluid Delivery Systems being requested by Applied, Applied, in its sole discretion, will either: (a) sublicense that Third Party FDS Technology to Kinetics, if Applied has the right to do so; or (b) make commercially reasonable efforts to assist Kinetics in obtaining a license to the Third Party FDS Technology from the owner; provided that neither Party will be required to take any act in violation of existing agreements with third parties. 3.12 FUTURE THIRD PARTY FDS TECHNOLOGY. In the event that the Parties agree to introduce in the future Third Party FDS Technology into any Applied Fluid Delivery System, then the Party with the relationship to the Third Party will obtain all necessary rights from the Third Party to allow Kinetics to manufacture Applied Fluid Delivery Systems incorporating the Third Party Technology. 3.13 LICENSE TO APPLIED FOR COVER AND SUPPORT. If Applied obtains Applied Fluid Delivery Systems from a second source (i) in accordance with Applied's "cover" rights under GSA Section 7.2 or (ii) to effect support as provided by GSA Section 4.8.3.b, then Kinetics agrees to extend to Applied a non-exclusive, non-transferable, royalty-free, worldwide, irrevocable (provided that Applied complies with all related obligations) license to manufacture, have manufactured for sale to Applied (and grant a sublicense to the manufacturer as necessary to exercise this right to have manufactured for sale to Applied), use and sell any such Applied Fluid Delivery Systems incorporating any Kinetics IP solely for incorporation into an Applied System in accordance with Applied's "cover" rights under GSA Section 7.2 or "Post Term Support" rights under GSA Section 4.8.3.b, as required. The license will expire upon expiration or termination in each case of Applied's "cover" rights under GSA Section 7.2(d) or "Post Term - 12 - CONFIDENTIAL TREATMENT REQUESTED Support" rights under GSA Section 4.8.3.b. Furthermore, in order for Applied to fully enjoy its licenses pursuant to this Section, Kinetics agrees to provide to Applied assistance, FDS Technology and Documentation, and otherwise take all action, necessary to allow Applied or a reasonably skilled FDS manufacturer, in the case that Applied exercises its sublicensing rights, to manufacture the Applied Fluid Delivery System. Notwithstanding the foregoing, Kinetics shall not be required to provide * to Applied or its manufacturer. 3.14 RESERVATION OF RIGHTS. All IP Rights of each Party that are not expressly granted in this Agreement are reserved and retained by such Party. Except as expressly provided in this Agreement, as of the Effective Date, no other licenses of IP Rights are granted whatsoever, whether expressly or by implication or estoppel, by either Party to the other Party. ARTICLE 4 CONFIDENTIALITY 4.1 DEFINITION. Confidential Information means all non-public, proprietary information of, or disclosed by, a Party ("Disclosing Party") that, from time-to-time, may be acquired by a Party ("Receiving Party") from the Disclosing Party that is: (i) related to an Applied FDS or Applied FDS Technology; or (ii) related to the provision of Applied FDS or Applied FDS Technology pursuant to this Agreement, the GSA, a DSA or a Development Services Agreement; or (iii) Visual Information as defined in Section 4.6. The Confidential Information may be in any form, medium, state or condition, inclusive of information that is embodied in a product or tangible item or that is intangible, whether disclosed in oral, written, graphic, machine recognizable (including computer programs, algorithms or databases), model or sample form or any derivation thereof, and shall include all of the following: * Material has been omitted and filed separately with the Commission. - 13 - CONFIDENTIAL TREATMENT REQUESTED (a) Processes; formulas; trade secrets; know-how; proprietary information; innovations; inventions; discoveries; improvements; research; development; product analysis or evaluations and test results, information and design; operations; systems; specifications; standards; drawings; designs; devices; data; patterns; compilations; methods; programs; technical documentation; manufacturing techniques or sequences; schematics; configurations; computer programs, codes and operating standards; all whether or not patented or patentable. (b) Product plans; customer configurations or product designs; confidential information received from customers; supplier configurations or product designs; confidential information received from suppliers. (c) Marketing plans; business plans; business activities; facilities; warehousing and leasing; inventory; inventory management plans, methods and procedures; inventory, materials and Components qualification and evaluation; business and product forecasts; corporate financial information and budgets or projections; business processes. (d) Personnel information; organizational structure; salaries and benefits; employee qualifications, requirements, resumes and individual data; labor cost models. (e) Supplier information, including identity; product sales; product manufacturing; supply; pricing; evaluation and performance histories; forecasts; requirements or standards; logistics; delivery or freight arrangements or requirements; materials handling techniques, standards or requirements; supplier personnel. (f) Customer information including: identity, product sales; product purchase histories or forecasts; customer agreements, terms and pricing; customer personnel. - 14 - CONFIDENTIAL TREATMENT REQUESTED (g) The terms, but not existence, of this Agreement, the GSA, any DSA or Development Services Agreement, and any and all information relating to the Outsource Relationship. Notwithstanding the above, Confidential Information does not include information: (i) of which the Receiving Party was rightfully in possession prior to disclosure, as evidenced by appropriate documentation; (ii) that was independently developed by employees or agents of the Receiving Party without use of Confidential Information provided by the Disclosing Party hereunder; (iii) that the Receiving Party rightfully receives from a third party not owing a duty of confidentiality to the Disclosing Party; (iv) that becomes publicly available without fault of the Receiving Party; or (v) whose disclosure is required by order of a court or government authority, provided that Disclosing Party shall notify the other party in advance of such a disclosure or release; shall take commercially reasonable efforts (at least equal to the efforts such party takes to protect the confidentiality of its own information) to protect the confidentiality of the Confidential Information in the Agreement, which shall include deleting the financial terms of or other Confidential Information in the Agreement from (or obtaining confidential treatment of such terms and information in) disclosure or public release when permitted by applicable law, rule or regulation (and requesting such deletion or equivalent protection or confidential treatment where approval by a court or governmental authority is required). - 15 - CONFIDENTIAL TREATMENT REQUESTED 4.2 CONFIDENTIALITY OBLIGATIONS. The Receiving Party shall hold the Disclosing Party's Confidential Information in strictest confidence for * years after receipt, using such measures as the Receiving Party uses to protect the confidentiality of its own Confidential Information of like importance, but in no event using less than reasonable care. The Receiving Party shall not make any disclosure of such Confidential Information, other than to its employees, consultants, agents and representatives on a need to know basis. This prohibition against disclosure includes a prohibition against disclosure by Kinetics to any Kinetics Affiliate, unless (1) Kinetics notifies Applied of a commercially reasonable need for such disclosure and (2) Kinetics obtains Applied's prior written consent to such disclosure, which consent will not be unreasonably withheld, and (3) the Affiliate executes an Non-Disclosure Agreement (NDA) having confidentiality obligations at least equal to those of this Article 4. The Receiving Party shall inform each such employee, consultant, agent and representative of the Receiving Party's confidentiality obligations under this Agreement, and shall be jointly and severally liable for any breach of this Agreement by any such employee, consultant, agent or representative. The Receiving Party shall use the Confidential Information solely to perform the activities contemplated by this Agreement, the GSA, and each DSA and Development Services Agreement entered into by the Parties pursuant to Section 3 hereof. Kinetics will not, without Applied's prior written consent: (i) use IP Rights contributed by Applied in connection with the sale to Applied's customers of Fluid Delivery Systems or Components, or (ii) sell to Applied's customers Fluid Delivery Systems or Components to which Applied contributed IP Rights. The preceding provision relates to Applied Pre-Existing IP Rights, as well as IP Rights in Future Modifications. * Material has been omitted and filed separately with the Commission. - 16 - CONFIDENTIAL TREATMENT REQUESTED 4.3 IDENTIFICATION AS CONFIDENTIAL. Unless such information is disclosed orally or as Visual Information (as defined by Section 4.6), Confidential Information shall be designated as such by an appropriate legend, such as "Kinetics Confidential" or "Applied Confidential". Confidential Information that is disclosed orally shall be identified as confidential before or at the time of disclosure, and shall be confirmed as confidential in a written notice given by the Disclosing Party to the Receiving Party within thirty (30) days after such oral disclosure. Such notice must contain a reasonable summary of the orally disclosed Confidential Information and a statement to the effect that such information is Confidential Information. Applied shall not be required to designate or identify Visual Information (as defined by Section 4.6) as "Confidential". 4.4 NEED-TO-KNOW DISCLOSURE. The Receiving Party agrees to limit disclosure of Confidential Information of the Disclosing Party only to those employees, agents, contractors and representatives of the Receiving Party who have a need to know the Confidential Information in order to perform the obligations set forth in the this Agreement, the GSA and each DSA and Development Services Agreement entered into by the Parties pursuant to Section 3 hereof, and provided that, before any such disclosure, each such employee, agent, consultant and representative shall execute an Employee Joinder of the form and substance of Schedule 4.4. 4.5 REMEDIES. The Parties acknowledge and agree that money damages above will not be an adequate remedy for any breach of the obligations set forth in this Article 4 of this Agreement or of any confidentiality obligation between the Parties. Accordingly, the Parties agree that the Disclosing Party may be irreparably harmed and shall be entitled to seek injunctive relief, including a temporary or preliminary injunction or a permanent injunction, or to any other - 17 - CONFIDENTIAL TREATMENT REQUESTED appropriate relief to restrain or redress any breach or threatened breach of confidentiality, in addition to any other remedies either Party may have in law or equity. 4.6 VISUAL INFORMATION. The Parties recognize and acknowledge that, in order for Kinetics to perform its GSA obligations, select Kinetics employees will have access to Applied information stored within and presented by Applied's computer system, or as a result of access to and presence on Applied facilities ("Visual Information"). The Visual Information will include both FDS-related and non-FDS information. ARTICLE 5 TERM AND TERMINATION 5.1 TERM. This Agreement shall commence on the Effective Date and expire concurrently with expiration of the GSA, unless terminated earlier in accordance with Section 5.2. 5.2 TERMINATION. 5.2.1 IN EVENT OF A GSA TERMINATION. This Agreement will be terminated in the event of a termination of the GSA. 5.2.2 BY EITHER PARTY IN EVENT OF AN IPA DEFAULT. This Agreement may be terminated by either Party by written notice to the other Party in the Event of IPA Default by the other Party upon the failure by the other Party to correct the Event of IPA Default within thirty (30) days of receipt of written notice of the Event of Default. An Event of IPA Default means a material breach of the warranties, representations, covenants or obligations under this Agreement. In the event that the allegedly defaulting party disputes the claim that an Event of Default has occurred, then either party may exercise its rights in and to the Business Review Process of Section 7.2.5 of the GSA. - 18 - CONFIDENTIAL TREATMENT REQUESTED 5.2.3 BY EITHER PARTY IMMEDIATELY UPON CONFIDENTIALITY BREACH. If a Party materially breaches its confidentiality obligations under Article 4 in a manner that cannot be cured, then, in addition to any rights under Section 5.2.2, the other Party may give written notice to the breaching Party that the other Party intends to promptly terminate this Agreement. During the five (5) business days after receipt of such notice, the breaching Party shall meet with the other Party to discuss the confidentiality breach and whether the breaching Party can cure it, but if the Parties do not agree in writing within such period on a plan to be implemented by the breaching Party to cure the confidentiality breach, then after such period the other Party may immediately terminate this Agreement by written notice to the breaching Party. During such period, the breaching party will take appropriate steps to remedy or mitigate its breach. 5.2.4 BY EITHER PARTY OF A DSA. A Party may terminate a DSA by written notice to the other Party if the other Party is in material breach of that DSA and fails to remedy that material breach within thirty (30) days after receiving written notice of the material breach from the terminating Party. In addition, any and all DSA's pending upon a termination pursuant to Section 5.2.1 - -- 5.2.3 shall terminate concurrently with the termination of the respective GSA or IPA, as applicable. Upon termination of a DSA: (i) each Party shall cease all activities pursuant to the DSA; (ii) Kinetics shall deliver to Applied all work-in-progress as of the termination date on each deliverable specified in the DSA; and (iii) Applied shall pay to Kinetics a quantum meruit of fees payable for the Design Service commenced but not completed under the DSA. 5.2.5 BY EITHER PARTY OF A DEVELOPMENT SERVICES AGREEMENT. A Party may terminate a DVA by written notice to the other Party if the other Party is in material breach of that DVA and fails to remedy that material breach within thirty (30) days after receiving written - 19 - CONFIDENTIAL TREATMENT REQUESTED notice of the material breach from the terminating Party. In addition, any and all DVA's pending upon a termination pursuant to Section 5.2.1 -- 5.2.3 shall terminate concurrently with the termination of the respective GSA or IPA, as applicable. Upon termination of a DVA: (i) each Party shall cease all activities pursuant to the DVA; (ii) Kinetics shall deliver to Applied all work-in-progress as of the termination date on each deliverable specified in the DVA; and (iii) Applied shall pay to Kinetics a quantum meruit of fees payable for the Development Services commenced but not completed under the DVA. 5.2.6 EFFECTIVE DATE OF TERMINATION UPON GSA TERMINATION. Any such termination pursuant to Section 5.2.1 will become effective upon that date determined by the GSA. A Party shall exercise such right of termination by the issuance of a notice of termination with respect to this Agreement that is issued concurrently with a Notice of Termination for Default with respect to the GSA pursuant to Article 25(b)(ii), or a Notice of Termination for Applied Default with respect to the GSA pursuant to Article 25(d)(iii), and the date on which termination of this Agreement is effective shall be the same date on which such termination of the GSA becomes effective, in accordance with the requirements of the GSA. The period between the notice of termination and the date on which such termination is effective is hereafter referred to as the "Wind-Down Period." During the Wind-Down Period, each Party will continue to comply with its obligations under the GSA, including particularly the provisions thereof related to the Wind-Down Period. 5.3 CONSEQUENCES OF TERMINATION OR EXPIRATION. Upon the date of expiration of this Agreement or the date on which termination of this Agreement is effective, as the case may be: - 20 - CONFIDENTIAL TREATMENT REQUESTED (a) Each Party shall cease all activities pursuant to this Agreement, the then existing GSA and any DSA or Development Services Agreement entered into by the Parties pursuant to Section 3 hereof, respectively, other than the activities provided for by this Section 5.3; (b) Each Party shall cease use of and return to the other Party all Confidential Information, including all Documentation reflecting and all other tangible embodiments of the Confidential Information, owned by the other Party, except as provided for in this Section 5.3; (c) Each Party shall confirm in writing to the other Party that all Confidential Information has been returned; (d) The obligations of Articles 4, 6 and 7 and Sections 3.10, 5.4, 8.4 and 8.5 (as applicable) shall remain in full force and effect, unless expressly terminated by mutual written agreement of the Parties; (e) The licenses of Sections 3.2 and 3.9 will terminate; (f) Kinetics agrees to provide to Applied any and all training or training materials reasonably necessary for Applied to assume manufacturing and servicing of the Applied Fluid Delivery Systems being manufactured or developed as of the date of termination in the same manner as then practiced by Kinetics, but Kinetics shall not be required to provide *; * Material has been omitted and filed separately with the Commission. - 21 - CONFIDENTIAL TREATMENT REQUESTED (g) Kinetics will disclose to Applied all FDS Technology necessary to manufacture the Applied Fluid Delivery Systems being manufactured or developed as of the date of termination in the same manner as then practiced by Kinetics, but Kinetics shall not be required to provide *; (h) Kinetics will provide to Applied all Documentation (and all copies of same) necessary to manufacture the Applied Fluid Delivery Systems being manufactured or developed as of the date of termination in the same manner as then practiced by Kinetics, but Kinetics shall not be required to provide *; and (i) Notwithstanding the above, each Party may retain the other Party's Confidential Information to the extent and for the period necessary to perform any obligations during the Wind-Down Period and any post-termination obligations under the GSA, and each party shall perform such obligations under the GSA. The above itemization of consequences is not exhaustive; instead, the Parties agree that, upon termination, Kinetics will take any and all steps necessary to place Applied in the same position as Kinetics at the time of termination with respect to the manufacturing, developing or both of Fluid Delivery Systems being manufactured or developed by Kinetics for Applied at the date of termination. These steps include the provisions by Kinetics of all information, in whatever form, relevant to FDS Technology, as it relates to the Applied Fluid Delivery Systems, and the license by Kinetics of all IP Rights, necessary for Applied to continue the manufacture of and have manufactured the then existing Applied Fluid Delivery Systems and utilization of the associated FDS Technology. Notwithstanding the foregoing, Kinetics shall not be required to provide Manufacturing Processes. * Material has been omitted and filed separately with the Commission. - 22 - CONFIDENTIAL TREATMENT REQUESTED 5.4 TERMINATION OF THE AMENDED IPA. The Parties hereby terminate the Amended IPA on the Effective Date of this Agreement. This Agreement supersedes the Amended IPA on and from the Effective Date, and accordingly each party waives its rights, and shall not perform its obligations, under Section 5.3 of the Amended IPA related to termination or expiration of the Amended IPA. ARTICLE 6 WARRANTIES AND REPRESENTATIONS 6.1 KINETICS PRE-EXISTING IP RIGHTS. Kinetics represents and warrants that (a) it is the owner of Kinetics' Pre-existing IP, (b) it is not aware of any claim of ownership or infringement by any third party with respect to the Kinetics Pre-Existing IP, (c) it has the right to grant the licenses granted under this Agreement, and (d) it has not and will not grant to any third parties rights inconsistent with the rights granted to Applied hereunder. 6.2 APPLIED PRE-EXISTING IP RIGHTS. Applied represents and warrants that (a) it is the owner of Applied's Pre-existing IP, (b) it is not aware of any claim of ownership or infringement by any third party with respect to the Applied Pre-Existing IP, (c) it has the right to grant the licenses granted under this Agreement, and (d) it has not and will not grant to any third parties rights inconsistent with the rights granted to Kinetics hereunder. 6.3 FUTURE MODIFICATIONS. The Parties represent and warrant that they will not knowingly infringe upon or misappropriate any third-party's IP Rights in performing any jointly agreed-to Future Modifications pursuant to this Agreement and any DSA or DVA. 6.4 COMPLETENESS OF SCHEDULES OF PRE-EXISTING IP RIGHTS. The Parties represent and warrant that the Schedules of Pre-Existing IP Rights are complete and accurate as to the best of the Parties' belief. In the event that any additional Pre-Existing IP Rights of a Party are - 23 - CONFIDENTIAL TREATMENT REQUESTED identified after the Effective Date and upon the Parties' agreement that the information constitutes a Pre-Existing IP Right, the Parties agree to amend the Schedule(s) accordingly. 6.5 DISCLAIMER OF WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE GSA, OR ANY DSA OR DVA, ANY FDS TECHNOLOGY OR CONFIDENTIAL INFORMATION PROVIDED BY EITHER PARTY UNDER ANY SUCH AGREEMENT IS PROVIDED "AS IS" AND WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED, IMPLIED, OR STATUTORY, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, OR NON-INFRINGEMENT, AND NEITHER PARTY SHALL STATE, COMMUNICATE, SUGGEST, OR REPRESENT TO ANY THIRD PARTY OTHERWISE. 6.6 LIMITATION OF LIABILITY. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE GSA, OR ANY DSA OR DVA, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY SPECIAL, INDIRECT, PUNITIVE, CONSEQUENTIAL, OR CONTINGENT DAMAGES, WHETHER OR NOT THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH EXCLUDED DAMAGES. ARTICLE 7 INDEMNITIES 7.1 INDEMNIFICATION - PERFORMANCE OF AGREEMENT. * (The "Indemnifying Party") shall indemnify, defend, and hold * harmless from and against any and all claims, suits, losses, and liabilities or portions thereof and the associated costs and expense, including attorneys' fees, to the extent awarded by a court of competent jurisdiction or pursuant to a settlement, caused in * Material has been omitted and filed separately with the Commission. - 24 - CONFIDENTIAL TREATMENT REQUESTED whole or in part by the breach by the Indemnifying Party of any term or provision of this Agreement or any DSA or DVA, or any negligent, grossly negligent or intentional acts, errors, or omissions by the Indemnifying Party, its employees, officers, agents or representatives in the performance of this Agreement or any DSA or DVA. 7.2 INDEMNIFICATION - INFRINGEMENT/MISAPPROPRIATION. In the event that * is charged with infringement, misappropriation or other violation of any third-party's IP Rights as a result of any IP Rights licensed by * under this Agreement or any DSA or DVA, but not including the Third Party Applications, * shall have the sole responsibility to: (a) defend against any such claim at its sole expense, and (b) account for any injury, loss, or damage, of any kind or nature, or any other liability incurred by or imposed upon * charged with infringement or misappropriation. Notwithstanding the foregoing and the priority of agreements provision of Section 1.3 of the GSA, Kinetics' indemnification duty relating to its supply obligations will be governed by the GSA. 7.3 INDEMNIFICATION/DUTY TO DEFEND SET-OFF. If a claim of infringement, misappropriation or other violation is made by a third party as a result of Kinetics' performance pursuant to this Agreement and Applied incurs expenses in connection with the defense of such matter as a result of Kinetics' failure to comply with its obligations set forth in Sections 7.1 and 7.2, Applied may apply up to fifty percent (50%) of any future royalties that otherwise may be payable to Kinetics hereunder in order to recover such expenses. * Material has been omitted and filed separately with the Commission. - 25 - CONFIDENTIAL TREATMENT REQUESTED 7.4 INDEMNIFIED PARTY'S OBLIGATIONS. In connection with any indemnity provided under this Agreement, the indemnified Party shall (a) provide reasonable cooperation and assistance to the indemnifying Party; and (b) provide prompt written notice of any claim that would trigger an indemnity obligation. The indemnifying Party will not be responsible for any obligation under any settlement agreement entered into without the indemnifying Party's consent. ARTICLE 8 GENERAL PROVISIONS 8.1 ENTIRE AGREEMENT. This instrument, including the exhibits and schedules hereto, sets forth the entire agreement between the Parties and merges and supersedes any and all previous agreements, understandings and negotiations between the Parties as to such subject matter, except for the GSA executed concurrently herewith. The GSA shall determine the priority of provisions amongst this Agreement, the GSA and each DSA and Development Services Agreement in the event of inconsistency among them. Any representation, promise, or condition in connection with such subject matter that is not incorporated in this instrument shall not be binding upon either Party. This Agreement may not be amended, modified or supplemented by the Parties in any manner, except by an instrument in writing signed by the Parties. 8.2 SUCCESSION AND ASSIGNMENT. (a) This Agreement shall be binding upon and inure to the benefit of each of the Parties and its respective permitted successors and permitted assigns. Neither Kinetics nor Applied shall assign or transfer to another person this Agreement, or its rights, interests or obligations under this Agreement, in whole or in part, whether voluntarily or by operation of law, (i) without the prior express written consent of the other party, or (ii) under and in accordance - 26 - CONFIDENTIAL TREATMENT REQUESTED with the requirements set out in Article 17 of Exhibit 1 to the GSA, which Article is incorporated herein by this reference to apply to this Agreement. (b) If a Party assigns or transfers the GSA, or permits the GSA to vest in another, in whole or in part, pursuant to any transaction in accordance with the provisions of the GSA, then that Party shall also assign, transfer or cause to vest in such other person, this Agreement, in whole or in like part. (c) Except as permitted and as provided in or under Sections 8.2 (a) and (b) above, neither Party may assign, transfer or permit this Agreement or any rights or obligations hereunder to vest in any other person, in whole or in part, without the express prior written consent of the other. (d) With prior notice to and express written consent by Applied (which may be included as part of a DSA or DVA), Kinetics may, solely for the purpose of providing Design or Development Services to Applied, delegate part, but not all, of its obligations hereunder, and may assign and sublicense part but not all of its rights hereunder, to an Affiliate of Kinetics if Kinetics remains primarily, or equally with the Affiliate, obligated for performance of all of Kinetics' obligations as a party to this Agreement and the Affiliate agrees in writing to be bound by the terms and conditions of this Agreement. (e) Any assignment, transfer or vesting of this Agreement not made in compliance with and approved as required under this Section shall be void and, at the option of the other Party, may be deemed a breach of and default under this Agreement. 8.3 EXPORT REGULATION. The Parties will not knowingly export directly or indirectly, any technology or know-how to any countries, agencies, groups or companies prohibited by the - 27 - CONFIDENTIAL TREATMENT REQUESTED United States Department of Commerce or United States Department of State unless prior authorization is obtained. 8.4 RULES OF CONSTRUCTION. Capitalized terms used herein shall have the meaning assigned to them by the definitions in Article 2. Additionally, the singular includes the plural and the plural includes the singular; words importing any genders include the other gender; references to "writing" include printing, typing, lithography and any other means of reproducing words in tangible, visible form; references to articles, section (or any subdivision of sections), schedules and exhibits are to those of this Agreement, unless otherwise indicated; the words "hereof," "hereunder," "herein," and any other words of similar import refer to this Agreement, including its schedules and exhibits; and the word "including," when used in this Agreement, is not intended to be exclusive and, in all cases, means "including without limitation". The headings contained in this Agreement are intended for reference only and shall not be referred to in the interpretation of this Agreement. 8.5 ATTORNEYS' FEES. If either Party seeks to enforce its rights under this Agreement by legal proceedings or otherwise, the non-prevailing Party shall pay all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing Party. 8.6 GENERAL PROVISIONS. The following provisions of the GSA and of Exhibit 1 of the GSA are incorporated into this Agreement by reference, provided that references in such provisions to the "Agreement" shall, when used herein, be references to this Amended and Restated Intellectual Property Agreement: (i) Article 11 of Exhibit 1 to the GSA, entitled "Applicable Law, Consent to Jurisdiction and Venue." (ii) Article 23 of Exhibit 1 to the GSA, entitled "Force Majeure." (iii) Section 9.1 of the GSA, entitled "Independent Contractor." - 28 - CONFIDENTIAL TREATMENT REQUESTED (iv) Section 9.2 of the GSA, entitled "No Third Party Beneficiary." (v) Section 9.3 of the GSA, entitled "Severability." (vi) Section 9.4 of the GSA, entitled "Waiver." (vii) Section 9.6 of the GSA, entitled "Execution." (viii) Section 10 of the GSA, entitled "Representations and Warranties of the Parties." (ix) Section 1.2.2 of the GSA, entitled "Notices." (x) Article 17 of Exhibit 1 to the GSA, entitled "Assignment and Succession", pursuant to Section 8.2 of this Agreement IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date set forth below to be effective as of the Effective Date. APPLIED MATERIALS, INC. By: /s/ Paul Hohlstein ------------------------------------------ Name: Paul Hohlstein ------------------------------------------ Title: Vice President --------------------------------------- Date: 5/21/02 ---------------------------------------- KINETICS FLUID SYSTEMS, INC. By: /s/ Dan Rubin ------------------------------------------ Name: Dan Rubin ---------------------------------------- Title: Vice President --------------------------------------- Date: 5/21/02 ---------------------------------------- - 29 - CONFIDENTIAL TREATMENT REQUESTED SCHEDULES - 30 - CONFIDENTIAL TREATMENT REQUESTED SCHEDULE 2.8 APPLIED FDS PRE-EXISTING IP APPLIED FDS CONFIDENTIAL INFORMATION 1. Confidential Information with respect to: (a) * fixture hardware and test fixture hardware that is based upon *; and (b) "Current TF Software", as defined in GSA Section 4.2.3(c), being all software used, as of the Effective Date, in the testing operation of all * and test fixtures listed in GSA Schedules 4.2.2(a), (c) and (d). 2. Confidential Information with respect to *. 3. Confidential Information with respect to process *. 4. Confidential Information with respect to *. 5. Confidential Information embodied in the documentation related to *. 6. Confidential Information embodied in the * drawings, * procedures, * and engineering change orders related to the * Applied Fluid Delivery Systems. 7. Confidential Information embodied in the Applied Software and * listed below. APPLIED FDS TRADEMARKS "APPLIED MATERIALS", including U.S. Trademark Regs. No. 1,980,572 and No. 1,943,850 Stylized "A" and "APPLIED MATERIALS", including U.S. Trademark Regs. No. 1,690,615 and No. 1,588,182 Stylized "A", including U.S. Trademark Reg. No. 1,549,863 "AMAT" (unregistered) APPLIED COPYRIGHTS Copyrights, whether or not registered, related to Applied-owned Documentation and, as appropriate, to Applied's *. * Material has been omitted and filed separately with the Commission. - 31 - CONFIDENTIAL TREATMENT REQUESTED * DATABASES: A. In-House Developed * * B. In-House *and * * C. Test Fixture Software All "Current TF Software", as defined in GSA Section 4.2.3(c), being all software used, as of the Effective Date, in the testing operation of all test fixtures listed in GSA Schedules 4.2.2(a), (c) and (d). * Material has been omitted and filed separately with the Commission. - 32 - CONFIDENTIAL TREATMENT REQUESTED SCHEDULE 2.33 KINETICS PRE-EXISTING IP PATENTS AND PATENT APPLICATIONS: PATENTS OWNED BY KINETICS FLUID SYSTEMS, INC.

PATENT PATENT APPLICATION FILING PATENT ISSUE MATTER NUMBER PATENT COUNTRY SERIAL NO. DATE NUMBER DATE INVENTOR PRODUCTS - ------------- ------ ------- ------------ ------ --------- --------- -------- -------- I0294/7005 Integrated U.S.A. 08/404,485 3/17/1995 5,605,179 2/25/1997 Benjamin very early Insync I0294/7003 Gas Panel Strong, gas panel (like Brent was in lobby at Elliot, Centre Pointe); Frank multiple valves Balma in single block, MFCs connected on VCR tube stubs; I0294/7005 Integrated U.S.A. 08/736,354 10/22/1996 Benjamin see above Gas Panel Strong, Brent Elliot, Frank Balma I0294/7006EP Building Blocks EP 97947611.6 12/3/1996 11/17/1998 Jeffrey R. foreign filing for Integrated Markulec off US#5,836,355; Gas Panel et al "IGS" modular blocks (long bolts); I0294/7006JP Building Blocks JP 525622/98 11/19/1997 Jeffrey R. foreign filing for Integrated Markulec off US#5,836,355; Gas Panel et al "IGS" modular blocks (long bolts); I0294/7006KR Building Blocks KR 99-7004883 11/19/1997 Jeffrey R. foreign filing for Integrated Markulec off US#5,836,355; Gas Panel et al "IGS" modular blocks (long bolts);

- 33 - CONFIDENTIAL TREATMENT REQUESTED I0294/7006PCT Building Blocks PCT PCT/US97/2 11/19/1997 WO 6/11/1998 Jeffrey R. foreign filing for Integrated 1327 98/25058 Markulec off Gas Panel et al US#5,836,355; "IGS" modular blocks (long bolts); Building Blocks U.S.A 08/760,150 12/3/1996 5,836,355 11/17/1998 Jeffrey R. variations upon for Integrated Markulec Insync "IGS" Gas Panel et al style multiple block modular substrates on two planes; I0294/7006 Building Blocks U.S.A 08/931,060 9/15/1997 6,302,141 10/16/2001 Jeffrey R. Insync "IGS" for Integrated Markulec style multiple Gas Panel et al block modular substrates on two planes; Improved U.S.A 08/672,826 6/28/1996 Benjamin Compression Seal Strong, Dennis Rex MFC - Quick PCT PCT/US96/0 4/4/1996 Benjamin Change Method 4708 Strong, and Apparatus Frank Balma, Brent Elliot, Michael Green MFC - Quick U.S.A 08/437/093 5/5/1995 Benjamin Change Method Strong, and Apparatus Frank Balma, Brent Elliot, Michael Green I0294/7005EP Mounting Plane EP 98925252.3 6/4/1998 PCT/US98 1/21/1999 Jeffrey R. foreign filing For Integrated 115474 Markulec, for US#6,231,260; Gas Panel WO99/028 Dennis G. "Versaplane" 67 Rex, modular gas panel Richard E. mounting plate; Schuster, Brent D. Elliot - 34 - CONFIDENTIAL TREATMENT REQUESTED I0294/7005JP Mounting Plane Japan 2000-502327 Jeffrey R. foreign filing For Integrated Markulec, for US#6,231,260; Gas Panel Dennis G. "Versaplane" Rex, modular gas panel Richard E. mounting plate; Schuster, Brent D. Elliot I0294/7005KR Mounting Plane Korea Jeffrey R. foreign filing For Integrated Markulec, for US#6,231,260; Gas Panel Dennis G. "Versaplane" Rex, modular gas panel Richard E. mounting plate; Schuster, Brent D. Elliot I0294/7005PCT Mounting Plane PCT PCT/US598/ 6/4/1998 WO99/028 01/25/199 Jeffrey R. foreign filing For Integrated 11574 67 Markulec, for US#6,231,260; Gas Panel Dennis G. "Versaplane" Rex, modular gas panel Richard E. mounting plate; Schuster, Brent D. Elliot I0294/7005 Mounting Plane U.S.A 08/893,773 7/11/1997 6,231,260 5/15/2001 Jeffrey R. "Versaplane" For Integrated Markulec, mounting plate; Gas Panel Dennis G. Rex, Richard E. Schuster, Brent D. Elliot I0294/7007CA Sieve Like Canada 2332286 3/31/1999 foreign filing Structure for for US#6,158,454; Fluid Flow venting modular Through backplance; Structural Arrangement I0294/7007CN Sieve Like China 99807334.2 foreign filing Structure for for US#6,158,454; Fluid Flow venting modular Through backplance; Structural Arrangement I0294/7007EP Sieve Like EP PCT99914326.6 foreign filing Structure for Pursuant to for US#6,158,454; Fluid Flow PCT/US99/07223 venting modular Through backplance; Structural Arrangement - 35 - CONFIDENTIAL TREATMENT REQUESTED I0294/7007JP Sieve Like JP PCT99914326.6 foreign filing Structure for Pursuant to for US#6,158,454; Fluid Flow PCT/US99/07223 venting modular Through backplance; Structural Arrangement I0294/7007KR Sieve Like KR 2000-7011447 foreign filing Structure for for US#6,158,454; Fluid Flow venting modular Through backplance; Structural Arrangement I0294/7007PCT Sieve Like PCT PCT/US99/0 3/31/1999 WO99/531 10/21/1999 foreign filing Structure for 7223 15 for US#6,158,454; Fluid Flow venting modular Through backplance; Structural Arrangement I0294/7007 Sieve Like U.S.A 09/060,519 4/14/1998 6,158,454 12/12/2000 Michael J. mounting plate Structure for Duret, design allowing Fluid Flow Erin Martin exhaust air to Through HasenKamp, sweep past Structural Jeffrey R. mechanical seals Arrangement Markulec, of surface Dennis G. mounted modular Rex, components; Richard E. Schuster I0294/7008TW System Of Taiwan 89125954 12/6/2000 foreign filing Modular based on US for US#6,283,155; Substrates For 09/456,226 "K.1" modular Enabling The (1.5"); Distribution of Process Fluids Thorough Removable Components I0294/7008 System Of U.S.A 09/456,226 12/6/1999 6,283,155 9/4/2001 Kim Ngoc "K.1" modular Modular Vu substrates (1.5" Substrates For wide) using Enabling The internal seal to Distribution of avoid welded Process Fluids caps; Thorough Removable Components - 36 - CONFIDENTIAL TREATMENT REQUESTED I0294/7008WO System Of WO PCT/US00/4 12/6/2000 WO foreign filing Modular 2589 based 01/42694 for US#6,283,155; Substrates For on US "K.1" modular Enabling The 09/456,226 (1.5"); Distribution of Process Fluids Thorough Removable Components I0294/7008 System of USA 09/456,226 12/6/1999 Kim Ngoc "K.1" modular Modular Vu (1.5") no-welds Substrates of substrates; Enabling the Distribution of Process Fluids Through Removable Components I0294/7008TW System of Taiwan 09/456,226 12/6/1999 Kim Ngoc "K.1" modular Modular Vu (1.5") no-welds Substrates of substrates; Enabling the Distribution of Process Fluids Through Removable Components

PATENTS OWNED BY UNIT INSTRUMENTS, INC. (KINETICS FLUID SYSTEMS, INC HAS RIGHTS TO THESE PATENTS.) Welded USA 09/398,302 9/20/1999 6,125,887 10/3/2000 James V. modular substrate Interconnection Pinto system which Modules For High combines Purity Fluid individual Flow Control component station Applications with orbitally welded elbow-tee- cross-etc. as single part Torque Tight USA 501682 7/12/1995 5,524,936 6/11/1996 Barr mechanism to Locking Device et. al. prevent VCR fittings from loosening through vibration or chained assembly sequence U0128/7000EP Manifold System EP 99933722.3 Kim N. Vu foreign filing of Removable et al. for US#tbd; Components For flanged modular Distribution Of substrates-k1s Fluids ETC.;

- 37 - CONFIDENTIAL TREATMENT REQUESTED U0128/7000JP Manifold System Japan 2000-229369 1/16/2001 Kim N. Vu foreign filing of Removable et al. for US#tbd; Components For flanged modular Distribution Of substrates-k1s Fluids ETC.; U0128/7000KR Manifold System Korea 10-2001- 11/8/2001 Kim N. Vu foreign filing of Removable 700024 et al. for US#tbd; Components For flanged modular Distribution Of substrates-k1s Fluids ETC.; U0128/7000 Manifold System USA 09/111,999 7/8/1998 GRANTED Eric J. covers individual of Removable Redemann, modular Components For Kim N. Vu, substrates with Distribution Of and David overlapping Fluids P. Sheriff flange interconnections; Z-Cubes, K1S, K1H, etc. U0128/7000WO Manifold System WO PCT/US99/ 07/7/99 Kim N. Vu foreign filing UNI/001WO of Removable 15272 01/13/99 et al. for US#tbd; Components For 09/229,722 flanged modular Distribution Of substrates-K1S, Fluids etc.; U0128/7001 Manifold System USA 09/229,722 1/13/1999 Eric J. covers individual of Removable Redemann, modular Components For Kim N. Vu, substrates with Distribution Of and David tongue & pocket Fluids P. Sheriff interconnections; Z-Cubes, K1S, K1H, etc. U0128/7006EP Gas Panel EP 97913896.3 5/12/1999 Eric J. foreign filing Redemann, for US#5,992,463; Kim N. Vu panel of long monolithic substrates; U0128/7006JP Gas Panel Japan 522,597/1998 10/29/1997 Eric J. foreign filing Redemann, for US#5,992,463; Kim N. Vu panel of long monolithic substrates; U0128/7006TW Gas Panel Taiwan 86116147 10/30/1997 122,473 10/29/2000 Eric J. foreign filing Redemann, for US#5,992,463; Kim N. Vu panel of long monolithic substrates - 38 - CONFIDENTIAL TREATMENT REQUESTED U0128/7006KR Gas Panel Korea 7003781/19 10/29/1997 Eric J. foreign filing 99 Redemann, for US#5,992,463; Kim N. Vu panel of long monolithic substrates; U0128/7006 Gas Panel USA 08/739,936 10/30/1996 5,992,463 11/30/1999 Redemann, panel of long Kim N. Vu monolithic substrates; U0128/7009 Gas Panel USA 09/371,408 8/10/1999 6,192,938 2/27/2001 Eric J. similar to Redemann, US#5,992,463 Kim N. Vu individual gas string using long substrate; also covers super component; U0128/7010 Gas Panel USA 09/371,655 8/10/1999 6,189,570 2/20/2001 Eric J. similar to Redemann, US#5,992,463 Kim N. Vu panel of multiple long substrates; U0128/7011 Gas Panel USA 09/371,659 8/10/1999 6,142,539 11/7/2000 Eric J. covers any Redemann, modular component Kim N. Vu base with combination of inlet & outlet seals with keeper and retained screws; U0128/7012CA Gas Panel Canada 2,307,663 10/28/1998 Eric J. foreign filing Redemann, for Kim N. Vu US#6,293,310B1; "V" channel under bridging components; U0128/7012CN Gas Panel China 98811585.9 5/26/2000 Eric J. foreign filing Redemann, for Kim N. Vu US#6,293,310B1; "V" channel under bridging components; U0128/7012EP Gas Panel EP 98,956,297 10/28/1998 Eric J. foreign filing Murgitroyd & Co. Redemann, for File No. P26089 Kim N. Vu US#6,293,310B1; "V" channel under bridging components; U0128/7012EP Gas Panel EP/ 1,102,387 10/28/1998 Eric J. foreign filing Murgitroyd & Co. HONG KONG Redemann, for File No. P26089 Kim N. Vu US#6,293,310B1; "V" channel under bridging components; - 39 - CONFIDENTIAL TREATMENT REQUESTED U0128/7012JP Gas Panel Japan Eric J. foreign filing Redemann, for Kim N. Vu US#6,293,310B1; "V" channel under bridging components; U0128/7012KR Gas Panel Korea 10-2000- 10/28/1998 Eric J. foreign filing 7004589 Redemann, for Kim N. Vu US#6,293,310B1; "V" channel under bridging components; U0128/7012MX Gas Panel Mexico 4,198 4/28/2000 Eric J. foreign filing Redemann, for Kim N. Vu US#6,293,310B1; "V" channel under bridging components; U0128/7012PCT Gas Panel PCT PCT/US98/ 10/28/1998 Eric J. foreign filing 22912 Redemann, for Kim N. Vu US#6,293,310B1; "V" channel under bridging components; U0128/7012PCL Gas Panel HK 1102386.7 Eric J. foreign filing Redemann, for Kim N. Vu US#6,293,310B1; "V" channel under bridging components; U0128/7012 Gas Panel USA 08/960,464 10/29/1997 6,293,310 9/25/2001 Eric J. covers small Redemann, individual Kim N. Vu modular substrates having "V" channel under bridging components; U0128/7018 Gas Panel USA 09/732,435 12/7/2000 Eric J. covers Redemann, incorporating Kim N. Vu moisture sensor into gas path defined by modular substrate architecture; U0128/7019 Gas Panel USA 09/732,434 12/7/2000 Eric J. covers using Redemann, prepackaged Kim N. Vu components with seals + keeper + screws; - 40 - CONFIDENTIAL TREATMENT REQUESTED U0128/7026 Fluid Flow USA 60/291,430 Provisional Kim Ngoc early approaches System Application Vu to "super- 05/16/2001 component" shown to AMAT under NDA; U0128/7028 Gas Panel USA 9939487 8/23/2001 Redemann, covers components Kim N. Vu bridging between substrates- applicable to both MFCs & parts on K1S, etc.; - 41 - CONFIDENTIAL TREATMENT REQUESTED CONFIDENTIAL INFORMATION: * 4. Confidential Information embodied in the software, databases and documents *. COPYRIGHTS: * * Material has been omitted and filed separately with the Commission. - 42 - CONFIDENTIAL TREATMENT REQUESTED SCHEDULE 2.38 THIRD PARTY APPLICATIONS A. Customized Applications ORACLE PDM MM 3000 GPSI B. Off-the-Shelf Applications SMS Interwise (LEAP training) Reflection Lotus Notes Netscape Navigator Microsoft Windows NT Microsoft Office (no access) McAfee VirusScan BoKs C. Netscape Plug Ins Jinitiator (Oracle plug-in for LEAP) Brio Macromedia Shockwave author.exe Macromedia Shockwave dir/flash.exe Install from the Web Real Player WinZip Adobe Acrobat Plug-in MS Agent Plug-in D. Additional (Non-Core Image) Applications Autoview Fastlook - 43 - CONFIDENTIAL TREATMENT REQUESTED SCHEDULE 3.5.1 -- DESIGN SOW DESIGN SERVICES STATEMENT OF WORK This Design Services Statement of Work ("Design SOW") is entered into as of ___________ ("Design SOW Effective Date") by and between Applied Materials, Inc., a Delaware corporation having offices located in Santa Clara, CA ("Applied") and Kinetics Fluid Systems, Inc., a California corporation having offices located in Santa Clara, CA ("Kinetics") (collectively the "Parties"). This Design SOW is entered into by and between the Parties under and pursuant to the Intellectual Property Agreement between the Parties with an effective date of ______________, 2001 ("IPA"). This Design SOW incorporates the terms of the IPA and of the Global Supply Agreement between the Parties with an effective date of June 1, 2002 ("GSA"). In the event (and to the extent) of conflict between this Design SOW and the related Purchase Order, then this Design SOW shall take precedence over the Purchase Order, except to the extent that this Design SOW expressly states that the Purchase Order shall take precedence. [PARTIES TO INSERT A DESCRIPTION OF: (i) THE SCOPE OF THE DESIGN SERVICES TO BE PROVIDED, (ii) A SPECIFICATION FOR EACH DELIVERABLE, (iii) ANY DELIVERY DUE DATES FOR EACH DELIVERABLE, (iv) THE AMOUNT OR METHOD OF CALCULATION OF ANY FEES PAYABLE, AND (v) PAYMENT DUE DATES.] Each of the parties hereto has caused this Agreement to be executed by its duly authorized officer or representative as of the Design SOW Effective Date set forth above. APPLIED MATERIALS, INC. KINETICS FLUID SYSTEMS, INC. By: By: Signature: Signature: -------------------------- ---------------------------- Printed Name: Printed Name: ----------------------- ------------------------ Title: Title: ------------------------------ ------------------------------- Date: Date: ------------------------------- -------------------------------- - 44 - CONFIDENTIAL TREATMENT REQUESTED SCHEDULE 4.4 KINETICS EMPLOYEE JOINDER I am an employee, agent, contractor or representative of Kinetics Fluid Systems, Inc. ("KINETICS"). Kinetics has entered into agreements with Applied Materials, Inc. ("APPLIED") under which Kinetics will manufacture fluid delivery systems for Applied. As part of that relationship, Applied will disclose its Confidential Information (defined below) to Kinetics, and Kinetics will disclose the Confidential Information to those Kinetics employees, agents, contractors and representatives who must receive the information to perform under the agreements. Applied and Kinetics have agreed to protect the confidentiality of each other's Confidential Information and, as part of this agreement, have agreed to have those employees, agents, contractors and representatives that receive Confidential Information review and agree to the following undertakings regarding the Confidential Information: 1 DEFINITION. Confidential Information means all non-public, proprietary information of, or disclosed by, Applied that, from time-to-time, may be acquired by Kinetics from Applied and that is related to the fluid delivery systems being manufactured by Kinetics for Applied pursuant to the Global Supply Agreement between Applied and Kinetics. The Confidential Information may be in any form, medium, state or condition, inclusive of information that is embodied in a product or tangible item or that is intangible, whether disclosed in oral, written, graphic, machine recognizable (including computer programs, algorithms or databases), model or sample form or any derivation thereof. Notwithstanding the above, Confidential Information does not include information: (i) of which Kinetics was rightfully in possession prior to disclosure, as evidenced by appropriate documentation; (ii) that was independently developed by employees or agents of Kinetics without use of Confidential Information provided by Applied hereunder; (iii) that Kinetics rightfully receives from a third party not owing a duty of confidentiality to Applied; (iv) that becomes publicly available without fault of Kinetics; or (v) whose disclosure is required by order of a court or government authority, provided that Applied shall have been given timely notice of such requirement and that Kinetics shall cooperate with Applied to limit the scope and effect of such order. 2 CONFIDENTIALITY OBLIGATIONS. I will hold Applied's Confidential Information in strictest confidence for five (5) years after receipt, using such measures as Kinetics uses to protect the confidentiality of its own Confidential Information of like importance, but in no event using less than reasonable care. I will not disclose any Confidential Information, other than to other Kinetics employees, consultants, agents and representatives who have a need to know the Confidential Information in order to perform the agreements between Kinetics and Applied. I - 45 - CONFIDENTIAL TREATMENT REQUESTED will not disclose any Confidential Information to any Kinetics Group company other than Kinetics Fluid Systems, Inc., unless I am specifically advised by Kinetics that such disclosure has been permitted by Applied. I will use the Confidential Information solely to perform the activities contemplated by the agreements between Kinetics and Applied. 3 IDENTIFICATION AS CONFIDENTIAL. Unless such information is disclosed orally, Confidential Information shall be designated as such by an appropriate legend, such as "Kinetics Confidential" or "Applied Confidential". Confidential Information that is disclosed orally shall be identified as confidential before or at the time of disclosure, and shall be confirmed as confidential in a written notice given within thirty (30) days after such oral disclosure. Such notice must contain a reasonable summary of the orally disclosed Confidential Information and a statement to the effect that such information is Confidential Information. 4 REMEDIES. I acknowledge and agree that money damages above will not be an adequate remedy for any breach of the obligations set forth herein. Accordingly, I agree that Applied may be irreparably harmed and shall be entitled to seek injunctive relief, including a temporary or preliminary injunction or a permanent injunction, or to any other appropriate relief to restrain or redress any breach or threatened breach of confidentiality, in addition to any other remedies Applied may have in law or equity. 5 VISUAL INFORMATION. I acknowledge that, in order for Kinetics to perform its obligations related to the manufacture of fluid delivery systems for Applied, I may access to Applied Confidential Information stored within and presented by Applied's computer system or as a result of access to and presence on Applied facilities ("VISUAL INFORMATION"). The Visual Information will include both gas panel and non-gas panel Confidential Information. I will only access, use or disclose any Visual Information as necessary to manufacture Fluid Delivery Systems pursuant to the Global Supply Agreement between Applied and Kinetics. I have read, and I understand and agree to be bound by, the confidentiality terms set forth above. - ------------------------- (Signature) - ------------------------- (Printed name) - ------------------------- (Date) - 46 - CONFIDENTIAL TREATMENT REQUESTED APPLIED EMPLOYEE JOINDER I am an employee, agent, contractor or representative of Applied Materials, Inc. ("APPLIED"). Applied has entered into agreements with Kinetics Fluid Systems, Inc. ("KINETICS") under which Kinetics will manufacture fluid delivery systems for Applied. As part of that relationship, Kinetics will disclose its Confidential Information (defined below) to Applied, and Applied will disclose the Confidential Information to those Applied employees, agents, contractors and representatives who must receive the information to perform under the agreements. Applied and Kinetics have agreed to protect the confidentiality of each other's Confidential Information and, as part of this agreement, have agreed to have those employees, agents, contractors and representatives that receive Confidential Information review and agree to the following undertakings regarding the Confidential Information: 1 DEFINITION. Confidential Information means all non-public, proprietary information of, or disclosed by, Kinetics that, from time-to-time, may be acquired by Applied from Kinetics and that is related to the fluid delivery systems being manufactured by Kinetics for Applied pursuant to the Global Supply Agreement between Applied and Kinetics. The Confidential Information may be in any form, medium, state or condition, inclusive of information that is embodied in a product or tangible item or that is intangible, whether disclosed in oral, written, graphic, machine recognizable (including computer programs, algorithms or databases), model or sample form or any derivation thereof. Notwithstanding the above, Confidential Information does not include information: (i) of which Applied was rightfully in possession prior to disclosure, as evidenced by appropriate documentation; (ii) that was independently developed by employees or agents of Applied without use of Confidential Information provided by Kinetics hereunder; (iii) that Applied rightfully receives from a third party not owing a duty of confidentiality to Kinetics; (iv) that becomes publicly available without fault of Applied; or (v) whose disclosure is required by order of a court or government authority, provided that Kinetics shall have been given timely notice of such requirement and that Applied shall cooperate with Kinetics to limit the scope and effect of such order. 2 CONFIDENTIALITY OBLIGATIONS. I will hold the Kinetics' Confidential Information in strictest confidence for five (5) years after receipt, using such measures as Applied uses to protect the confidentiality of its own Confidential Information of like importance, but in no event using less than reasonable care. I will not disclose any Confidential Information, other than to other Applied employees, consultants, agents and representatives who have a need to know the Confidential Information in order to perform the agreements between Kinetics and Applied. I - 47 - CONFIDENTIAL TREATMENT REQUESTED will use the Confidential Information solely to perform the activities contemplated by the agreements between Kinetics and Applied. 3 IDENTIFICATION AS CONFIDENTIAL. Unless such information is disclosed orally, Confidential Information shall be designated as such by an appropriate legend, such as "Kinetics Confidential" or "Applied Confidential". Confidential Information that is disclosed orally shall be identified as confidential before or at the time of disclosure, and shall be confirmed as confidential in a written notice given within thirty (30) days after such oral disclosure. Such notice must contain a reasonable summary of the orally disclosed Confidential Information and a statement to the effect that such information is Confidential Information. 4 REMEDIES. I acknowledge and agree that money damages above will not be an adequate remedy for any breach of the obligations set forth herein. Accordingly, I agree that Kinetics may be irreparably harmed and shall be entitled to seek injunctive relief, including a temporary or preliminary injunction or a permanent injunction, or to any other appropriate relief to restrain or redress any breach or threatened breach of confidentiality, in addition to any other remedies Kinetics may have in law or equity. I have read, and I understand and agree to be bound by, the confidentiality terms set forth above. - ------------------------- (Signature) - ------------------------- (Printed name) - ------------------------- (Date) - 48 - EX-10.17 12 f82015a1exv10w17.txt EXHIBIT 10.17 EXHIBIT 10.17 EXECUTION COPY - -------------------------------------------------------------------------------- STOCK PURCHASE AGREEMENT Dated as of February 28, 2001 By and Among KINETICS ELECTRONICS MANAGEMENT, INC., MAGNOLIA TREE, LLC and JAMES E. HAWTHORNE, AS TRUSTEE OF THE JAMES AND ROBERTA HAWTHORNE FAMILY TRUST U/T/A DATED AUGUST 31, 1999 -------------------- FOR THE PURCHASE OF ALL OF THE OUTSTANDING CAPITAL STOCK OF MARCHI ASSOCIATES, INC. - -------------------------------------------------------------------------------- 1 Table of Contents ARTICLE 1 DEFINITIONS...............................................................1 Section 1. Definitions.......................................................1 ARTICLE 2 SALE OF STOCK.............................................................8 Section 2.1 Sale of Stock.....................................................8 Section 2.2 Closing Payment...................................................8 Section 2.3 Determination of Purchase Price...................................9 Section 2.4 Closing..........................................................10 ARTICLE 3 REPRESENTATIONS OF THE SELLERS...........................................10 Section 3.1 Existence and Good Standing......................................10 Section 3.2 Capital Stock; Subsidiaries......................................10 Section 3.3 Financial Statements.............................................11 Section 3.4 Section 3.4......................................................11 Section 3.5 Personal Property................................................11 Section 3.6 Leases and Owned Real Property...................................11 Section 3.7 Material Contracts...............................................13 Section 3.8 Consents and Approvals; No Violations............................14 Section 3.9 Litigation.......................................................14 Section 3.10 Taxes............................................................14 Section 3.11 Liabilities......................................................16 Section 3.12 Insurance........................................................16 Section 3.13 Intellectual Properties..........................................17 Section 3.14 Accounts Receivable..............................................18 Section 3.15 Employment Relations.............................................18 Section 3.16 Employee Benefit Plans...........................................19 Section 3.17 Permits..........................................................22 Section 3.18 Interests in Clients.............................................23 Section 3.19 Bank Accounts Powers of Attorney and Compensation of Employees...23 Section 3.20 No Changes.......................................................23 Section 3.21 Compliance with Laws.............................................24 Section 3.22 Broker's or Finder's Fees, etc...................................24 2 Section 3.23 Environmental Laws and Regulations...............................24 Section 3.24 Customers........................................................25 Section 3.25 Disclosure.......................................................25 Section 3.26 Copies of Documents..............................................25 Section 3.27 Inventory........................................................25 Section 3.28 No Other Representations or Warranties...........................26 Section 3.29 Disclosed Matters................................................26 ARTICLE 4 REPRESENTATIONS OF MAGNOLIA..............................................26 Section 4. Representations of Magnolia......................................26 Section 4.1 Power and Authority..............................................26 Section 4.2 Ownership of Stock...............................................26 Section 4.3 Broker's or Finder's Fees, etc...................................27 Section 4.4 Consents and Approvals; No Violations............................27 ARTICLE 5 REPRESENTATIONS OF HAWTHORNE TRUST.......................................27 Section 5. Representations of Hawthorne Trust...............................27 Section 5.1 Power and Authority..............................................27 Section 5.2 Ownership of Stock...............................................28 Section 5.3 Broker's or Finder's Fees, etc...................................28 Section 5.4 Consents and Approvals: No Violations............................28 ARTICLE 6 REPRESENTATIONS OF THE PURCHASER.........................................28 Section 6. Representations of the Purchaser.................................28 Section 6.1 Existence and Good Standing: Power and Authority.................29 Section 6.2 No Conflicts.....................................................29 Section 6.3 Litigation.......................................................29 Section 6.4 Broker's or Finder's Fees, etc...................................30 Section 6.5 Operation of Business............................................30 Section 6.6 No Other Representations or Warranties...........................30 ARTICLE 7 CONDUCT OF BUSINESS; EXCLUSIVE DEALING: REVIEW; OTHER AGREEMENTS.........30 Section 7.1 Access to Information Concerning Properties and Records..........30 Section 7.2 Conduct of Business of the Company...............................30 Section 7.3 Commercially Reasonable Efforts..................................32 3 Section 7.4 Exclusive Dealing................................................32 Section 7.5 Purchase of Kinetics Common Stock................................32 ARTICLE 8 TAX MATTERS..............................................................33 Section 8.1 Tax Returns......................................................33 Section 8.2 Payment of Taxes.................................................33 Section 8.3 Amended Returns..................................................34 Section 8.4 Prior Tax Agreements.............................................34 Section 8.5 Non-foreign Person Affidavit.....................................34 Section 8.6 Post-Closing Access and Cooperation..............................34 Section 8.7 Tax Indemnification..............................................34 Section 8.8 Tax Controversies................................................35 ARTICLE 9 CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER...........................35 Section 9.1 Conditions to the Purchaser's Obligations........................35 Section 9.2 Truth of Representations and Warranties..........................35 Section 9.3 Performance of Agreements........................................36 Section 9.4 No Material Adverse Change.......................................36 Section 9.5 No Litigation Threatened.........................................36 Section 9.6 Good Standing and Other Certificates.............................36 Section 9.7 Approvals and Consents...........................................36 Section 9.8 Resignation of Directors.........................................36 Section 9.9 Opinion of the Sellers' Counsel..................................36 Section 9.10 Statutes.........................................................37 Section 9.11 Transaction Documents............................................37 Section 9.12 Seller Non-Compete Agreement.....................................37 ARTICLE 10 CONDITIONS TO THE OBLIGATIONS OF THE SELLERS.............................37 Section 10.1 Conditions to the Obligations of the Sellers.....................37 Section 10.2 Truth of Representations and Warranties..........................37 Section 10.3 Performance of Agreements........................................37 Section 10.4 Approvals and Consents...........................................37 Section 10.5 Opinion of the Purchaser's Counsel...............................37 ARTICLE 11 SURVIVAL OF REPRESENTATIONS: INDEMNIFICATION.............................37 Section 11.1 Survival of Representations......................................37 Section 11.2 General Indemnification..........................................38 4 Section 11.3 Indemnification Procedure........................................39 Section 11.4 Third Party Claims...............................................40 ARTICLE 12 TERMINATION AND ABANDONMENT..............................................41 Section 12.1 Termination......................................................41 Section 12.2 Effect of Termination............................................42 ARTICLE 13 MISCELLANEOUS............................................................42 Section 13.1 Expenses.........................................................42 Section 13.2 Governing Law....................................................42 Section 13.3 Captions.........................................................42 Section 13.4 Publicity........................................................42 Section 13.5 Notices..........................................................43 Section 13.6 Parties in Interest..............................................44 Section 13.7 Counterparts.....................................................44 Section 13.8 Entire Agreement.................................................45 Section 13.9 Amendments.......................................................45 Section 13.10 Severability.....................................................45 Section 13.11 Third Party Beneficiaries........................................45 Section 13.12 Submission to Jurisdiction; Waiver of Jury Trial.................45 Section 13.13 Schedules........................................................45 Section 13.14 Gender...........................................................45 Section 13.15 Attorneys' Fees..................................................45 5 STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT, dated as of February 28, 2001 (this "Agreement"), is by and among Kinetics Electronics Management, Inc., a California corporation (the "Purchaser"), Magnolia Tree, LLC, a Delaware limited liability company ("Magnolia"), and James E. Hawthorne, as Trustee of The James and Roberta Hawthorne Family Trust U/T/A dated August 31, 1999 ("Hawthorne Trust", and together with Magnolia, the "Sellers" and each, a "Seller"). W I T N E S S E T H: WHEREAS, Magnolia owns 750,000 shares of common stock of Marchi Associates, Inc. (d/b/a Marchi Systems, Inc.), a California corporation (the "Company"), and Hawthorne Trust owns 250,000 shares of common stock of the Company, all of such shares of common stock representing in the aggregate 100% of the capital stock of the Company; and WHEREAS, the Sellers desire to sell the Stock (as defined below), and the Purchaser desires to purchase the Stock pursuant to this Agreement: NOW, THEREFORE, for and in consideration of the premises and of the mutual representations, warranties, covenants and agreements contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and upon the terms and subject to the conditions hereinafter set forth, the parties do hereby agree as follows: ARTICLE 1 DEFINITIONS Section 1. Definitions. When used in this Agreement, the following terms shall have the respective meanings specified therefor below (such meanings to be equally applicable to both the singular and plural fortes of the terms defined). "Affiliate" of any Person shall mean any Person directly or indirectly controlling, controlled by, or under common control with, such Person; provided that, for the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise and provided, further, that, with respect to Sections 3.7(a)(xii), 3.18, 3.20(n), 3.20(o) and 7.2(m), an Affiliate of any Person shall also include (w) any Person that directly or indirectly owns more than five percent (5%) of any class of capital stock or other interest of such Person, (x) any officer, director, trustee or beneficiary of such Person, (y) any spouse, parent, sibling or descendant of any Person described in clauses (w) or (x) above, and (z) any trust for the benefit of any Person described in clauses (w) through (y) above or for any spouse, issue or lineal descendant of any Person described in clauses (w) through (y) above. "Agreed Claims" shall have the meaning assigned to such term in Section 11.3(c). 1 "Agreement" shall have the meaning assigned to such term in the preamble to this Agreement. "Arbitrator" shall have the meaning assigned to such term in Section 2.3(b)(ii). "Business day" shall mean any day, other than a Saturday, Sunday or a day recognized in the State of California as a "bank holiday" on which banks shall be authorized or required by law to close. "Certificate" shall have the meaning assigned to such term in Section 113(a). "Closing" shall have the meaning assigned to such term in Section 2.4. "Closing Date" shall have the meaning assigned to such term in Section 2.4. "Closing Date Working Capital" shall have the meaning assigned to such term in Section 2.3(a). "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and the rulings issued thereunder. "Company" shall have the meaning set forth in the first recital of this Agreement. "Company Property" shall mean any real property and improvements at any time owned (directly, indirectly or beneficially), leased, used, operated or occupied by the Company. "Contingent Obligation" shall mean, as to any Person, any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other obligations (the "primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefore, (ii) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonable anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Current Assets," with respect to any Person, shall include, without limitation, accounts receivable, cash, prepaid expenses and other prepaid items, inventory and other current assets 2 except deferred tax assets) of such Person and shall be determined in accordance with GAAP consistent with the past practice of such Person. "Current Liabilities", with respect to any Person, shall include, without limitation. accounts payable and other current liabilities (excluding Tax liabilities) of such Person, and shall be determined in accordance with GAAP consistent with the past practice of such Person. "Due Inquiry" shall mean James E. Hawthorne's interview of the executives and management of the Company relating to the subject matter in question and review of any material agreements or documents readily available and accessible regarding the same. "Employee Benefit Plan" shall have the meaning assigned to such term in Section 3.16(a). "Environmental Claims" shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law or any permit issued under any such Environmental Law (for purposes of this definition, "Claims") including, without limitation (i) any and all Claims by governmental or regulatory authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law and (ii) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. "Environmental Law" shall mean any federal, state, foreign or local statute, law, rule, regulation, ordinance, code, guideline, policy or rule of common law in effect and in each case as amended as of the date hereof and the Closing Date, and any judicial or administrative interpretation thereof as of the date hereof and the Closing Date, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety or Hazardous Materials, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq.; the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; the Clean Air Act, 42 U.S.C. Section 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq.; the Oil Pollution Act of 1990, 33 U.S.C. et seq. Section 2701 and their state and local counterparts and equivalents. "ERISA" shall have the meaning assigned to such term in Section 3.16(a). "Escrow Agent" shall have the meaning assigned to such term in Section 2.2(b). "Escrow Agreement" shall mean the escrow agreement, dated as of the date hereof by and among the Sellers. the Purchaser and the Escrow Agent attached hereto as Exhibit A. "Escrow Amount" shall mean Three Million Two Hundred Thousand Dollars ($3,200,000). 3 "Escrow Shares" shall mean collectively, the Hawthorne Indemnity Escrow Shares. the Hawthorne Working Capital Escrow Shares, the Magnolia Indemnity Escrow Shares, and the Magnolia Working Capital Escrow Shares. "Estimated Working Capital" shall have the meaning assigned to such term in Section 2.2(a). "Financial Statements" shall have the meaning assigned to such term in Section 3.5. "GAAP" shall mean generally accepted accounting principles in the United States of America applied on a consistent basis. "Hawthorne Closing Payment" shall mean Six Million Seven Hundred and Fifty Thousand Dollars ($6,750,000), minus twenty-five percent (25%) of the amount, if any, by which the Minimum Working Capital exceeds the amount of the Estimated Working Capital. "Hawthorne Indemnity Escrow Shares" shall mean 22,500 shares of Kinetics Class A Common Stock and 202,500 shares of Kinetics Class B Common Stock owned by Hawthorne Trust, which constitutes $675,000 of the Escrow Amount. "Hawthorne Purchase Price" shall mean the sum of the Hawthorne Closing Payment, as adjusted pursuant to Section 2.3(c) and (ii) the Earnout Payment (as such term is defined in the Stock Repurchase and Earnout Agreement), if any. "Hawthorne Trust" shall have the meaning assigned to such term in the preamble to this Agreement. "Hawthorne Working Capital Escrow Shares" shall mean 4,167 shares of Kinetics Class A Common Stock and 37,500 shares of Kinetics Class B Common Stock owned by Hawthorne Trust, which constitutes $125,000 of the Escrow Amount. "Hazardous Materials" shall mean (i) any petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls, and radon gas; (ii) any chemicals. materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," or words of similar import, under any applicable Environmental Law: and (iii) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority. "Indebtedness" shall mean, as to any Person, without duplication, (i) all indebtedness (including principal, interest, fees and charges) of such Person for borrowed money or for the deferred purchase price of property or services other than trade payables and accrued expenses arising in the ordinary course of business in accordance with customary trade terms, (ii) the maximum amount available to be drawn under all letters of credit issued for the account of such person and all unpaid drawings in respect of such letters of credit, (iii) all Indebtedness of the types described in clause (i), (ii), (iv), (v), (vi), (vii) and (viii) of this definition secured by any 4 Lien on any property owned by such Person, whether or not such Indebtedness has been assumed by such Person (and, if such Indebtedness is non-recourse except to such property, only to the extent of the fair market value of the property), (iv) all capitalized lease obligations of such person, (v) all obligations of such Person to pay a specified purchase price for goods or services. whether or not delivered or accepted, i.e., take-or-pay and similar obligations, (vi) all Contingent Obligations of such Person, (vii) all obligations of such Person under any interest rate protection agreements, currency protection agreements, interest rate swaps, control disbursement accounts, repurchase agreements, reverse repurchase agreements, caps, collars, derivatives, currency hedge agreements or other similar types of agreements and (viii) the greater of (x) any premiums and other amounts payable to any third party pursuant to any mandatory prepayment obligations under the terms of any Indebtedness as a result of the consummation of the transactions contemplated hereby and (y) any premiums and other amounts payable to any third party pursuant to any voluntary prepayment provision under the terms of any Indebtedness, assuming the Closing Date occurs on or before February 28, 2001 and notice of any such voluntary prepayment is given by such Person on or before the Closing Date. "Indemnified Party" shall have the meaning assigned to such term in Section 11.4(a). "Indemnifying Party" shall have the meaning assigned to such term in Section 11.4(a). "Intellectual Property" shall mean all domestic and foreign patents, patent applications, trademarks, service marks and other indicia of origin, trademark and service mark registrations and applications for registrations thereof, copyrights, copyright registrations and applications for registration thereof. Internet domain names and universal resource locators ("URLs"), trade secrets, inventions (whether or not patentable), invention disclosures, moral and economic rights of authors and inventors (however denominated), technical data, customer lists, corporate and Company names, trade names, trade dress, brand names, know-how, formulae, methods (whether or not patentable), designs, processes, procedures, technology, source codes, object codes, computer software programs, databases, data collectors and other proprietary information or material of any type, whether written or unwritten (and all good will associated with, and all derivatives, improvements and refinements of, any of the foregoing). "KHC" shall mean Kinetics Holdings Corporation, a Delaware corporation. "Kinetics Class A Common Stock" shall mean the shares of voting Class A Common stock, par value $0.01 per share, of KHC, which, for purposes of this Agreement, shall be valued at Three Dollars ($3.00) per share. "Kinetics Class B Common Stock" shall mean the shares of nonvoting Class B Common Stock, par value $0.01 per share, of KHC, which, for purposes of this Agreement, shall be valued at Three Dollars ($3.00) per share. "Leased Property" shall have the meaning assigned to such term in Section 3.6. "Leases" shall have the meaning assigned to such term in Section 3.6. "Liens" shall mean liens, security interests, options, rights of first refusal, easements. mortgages, charges, indentures, deeds of trust, rights of way, restrictions on the use of real 5 property, encroachments, licenses to third parties, leases to third parties, security agreements, or any other encumbrances and other restrictions or limitations on use of real or personal property or irregularities in title thereto. "Listed Intellectual Property" shall have the meaning assigned to such term in Section 131a). "Loss" shall have the meaning assigned to such term in Section 11.2(a). "Magnolia" shall have the meaning assigned to such term in the preamble to this Agreement. "Magnolia Closing Payment" shall mean Twenty Million Two Hundred and Fifty Thousand Dollars ($20,250,000), minus seventy-five percent (75%) of the amount, if any, by which the Minimum Working Capital exceeds the amount of the Estimated Working Capital. "Magnolia Indemnity Escrow Shares" shall mean 67,500 shares of Kinetics Class A Common Stock and 607,500 shares of Kinetics Class B Common Stock owned by Magnolia. which constitutes $2,025,000 of the Escrow Amount. "Magnolia Purchase Price" shall mean the Magnolia Closing Payment. as adjusted pursuant to Section 2.3(c). "Magnolia Working Capital Escrow Shares" shall mean 12,500 shares of Kinetics Class A Common Stock and 112,500 shares of Kinetics Class B Common Stock owned by Magnolia. which constitutes $375,000 of the Escrow Amount. "Minimum Working Capital" shall mean Three Million One Hundred and Thirty Thousand Dollars ($3,130,000). "Notice of Objection" shall have the meaning assigned to such term in Section 2.3(b)(i). "Overlap Period" shall mean taxable periods beginning before the Closing Date and ending after the Closing Date. "Permits" shall have the meaning assigned to such term in Section 3.17. "Permitted Liens" shall mean (i) Liens reflected on the Financial Statements, (ii) Liens arising by operation of law, (iii) Liens for current taxes, assessments or governmental charges or levies on property not yet due and delinquent, and (iv) Liens for purchase money security interests in equipment valued at less than $25,000 in the aggregate. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a limited liability company, a limited liability partnership, a trust, an incorporated organization and a government or other department or agency thereof. "Pre-Closing Periods" shall have the meaning assigned to such term in Section 3.10(b). 6 "Purchase Price" shall mean the aggregate of the Magnolia Purchase Price and the Hawthorne Purchase Price. "Purchaser" shall have the meaning assigned to such term in the preamble to this Agreement. "Purchaser Indemnitee" shall have the meaning assigned to such term in Section 11.2(a). "Redwood City Lease" shall mean that certain lease agreement dated July 1, 2000 by and between the Company and Oakbrook Properties, LLC regarding the real property located at 670 Price Avenue, Redwood City, California. "Release" shall mean the active or passive disposing, discharging, injecting, spilling, leaking, leaching, dumping, emitting, escaping, emptying, seeping, placing and the like, into or upon any land or water or air, or otherwise entering into the environment. "Remedy Percentage" shall mean, with respect to Magnolia, seventy five percent (75%) and, with respect to Hawthorne Trust, twenty five percent (25%). "Returns" shall have the meaning assigned to such term in Section 3.10(a). "Seller" shall have the meaning assigned to such term in the preamble to this Agreement. "Seller Indemnitee" shall have the meaning assigned to such term in Section 11.2(b). "Seller Non-Compete Agreement" shall mean the non-competition agreement, dated as of the date hereof, by and between James E. Hawthorne, an individual residing in the State of California, and the Purchaser attached hereto as Exhibit B. "Stock" shall have the meaning assigned to such term in Section 2.1. "Stock Repurchase and Earnout Agreement" shall mean the stock repurchase and earnout agreement, dated as of the date hereof, by and between Hawthorne Trust and the Purchaser attached hereto as Exhibit C. "Subsidiary" shall mean, with respect to any Person, (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is owned by such Person directly or indirectly through one or more Subsidiaries of such Person and (ii) any partnership, association, joint venture or other entity in which such Person directly or indirectly through one or more Subsidiaries of such Person has more than a 50% voting equity interest. "Tax" or "Taxes" shall mean all taxes, assessments, charges, duties, fees, levies or other governmental charges including, without limitation, all Federal, state, local, foreign and other income, franchise, profits, capital gains, capital stock, transfer, sales, use, occupation, property, excise, severance, windfall profits, stamp, license, payroll, withholding and other taxes, 7 assessments, charges, duties, fees, levies or other governmental charges of any kind whatsoever (whether payable directly or by withholding and whether or not requiring the filing of a Return), all estimated taxes, deficiency assessments, additions to tax, penalties and interest and shall include any liability for any such amounts as a result either of being a member of a combined, consolidated, unitary or affiliated group or of a contractual obligation to indemnify any Person or other entity. "Tax Matter" shall have the meaning assigned to such term in Section 8.8. "Transaction Documents" shall mean, collectively, this Agreement, the Escrow Agreement, the Seller Non-Compete Agreement, and the Stock Repurchase and Earnout Agreement. "VEBAs" shall have the meaning assigned to such term in Section 3.16(a). "WARN" shall have the meaning assigned to such term in Section 3.15(j). "Working Capital" shall mean, with respect to any Person, the Current Assets of such Person less the Current Liabilities of such Person. "Working Capital Escrow Shares" shall mean collectively, the Magnolia Working Capital Escrow Shares and the Hawthorne Working Capital Escrow Shares. ARTICLE 2 SALE OF STOCK Section 2.1 Sale of Stock. Upon the terms and subject to the conditions set forth in this Agreement, (i) Magnolia shall sell, assign, transfer and deliver to the Purchaser at the Closing, and the Purchaser shall purchase at the Closing, 750,000 shares of common stock of the Company and (ii) Hawthorne Trust shall sell, assign, transfer and deliver to the Purchaser at the Closing, and the Purchaser shall purchase at the Closing, 250,000 shares of common stock of the Company (such shares, collectively, the "Stock"). The certificates representing the Stock shall be duly endorsed in blank, or accompanied by stock powers duly executed in blank, by the sellers, with all necessary transfer tax and other revenue stamps, acquired at the Sellers' expense affixed and canceled. The Sellers agree to cure any deficiencies with respect to the endorsement of the certificates representing the Stock owned by the Sellers or with respect to the stock powers accompanying any such certificates. Section 2.2 Closing Payment. (a) At least two (2) but no more than seven (7) business days prior to the Closing Date, the Sellers shall cause the Company to prepare and deliver to the Purchaser an estimate of the Working Capital of the Company (the "Estimated Working Capital") as of the Closing Date, which shall quantify in reasonable detail the items constituting such Working Capital. The statement of Estimated Working Capital shall be prepared in accordance with GAAP and consistent with past practices of the Company. 8 (b) On the Closing Date, the Purchaser shall pay to (i) Magnolia the Magnolia Closing Payment and (ii) Hawthorne Trust the Hawthorne Closing Payment; provided that each of Magnolia and Hawthorne Trust shall deliver to Chase Manhattan Trust Company, N.A. (the "Escrow Agreement") the Escrow Shares to be held in an escrow account pursuant to the provisions of the Escrow Agreement. Section 2.3 Determination of Purchase Price. (a) Promptly after the Closing Date, but in any event not later than sixty (60) days following the Closing Date, the Purchaser shall cause the company to prepare and deliver to the Sellers a statement of the Working Capital of the Company (the "Closing Date Working Capital") as of the Closing Date. The Closing Date Working Capital shall be prepared in accordance with GAAP and in the same method and manner as the determination of the Estimated Working Capital. If the Purchaser fails to deliver to the Sellers the statement of Closing Date Working Capital within such sixty (60) day period, the Escrow Agent shall automatically and without further instructions deliver to the Sellers the Working Capital Escrow Shares. (b) (i) In the event that a Seller does not object to the determination by the Purchaser of the Closing Date Working Capital by written notice of objection (the "Notice of Objection") delivered to the Purchaser within ten (10) business days after such Seller's proposed adjustments to the proposed Closing Date Working Capital, the proposed Closing Date Working Capital amount shall be deemed final and binding; (ii) If either Seller delivers a Notice of Objection to the Purchaser, then any dispute shall be resolved as follows: (x) The Sellers and the Purchaser shall promptly endeavor to agree upon the calculation of the Closing Date Working Capital. In the event that a written agreement determining the amount of the Closing Date Working Capital has not been reached within ten (10) business days after the date of receipt by the Purchaser from such Seller of such Seller's Notice of Objection thereto, then such Seller and the Purchaser shall submit its respective determination of the Closing Date Working Capital to Arthur Andersen (the "Arbitrator"). (y) Within thirty (30) days after a party submits to the Arbitrator any dispute concerning the determination of the Closing Date Working Capital, the Arbitrator shall render a decision in accordance with this Section 2.3 along with a statement of reasons therefor. The decision of the Arbitrator shall be final and binding upon each party hereto and shall constitute an arbitral award upon which a judgment may be entered by a court of competent jurisdiction. (z) In the event a Seller and the Purchaser submit a Notice of Objection to the Arbitrator for resolution, the Sellers, on the one hand, and the Purchaser, on the other hand, will equally share the fees and expenses of the Arbitrator. (c) (i) If Closing Date Working Capital is less than the amount of the Estimated Working Capital, then the Sellers shall pay to the Purchaser the amount of any such 9 deficiency within five (5) business days after the determination of Closing Date Working Capital by return to the Purchaser of the number of shares of Working Capital Escrow Shares equal in value to such deficiency in accordance with the terms of the Escrow Agreement and, to the extent the value of the Working Capital Escrow Shares is less than such deficiency, thereafter by check or wire transfer (as requested) of immediately available funds to the account designated in writing by the Purchaser. If Closing Date Working Capital exceeds the amount of the Estimated Working Capital, then the Purchaser shall pay to the Sellers the amount of any such excess up to the amount by which the Minimum Working Capital exceeds the Estimated Working Capital, if any, within five (5) business days after the determination of Closing Date Working Capital by check or wire transfer (as requested) of immediately available funds to the account designated in writing by the Sellers; (ii) The parties hereto acknowledge and agree that the Working Capital Escrow Shares secure the obligations, if any, of the Sellers pursuant to Section 2.3(c)(i). Section 2.4 Closing. The sale referred to in Section 2.1 (the "Closing") shall take place at 10:00 a.m., at the offices of Doty Sundheim & Gilmore, 260 Sheridan Avenue, Suite 200, Palo Alto, CA, 94306-2009 on the date hereof, or at such other time and date as the parties hereto shall mutually agree, which shall in no event be prior to February 1, 2001. Such date is herein referred to as the "Closing Date". ARTICLE 3 REPRESENTATIONS OF THE SELLERS Section 3. Representations of the Sellers.The Sellers represent and warrant, severally, to the purchaser as follows (for purposes of this Article III, "actual knowledge" shall mean (i) with respect to Magnolia, the actual knowledge of David Shimmon and (ii) with respect to Hawthorne Trust, the actual knowledge of James E. Hawthorne): Section 3.1 Existence and Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Company has the requisite corporate power and authority to own, lease, operate its properties and to carry on its business as now being conducted. The Company is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the character or location of the properties owned, leased or operated by the Company or the nature of the business conducted by the Company makes such qualification or license necessary, except where the failure to be so duly qualified or licensed or in good standing, could not reasonably be expected to have a material adverse effect on the financial condition or results of operations of the Company. Section 3.2 Capital Stock; Subsidiaries. The Company has an authorized capitalization consisting of 2,000,000 shares of common stock, no par value, of which 1,000,000 shares are issued and outstanding. All issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and are not subject to, nor were issued in violation of, any preemptive rights. No shares of capital stock of the Company are reserved for issuance and there are no outstanding or authorized options, warrants, rights, subscriptions, claims of any character, agreements, obligations, convertible or exchangeable securities, or other commitments, contingent or otherwise, relating to the capital stock of the Company, or pursuant to which the Company is or may become 10 obligated to issue shares of its capital stock or any securities convertible into, exchangeable for, or evidencing the right to subscribe for any shares of the capital stock of the Company. The Company does not have authorized or outstanding bonds, debentures, notes or other indebtedness the holders of which have the right to vote (or convertible or exchangeable into or exercisable for securities having the right to vote) with the stockholders of the Company on any matter. Except as set forth on Schedule 3.2, the Company does not own, directly or indirectly, any capital stock or other equity, ownership or proprietary interest in any Person. There are no restrictions of any kind which prevent or restrict the payment of dividends by the Company. Section 3.3 Financial Statements. The Sellers have heretofore furnished the Purchaser with the audited balance sheets of the Company as of September 30, 1997, September 30, 1998, September 30, 1999 and September 30, 2000 and the related statements of income, equity and cash flows for the fiscal years then ended (collectively, the "Financial Statements"). The Financial Statements, including the footnotes thereto, have been prepared in accordance with GAAP consistently followed throughout the period indicated, and fairly present in all material respects the financial position of the Company at its date thereof, and the results of operations and cash flows of the Company for the periods indicated. Section 3.4 Books and Records. The minute books of the Company as previously made available to the Purchaser and its representatives contain accurate records of all meetings of, and corporate actions taken by (including action taken by written consent), the shareholders and the Board of Directors of the Company. The Company does not have any of its records, systems, controls, data or information recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which (including all means of access thereto and therefrom) are not under the exclusive ownership and direct control of the Company except for any records or data maintained by the Company's accountants and payroll company. Section 3.5 Personal Property. Except for properties and assets reflected in the Financial Statements, or acquired since September 30, 2000, in each case which have been sold or otherwise disposed of in the ordinary course of business, the Company owns (a) all of its personal properties and assets (tangible and intangible), including, without limitation, all of the personal properties and assets reflected in the Financial Statements, and (b) all of the personal properties and assets (tangible or intangible) purchased by the Company since September 30, 2000, in each case free and clear of all Liens, except for Permitted Liens. All such personal properties and assets are in good operating condition and in a state of good maintenance and repair, ordinary wear and tear excepted, and are adequate and suitable for the purposes for which they are presently being used. Section 3.6 Leases and Owned Real Property. (a) Schedule 3.6 attached hereto contains an accurate and complete list of all (a) real property leased (directly or indirectly, beneficially, or otherwise), to or from the Company ("Leased Property") and (b) leases ("Leases") (including, without limitation, any amendments or modifications thereto) to which the Company is a party (as lessee, sublessee, sublessor or lessor), and a reference to any title policies and surveys relating thereto which are in the possession of the Company. The term "Leases" includes, without limitation, occupancy and 11 similar agreements. Each Lease set forth on Schedule 3.6 (or required to be set forth on Schedule 3.6) is in full force and effect and is valid and binding and is enforceable against the Company and, to either Seller's actual knowledge (after Due Inquiry, with respect to the Redwood City Lease only), the other parties thereto, except to the extent that such enforcement may be affected by applicable bankruptcy, reorganization, insolvency and similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether enforcement is sought at law or in equity); all rents and additional rents due to date on each such Lease have been paid and no rent has been paid minor a than one (1) month in advance, and all other obligations of the lessees thereunder required to have been performed to date have been performed by the Company and, to either Seller's actual knowledge, the other parties thereto in accordance with the provisions of the applicable Lease; in each case, with respect to Leases where the Company is the lessee, such entity has been in peaceable possession since it became the lessee under such Lease and is not in default thereunder, and there are no uncured notices of default under any of such Leases, and no waiver, indulgence or postponement of the lessee's obligations thereunder has been granted by the lessor; and there exists no (and neither of the execution of the Transaction Documents or the purchase of the Stock hereunder or will give rise to any) event of default or event, occurrence, condition or act which, with the giving of notice, the lapse of time or the happening of any further event or condition, would become a default or give rise, whether by the exercise by the holder of the landlord interest in the Lease or by express provision of the Lease without exercise by such holder, to so-called "recapture", termination or cancellation of, or have a material adverse effect on, any Lease set forth on Schedule (or required to be set forth on Schedule 3.6). Except as set forth on Schedule 3.6, neither the Company nor, to either Seller's actual knowledge, any other Person who is a party to any lease has violated any of the terms or conditions under any such lease in any material respect. and all of the covenants to be performed by the Company or, to either Seller's actual knowledge, by any other party under any such Lease have been fully performed. Each Leased Property and all other property leased by the Company is in good operating condition and in a state of good maintenance and repair, ordinary wear and tear excepted, and is adequate and suitable for the purposes for which it is presently being used. The Company has good clear record and marketable leasehold interest in all Leased Property described in such Leases, free and clear of any and all Liens, except for Permitted Liens. Except as set forth on Schedule 3.6, the company has not assigned, transferred, conveyed, mortgaged or encumbered any interest in any lease or in any Leased Property subject thereto (or any portion thereof). Except as set forth on Schedule 3.6, the Company has not been a party to a Lease with respect to which it has or may have any continuing liability thereunder, notwithstanding that a third party has assumed, guaranteed or otherwise agreed to pay and perform the obligations of the Company. Except as set forth on Schedule 3.6, the Company is not currently negotiating with respect to a Lease nor is it a party to a Lease with respect to Leased Property with respect to which the term has not commenced. The Company has not granted, nor has the benefit of, any options to enter into any Leases or acquire any leasehold interest. No Leased Property (including buildings, structures, improvements or appurtenances or any equipment), nor the construction, operation or maintenance thereof, violates in any material respect any provision of any federal, state or local law, ordinance, rule or regulation, and the Company has valid certificates of occupancy with respect to the Leased Property. To either Seller's actual knowledge after Due Inquiry, each Leased Property is served by water, sewer, sanitary sewer, storm drain facilities and other utilities adequate to serve such Leased Property for its intended use. All public utilities necessary for the intended use and enjoyment of each 12 Leased Property are located in the public right-of-way or in private recorded easements or rights of way abutting such Leased Property. The Sellers have delivered to the Purchaser true and complete copies of each Lease including, in each case, all exhibits and schedules thereto. (b) The Company owns no real property. Section 3.7 Material Contracts. (a) Except as set forth on Schedule 3.7 attached hereto or as contemplated by any of the Transaction Documents, the Company is not a party to, and is not bound by: (i) any agreement, contract or commitment relating to the employment of any Person by the Company, or any bonus, deferred compensation, pension, profit sharing, stock option, employee stock purchase, retirement or other employee benefit plan; (ii) any agreement, indenture or other instrument which contains restrictions with respect to payment of dividends or any other distribution in respect of its capital stock; (iii) any agreement, contract or commitment relating to an outstanding obligation to make capital expenditures; (iv) any loan (other than accounts receivable from trade debtors arising in the ordinary course of business) or advance to (other than travel or entertainment advances to employees made in the ordinary course of business), or investment in, any Person or any agreement, contract or commitment relating to the making of any such loan, advance or investment; (v) any agreement relating to Indebtedness; (vi) any guarantee or other contingent liability in respect of any Indebtedness or obligation of any other Person (other than the endorsement of negotiable instruments for collection in the ordinary course of business); (vii) any management service, consulting, financial advisory or any other similar type of contract including, without limitation, any contract with any investment or commercial bank; (viii) any agreement, contract or commitment limiting the ability of the Company to engage in any line of business or to compete with any Person; (ix) any agreement, contract or commitment which involves $50,000 or more and is not cancelable without penalty within thirty (30) days; (x) any other material agreement, contract or commitment; 13 (xi) any collective bargaining agreement, labor contract or other written arrangement with any labor union or any employee organization; or (xii) any agreement, contract or commitment with any Affiliate. (b) Each contract or agreement set forth on Schedule 3.7 (or required to be set forth on Schedule 3.7) is in full force and effect and there exists no material default or event of default by the Company or, to either Seller's actual knowledge after Due Inquiry, any other Person party to such contract or agreement or event, occurrence, condition or act (including the consummation of the transactions contemplated hereby) which, with the giving of notice, the lapse of time or the happening of and other event or condition, would become a material default or event of default by the company or, to either Seller's actual knowledge after Due Inquiry, any other Person party thereto. Section 3.8 Consents and Approvals; No Violations. Other than as set forth on Schedule 3.8 attached hereto, the execution and delivery of the Transaction Documents by each Seller which is a party thereto and the consummation by either Seller of the transactions contemplated thereby will not: (1) violate any provision of the certificate of incorporation or bylaw's (or other organizational document) of the Company; (2) violate any statute, ordinance, rule, regulation, order or decree of any court or of any governmental or regulatory body, agency or authority applicable to the Company or by which any of its properties or assets may be bound; (3) require any Person to make or obtain any filing with or permit, consent or approval or give any notice to, any governmental or regulatory body, agency or authority; or (4) result in a violation or breach of conflict with, constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, payment or acceleration) under, or result in the creation of any Lien upon any of the properties or assets of the Company under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, Franchise, permit, agreement, lease, franchise agreement, collective bargaining agreement or other agreement, instrument or obligation to which the Company is a party, or by which the Company or any of its properties or assets are bound. Section 3.9 Litigation. (a) Except as set forth on Schedule 3.9, there is no action, suit, proceeding at law or in equity, arbitration or administrative or other proceeding by or before or, to either Seller's actual knowledge after Due Inquiry, any investigation by, any governmental or other instrumentality or agency, pending, or, to either Seller's actual knowledge after Due Inquiry threatened against or affecting the Company or any of its respective properties or rights. and neither Seller knows of any valid basis for any such action, proceeding or investigation. (b) The Company is not subject to any judgment, order or decree entered in any lawsuit or proceeding. Section 3.10 Taxes. (a) Tax Returns. The Company has, after taking into consideration applicable extensions, timely filed or caused to be timely filed with the appropriate taxing authorities all returns, statements, forms and reports for Taxes ("Returns") that are required by 14 law to be filed by, or with respect to, the Company on or prior to the Closing Date. The Returns accurately reflect and will accurately reflect all material liability for Taxes of the Company for the periods covered thereby and all other information set forth on the Returns is complete and accurate in all material respects. (b) Payment of Taxes. (i) All Taxes and Tax liabilities of the Company for all taxable years or periods that end on or before the Closing Date have been timely paid in full on or prior to the Closing Date and (ii) with respect to any taxable year or period beginning before and ending after the Closing Date, all Taxes and Tax liabilities with respect to the portion of such taxable year or period ending on and including the Closing Date (all taxable periods or portions thereof described in clause (i) and clause (ii) referred to as "Pre-Closing periods") have been timely paid in full on or prior to the Closing Date or are fully set forth on Schedule 3.10(b). (c) Other Tax Matters. (i) The Company has not been the subject of an audit or other examination of Taxes by any taxing authority and, except as set forth on Schedule 3.10(c)(i), the Company has not received any notices from any taxing authority relating to any issue which could affect the Tax liability of the Company. (ii) Except as set forth on Schedule 3.10(c)(ii) attached hereto, none of the Sellers or the Company, as of the Closing Date, (A) has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of Taxes of the Company, (B) has applied for and/or received a ruling or determination from a taxing authority regarding a past or prospective transaction of the Company, or (C) is presently contesting the Tax liability of the Company before any court, tribunal or agency. (iii) Except as set forth on Schedule 3.10(c)(iii) attached hereto, the Company has not been included in any "consolidated", "unitary" or "combined" Return provided for under the law of the United States, any foreign jurisdiction or any state or locality with respect to Taxes for any taxable period for which the statute of limitations has not expired. (iv) The Company has not applied for, been granted, or agreed to any accounting method change for which it will be required to take into account any adjustment under Section 481 of the Code or any similar provision of the Code or the corresponding tax laws of any nation, state or locality, and the Company will not be required to include any item in income after the Closing Date for Tax purposes which has economically accrued prior to the Closing Date. (v) No election under Section 341(f) of the Code has been made or shall be made prior to the Closing Date to treat the Company as a consenting corporation, as defined in Section 341 of the Code. (vi) All Taxes which the Company is or was required by law to withhold or collect have been duly withheld or collected, and have been timely paid over to the proper authorities to the extent due and payable. 15 (vii) The Company is not a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code. (viii) Except as set forth on Schedule 3.10(c)(viii) attached hereto, there are no tax sharing, allocation, indemnification or similar agreements in effect as between the Company or any predecessors or Affiliates thereof and any other party (including the Sellers or the Company or any predecessors or Affiliates thereof) under which the Purchaser or the Company could be liable for any Taxes or other claims of any party. (ix) No indebtedness of the Company consists of "corporate acquisition indebtedness" within the meaning of Section 279 of the Code or otherwise bears interest that is not deductible for Federal income tax purposes. (x) The Company has not received a written claim from any taxing authority in a jurisdiction where the Company does not file Tax Returns that the Company is or may be subject to taxation by that jurisdiction. (xi) The Company is not a party to any agreement that would require the Company or any of its Subsidiaries or any Affiliate thereof to make any payment that would constitute an "excess parachute payment" for purposes of Sections 2806 and 4999 of the Code. (xii) None of the transactions contemplated by this Agreement will result in the realization of any deferred income or gain that will be recognized by the Company after the Closing Date. (xiii) The Company has made a valid S election under Section 1361 of the Code. With respect to the Company, such election was initially made on September 1, 1993. The Sellers previously disclosed to the Purchaser that the Company made an S election under the Code, withdrew it on September 21, 1999, and subsequently had the S election reinstated on October 5, 1999. The Company has also made all such elections required under any analogous provisions of state or local law. The Company will continue to be a valid S corporation through the day immediately preceding the Closing Date. Section 3.11 Liabilities. Except as set forth on Schedule 3.11 attached hereto, the Company has no outstanding claims or liabilities, contingent or otherwise, except as set forth on the Financial Statements or referred to in the footnotes thereto or incurred subsequent to September 30, 2000 in the ordinary course of business consistent with past practices not involving borrowings by the Company. The Company does not have any outstanding Indebtedness. Section 3.12 Insurance. Set forth on Schedule 3.12 attached hereto is a complete list of insurance policies which the Company maintains with respect to its businesses, properties or employees. Such policies are in full force and effect (and will, after consummation of the transactions contemplated by the Transaction Documents, remain in full force and effect unless terminated at the election of the Purchaser), and all premiums due have been paid in full and are free from any right of termination on the part of the insurance carriers. Such policies, with respect to their amounts and types of coverage, are, to either Seller's actual knowledge after Due 16 Inquiry adequate to insure fully against risks that, to either Seller's actual knowledge after Due Inquiry, should be insured against and, based on discussions with the insurance broker of the Company. Such policies are adequate to insure fully against risks customarily insured against and in amounts customarily covered by companies which are similarly situated to the Company. Since September 30, 2000, there has not been any material adverse change in the relationship of the Company with their respective insurers or in the premiums payable pursuant to such policies. Section 3.13 Intellectual Properties. (a) Schedule 3.13 attached hereto contains an accurate and complete list of all material Intellectual Property owned by, licensed to or used by the Company (other than "shrink-wrap" licenses related to "off-the-shelf" software) (collectively, the "Listed Intellectual Property"). The patents, registered copyrights, registered trademarks and service marks, and domain names included in the Listed Intellectual Property have been duly registered in, filed in or issued by the United States Patent and Trademark Office, United States Copyright Office or a duly accredited and appropriate domain name registrar. the appropriate offices in the various states of the United States and the appropriate offices of other jurisdictions, and each such registration, filing and issuance remains in full force and effect as of the Closing Date. Except as set forth on Schedule 3.13, true and complete copies of all license agreements to which reference is therein made have been delivered by the Sellers to the Purchaser. (b) Except as set forth on Schedule 3.13, the Company is not a party to any material license or agreement, whether as licensor, licensee, or otherwise with respect to any of the Intellectual Property. To the extent any Intellectual Property is used under license by the company, no notice of a material default has been sent or received by either Seller under any such license which remains uncured and the execution, delivery and performance of each Sellers' obligations hereunder will not result in such a default. Each such material license agreement is a legal, valid and binding obligation of the Company and, to either Seller's actual knowledge after Due Inquiry, the other Persons party thereto, enforceable in accordance with the terms thereof except as may be limited by applicable bankruptcy, reorganization, insolvency and similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether enforcement is sought at law or in equity). (c) Except as set forth on Schedule 3.13, the Company owns or is licensed to use, all of the Listed Intellectual Property, free and clear of any Liens, without obligation to pay any royalty or any other fees with respect thereto and the operation of its businesses requires no rights under Intellectual Property other than the Listed Intellectual Property. The operation of the Company's business and the Company's use of any Intellectual Property does not infringe, misuse, or misappropriate any Intellectual Property rights of any third party. No Listed Intellectual Property has been canceled, abandoned or otherwise terminated and all renewal and maintenance fees in respect thereof have been duly paid. (d) Except as set forth on Schedule 3.13, since February 28, 1998, the Company has riot received any written notice from any third parry challenging the right of the Company to use any Intellectual Property. The Listed Intellectual Property constitutes ail the intellectual Property necessary to operate the business of the Company as of the Closing Date in the manner in which it was operated prior to the Closing Date. Immediately after the Closing 17 Date, the purchaser will have all Intellectual Property rights necessary to operate the business of the Company in the manner in which it was operated prior to the Closing Date. (e) Except as set forth on Schedule 3.13, since February 28, 1998, the Company has not made any claim in writing of a violation, infringement, misuse or misappropriation by any person of any of its rights to, or in connection with, any Intellectual Property, which claim is still pending. (f) Except as set forth on Schedule 3.13, there are no pending or, to either Seller's actual knowledge after Due Inquiry, threatened claims of a violation, infringement, misuse or misappropriation by the Company of any Intellectual Property, or of the invalidity of any patent or of the registration of a copyright, trademark, service mark, domain name, or trade name included in the Listed Intellectual Property. (g) Except as set forth on Schedule 3.13, there are no interferences or other contested proceedings either pending or, to either Seller's actual knowledge after Due Inquiry, threatened, in the United States Copyright Office, the United States Patent and Trademark Office, or any governmental authority relating to any pending application with respect to the Listed Intellectual Property. Section 3.14 Accounts Receivable. The amount of all accounts receivable, unbilled invoices and other debts due or recorded in the respective records and books of account of the Company as being due to it as at the Closing Date (less the amount of any provision or reserve therefor made in accordance with GAAP consistent with past practice in the respective records and books of account of the Company) has been properly recorded and represents bona fide sales made in the ordinary course of business; to either Seller's actual knowledge after Due Inquiry. none of such accounts receivable or other debts are subject to any counterclaim or set-off except to the extent of any such provision or reserve. The reserve for doubtful accounts reflected in the Financial Statements has been established in accordance with GAAP consistent with past practice. Except as set forth on Schedule 3.14, there have been no material write-offs and no material adverse change since September 30, 2000 in the condition of accounts receivable or other debts due to the Company or the allowances with respect thereto from that reflected in the Financial Statements. Section 3.15 Employment Relations. Except as set forth on Schedule 3.15 attached hereto: (a) the Company is in substantial compliance with all federal, state or other domestic applicable laws, respecting employment and employment practices, terms and conditions of employment and wages and hours, and has not and is not engaged in any unfair labor practice; (b) no unfair labor practice complaint against the Company, is pending or, to either Sellers actual knowledge after Due Inquiry, threatened before the National Labor Relations Board; 18 (c) there is no labor strike, dispute, slowdown or stoppage actually pending or, to ether Seller's actual knowledge after Due Inquiry, threatened against or involving the Company; (d) to either Seller's actual knowledge after Due Inquiry, no collective bargaining or union representation question exists respecting the employees of the Company; (e) no material grievance which might have an adverse effect upon the Company or the conduct of its business, and no arbitration proceeding arising out of or under any collective bargaining agreement with respect to employees of the Company is pending and no claim therefor has been asserted; (f) no collective bargaining agreement is currently applicable to the Company or is being negotiated by the Company with respect to employees of any such entity; (g) none of the Company or either Seller has received any notice of the termination of employment from any employee of the Company nor any notification of intent to leave by any employee of the Company, in each case who receives total compensation (including salary and bonus) from the Company in excess of $50,000 per year; (h) there exists no written or oral employment, consulting, severance or indemnification agreements with respect to employees of the Company or any agreement that would give am Person the right to receive any payment from the Company as a result of this Agreement; and (i) the Company is in compliance with the requirements of the Federal Workers' Employment and Retraining Notification Act (hereinafter referred to as "WARN") and the Company, has no liabilities pursuant to WARN. Section 3.16 Employee Benefit Plans. (a) List of Plans. Set forth on Schedule 3.16(a) attached hereto is an accurate and complete list of all domestic and foreign (i) "employee benefit plans," within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder ("ERISA"); (ii) bonus, stock option, stock purchase, restricted stock, incentive fringe benefit, "voluntary employees' beneficiary associations" ("VEBAs") under Section 501(c)(9) of the Code, profit-sharing, pension or retirement, deferred compensation, medical, life insurance, disability, accident, salary continuation, severance, accrued leave, vacation, sick leave, supplemental retirement and unemployment benefit plans, programs, arrangements, commitments and/or practices (whether or not insured); and (iii) employment, consulting, termination, and severance contracts or agreements; in each case for active, retired or former employees or directors, whether or not any such plans, programs, arrangements, commitments, contracts, agreements and/or practices (referred to in (i), (ii) or (iii) above) are in writing or are otherwise exempt from the provisions of ERISA; that have been established, maintained or contributed to (or with respect to which an obligation to contribute has been undertaken) or with respect to which any potential liability is borne by the Company (including, for this purpose and for the purpose of all of the representations in this Section 3.16, any predecessors to the Company and all employers (whether or not incorporated) that would be 19 treated together with the Company and/or the Sellers as a single employer (1) within the meaning of Section 414 of the Code, or (2) as a result of the Company and/or the Sellers being or having been a general partner of any such employer), since January 1, 1993 ("Employee Benefit Plans"). (b) Status of Plans. Each Employee Benefit Plan (including any related trust) complies in form with the requirements of all applicable laws, including, without limitation. ERISA and the Code, and has at all times been maintained and operated in substantial compliance with its terms and the requirements of all applicable laws, including, without limitation, ERISA and the Code. No complete or partial termination of any Employee Benefit Plan has occurred or is expected to occur. The Company has no commitment, intention or understanding to create, modify or terminate any Employee Benefit Plan. Except as required to maintain the tax-qualified status of any Employee Benefit Plan intended to qualify under Section 401 (a) of the Code, no condition or circumstance exists that would prevent the amendment or termination of an Employee Benefit Plan. No event has occurred and no condition or circumstance has existed that could result in a material increase in the benefits under or the expense of maintaining any Employee Benefit Plan from the level of benefits or expense incurred for the most recent fiscal year ended thereof. (c) No Pension Plans. No Employee Benefit Plan is an "employee pension benefit Plan" (within the meaning of Section 3(2) of ERISA) subject to Section 412 of the Code or Section 302 or Title IV of ERISA. Neither the Company nor any of its Subsidiaries has ever maintained or contributed to, or had any obligation to contribute to (or borne any liability with respect to) any "multiple employer plan" (within the meaning of the Code or ERISA) or any "multi-employer plan" (as defined in Section 4001(a)(3) of ERISA). (d) Liabilities. The Company does not maintain any Employee Benefit Plan which is a "group health plan" (as such term is defined in Section 607(1) of ERISA or Section 5000(b)(1) of the Code) that has not been administered and operated in all respects in compliance with the applicable requirements of Part 6 of Subtitle B of Title I of ERISA and Section 4980B of the Code and the Company is not subject to any material liability, including, without limitation, additional contributions, fines, taxes, penalties or loss of tax deduction as a result of such administration and operation. No Employee Benefit Plan which is such a group health plan is a "multiple employer welfare arrangement," within the meaning of Section 3(40) of ERISA. Each Employee Benefit Plan that is intended to meet the requirements of Section 125 of the Code meets such requirements, and each program of benefits for which employee contributions are Provided pursuant to elections under any Employee Benefit Plan meets the requirements of the Code applicable thereto. The Company does not maintain any Employee Benefit Plan which is an employee welfare benefit plan" (as such term is defined in Section 3(1) of ERISA) that has provided any "disqualified benefit" (as such term is defined in Section 4976(b) of the Code) with respect to which an excise tax could be imposed. The Company does not maintain any Employee Benefit Plan (whether qualified or nonqualified under Section 401(a) of the Code) providing for post-employment or retiree health, life insurance and/or other welfare benefits and having unfunded liabilities, and the Company does not have any obligation to provide any such benefits to any retired or former employees or active employees following such employees' retirement or termination of service. The Company does not have any unfunded liabilities pursuant to any Employee Benefit Plan that is not 20 intended to be qualified under Section 401(a) of the Code. No Employee Benefit Plan holds as an asset any interest in any annuity contract, guaranteed investment contract or any other investment or insurance contract, policy or instrument issued by an insurance company that, to either Seller's actual knowledge after Due Inquiry, is or may be the subject of bankruptcy, conservatorship, insolvency, liquidation, rehabilitation or similar proceedings. The Company has not incurred any liability for any tax or excise tax arising under Chapter 43 of the Code, and no event has occurred and no condition or circumstance has existed that could give rise to any such liability. There are no actions, suits, claims or disputes pending, or, to either Seller's actual knowledge after Due Inquiry, threatened, anticipated or expected to be asserted against or with respect to any Employee Benefit Plan or the assets of any such plan (other than routine claims for benefits and appeals of denied routine claims). No civil or criminal action brought pursuant to the provisions of Title I, Subtitle B, Part 5 of ERISA is pending, or, to either Seller's actual knowledge after Due Inquiry, threatened, anticipated, or expected to be asserted against the Company or any fiduciary of any Employee Benefit Plan, in any case with respect to any Employee Benefit Plan. To either Seller's actual knowledge after Due Inquiry, no Employee Benefit Plan or any fiduciary thereof has been the direct or indirect subject of an audit, investigation or examination by any governmental or quasi-governmental agency. (e) Contributions. Full payment has been timely made of all amounts which the Company is required, under applicable law or under any Employee Benefit Plan or any agreement relating to any Employee Benefit Plan, to have paid as contributions or premiums thereto as of the last day of the most recent fiscal year of such Employee Benefit Plan ended prior to the date hereof. All such contributions and/or premiums have been fully deducted for income tax purposes and no such deduction has been challenged or disallowed by any governmental entity, and to either Seller's actual knowledge after Due Inquiry, no event has occurred and no condition or circumstance has existed that could give rise to any such challenge or disallowance. The Company has made adequate provision for reserves to meet contributions and premiums and any other liabilities that have not been paid or satisfied because they are not yet due under the terms of any Employee Benefit Plan, applicable law or related agreements. Benefits under all Employee Benefit Plans are as represented and have not been increased subsequent to the date as of which documents have been provided. (f) Tax Qualification. Each Employee Benefit Plan intended to be qualified under Section 401(a) of the Code has, as currently in effect, been determined to be so qualified by the Internal Revenue Service. Each trust established in connection with any Employee Benefit Plan which is intended to be exempt from Federal income taxation under Section 501(a) of the Code has, as currently in effect, been determined to be so exempt by the Internal Revenue Service. Each VEBA has been determined by the Internal Revenue Service to be exempt from Federal income tax under Section 501(c)(9) of the Code. Since the date of each most recent determination referred to in this paragraph (f), no event has occurred and no condition or circumstance has existed that resulted or is likely to result in the revocation of any such determination or that could adversely affect the qualified status of any such Employee Benefit Plan or the exempt status of any such trust or VEBA. 21 (g) Transactions. Neither the Company nor any of its directors, officers, employees or, to either Sellers actual knowledge after Due Inquiry, other persons who participate in the operation of any Employee Benefit Plan or related trust, or funding vehicle, has engaged in any transaction with respect to any Employee Benefit Plan or breached any applicable fiduciary responsibilities or obligations under Title I of ERISA that would subject any of them to a tax, penalty, or liability for prohibited transactions or breach of any obligations under ERISA or the Code or would result in any claim being made under, by or on behalf of any such Employee Benefit Plan by any party with standing to make such claim. (h) Triggering Events. The execution of this Agreement and the consummation of the transactions contemplated hereby, do not constitute a triggering event under any Employee Benefit Plan, policy, arrangement, statement, commitment or agreement, whether or not legally enforceable, which (either alone or upon the occurrence of any additional or subsequent event) will or may result in any payment (whether of severance pay or otherwise), "parachute payment" (as such term is defined in Section 2806 of the Code), acceleration, vesting or increase in benefits to any employee or former employee or director of the Company. No Employee Benefit Plan provides for the payment of severance, termination, change in control or similar type payments or benefits. (i) Documents. The Sellers have delivered or caused to be delivered to the Purchaser and its counsel true and complete copies of all material documents in connection with each Employee Benefit Plan including, without limitation (where applicable): (i) all Employee Benefit Plans as in effect on the date hereof, together with all amendments thereto, including in the case of any Employee Benefit Plan not set forth in writing, a written description thereof; (ii) all current summary plan descriptions, summaries of material modifications, and material communications; (iii) all current trust agreements, declarations of trust and other documents establishing other funding arrangements (and all amendments thereto and the latest financial statements thereof); (iv) the most recent Internal Revenue Service determination letter obtained Code with respect to each Employee Benefit Plan intended to be qualified under Section 401(a) of the Code or exempt under Section 501(a) or 501(c)(9) of the Code; (v) the annual report on Internal Service Form 5500-series or 990 for each of the last three years for each Employee Benefit Plan required to file such form; (vi) the most recently prepared financial statements for each Employee Benefit Plan for which such statements are required; and (vii) all contracts and agreements relating to each Employee Benefit Plan, including, without limitation, service provider agreements, insurance contracts, annuity contracts, investment management agreements, subscription agreements, participation agreements, and recordkeeping agreements and collective bargaining agreements. Section 3.17 Permits. The Company has obtained and possesses all governmental licenses, permits, franchises and other authorizations (collectively, "Permits") of and has made all required registrations or filings with, any federal, state, local or foreign governmental authority related to the ownership of its properties or the operation of its assets and business as currently conducted all such Permits are in full force and effect. No proceedings against the Company are pending or, to either Seller's actual knowledge after Due Inquiry, threatened, seeking the revocation or the limitation of any Permits. Any applications for the renewal of any such Permits which were due prior to the Closing Date have been or will be timely filed prior to the Closing Date. 22 Section 3.18 Interests in Clients. Suppliers etc. Except as set forth on Schedule 3.18 attached hereto, none of the Company nor any of its Affiliates, directors, officers, or employees possesses, directly or indirectly, any financial interest in, or is a director, officer or employee of, any Person which is a client, supplier, customer, lessor, lessee, or competitor or potential competitor of the Company. Ownership of two percent (2%) or less of any class of securities of a company whose securities are registered under the Securities Exchange Act of 1934, as amended, shall not be deemed to be a financial interest for purposes of this Section 3.18. Section 3.19 Bank Accounts Powers of Attorney and Compensation of Employees. Set forth on Schedule 3.19 attached hereto is an accurate and complete list showing (a) the name and address of each bank in which the Company has an account or safe deposit box, the number of any such account or any such box and the names of all Persons authorized to draw thereon or to have access thereto, (b) the names of all Persons, if any, holding powers of attorney from the Company and (c) the names of all persons whose total compensation (including salary and bonus) from the Company for the fiscal year ended on September 30, 2000 exceeded an annualized rate of $100,000, together with a statement of the full amount paid or payable to each such person for services rendered during such fiscal year. Section 3.20 No Changes. Since September 30, 2000, except as set forth on Schedule 3.20 attached hereto, the Company has not: (a) incurred any liability or obligation of any nature (whether accrued, absolute, contingent or otherwise), except in the ordinary course of business consistent with past practice: (b) permitted any of its assets to be subjected to any Lien (other than Permitted Liens); (c) sold, transferred or otherwise disposed of any assets except inventory in the ordinary course of business consistent with past practice; (d) made any capital expenditure or commitment therefor in an amount exceeding $40,000 in any single instance or $120,000 in the aggregate; (e) redeemed, purchased or otherwise acquired any shares of its capital stock; (f) issued any capital stock or granted or issued any options, warrants, rights, subscriptions, claims of any character, obligations, convertible or exchangeable securities, or other commitments, contingent or otherwise, relating to any of its capital stock; (g) made any bonus, pension, retirement or profit sharing distribution or payment of and kind except in the ordinary course of business consistent with past practice; (h) incurred any Indebtedness or made any loan to any Person; (i) written off as uncollectible any notes or accounts receivable, except write-offs in the ordinary course of business charged to applicable reserves; 23 (j) granted any increase in the rate of wages, salaries, bonuses or other remuneration of any executive or other employee, except in the ordinary course of business consistent with past practice; (k) canceled or waived any claims or rights of substantial value; (l) made any change in any method of accounting or auditing practice; (m) otherwise conducted its business or entered into any transaction, except in the usual and ordinary manner and in the ordinary course of business consistent with past practice; (n) made any payments to any Affiliate, except payments made in the ordinary course of business; (o) entered into any agreement with any Affiliate; (p) done anything which would be restricted by Section 7.2; (q) failed to maintain its corporate books and records in the ordinary course of business consistent with past practice; or (r) agreed, whether or not in writing, to do any of the foregoing. No fact or condition exists or is contemplated or threatened which might cause any change described in clauses (a)-(r) hereof in the future. Section 3.21 Compliance with Laws. The Company is in compliance with all material laws, regulations, orders, judgments and decrees applicable to such entity. Section 3.22 Broker's or Finder's Fees, etc. No agent, broker, person or firm acting on behalf of the Company is, or will be, entitled to any commission or broker's or finder's fees from any of the parties hereto, or from any Affiliate of any of the parties hereto, in connection with any of the transactions contemplated by this Agreement. All engagement letters from all professionals (including, without limitation, accountants, financial advisors and attorneys) utilized by the Company in connection with the transactions contemplated hereby provide that such Persons shall look only to the Company or the Sellers for payment of their fees and expenses; provided, that the Company shall bear no liability for such fees and expenses as of the Closing Date, and the Sellers will be solely responsible for the payment of all such fees and expenses on and after the Closing Date. Section 3.23 Environmental Laws and Regulations. Except as set forth on Schedule 3.23: (a) During the period in which the Company has been in possession of Company Property, Hazardous Materials have not at any time been generated, used, treated or stored on, or transported to or from, or Released on, any Company Property or, to either Seller's 24 actual knowledge after Due Inquiry, any property adjoining, adjacent to or in the vicinity of any Company Property: (b) The Company is in compliance with all Environmental Laws and the requirements of any permits issued under such Environmental Laws with respect to any Company Property; (c) There are no past, pending or threatened Environmental Claims against the Company or any Company Property; (d) There are no facts, circumstances. conditions or occurrences regarding the Company or any Company Proper, or, to either Seller's actual knowledge after Due Inquiry, any property adjoining or in the vicinity of any Company Property that could reasonably be anticipated (i) to form the basis of a Environmental Claim against the Company or any Company Property, or assets or (ii) to cause such Company Property or assets to be subject to any material and non-customary restrictions on its conducting business, occupancy, use or transferability under any Environmental Law. During the period in which the Company has been in possession of Company Property, there have been no underground storage tanks located on any Company Property, or to either Seller's actual knowledge after Due Inquiry, on any property adjoining or adjacent to any Company Property. Section 3.24 Customers. None of the customers of the Company set forth on Schedule 3.24 has expressly informed (orally or in writing) either Seller or the Company that it intends to cease to do business with the Company, or materially alter the amount of business presently done with the Company. The Sellers make no representation and express no opinion regarding the effect an industry or general economic slowdown or recession might have on any customer's relationship with the Company. Section 3.25 Disclosure. None of this Agreement, any Schedule, Exhibit or certificate attached hereto or delivered pursuant to this Agreement or any other document or statement in which has been supplied by or on behalf of the Sellers or by directors or officers of the Company in connection with the transactions contemplated by this Agreement contains any untrue statement of a material fact, or omits any statement of a material fact necessary in order to make the statements contained herein or therein not misleading. Section 3.26 Copies of Documents. The Sellers have caused to be made available for inspection and copying by the Purchaser and their advisers, true, complete and correct copies of all documents referred to in this Article III or in any Schedule to this Agreement. Section 3.27 Inventory. The inventory of the Company consists of items which are good and merchantable, and are of a quality and quantity presently usable or salable in the ordinary course of business, except for items reserved against as obsolete or below standard quality in accordance with GAAP consistent with past practice. The value of all inventory items reflected on the books and records of the Company, including materials and supplies and work-in-process, have been recorded at the lower of cost or fair market value consistent with the accounting policies and practices of the Company. Since the September 30, 2000 Financial 25 Statements, the Company has not changed the method of valuing its inventory or computing the provisions for items that are obsolete or below standard quality. The Company has the type and quantities of inventories appropriate to conduct the operations of the Company as they have heretofore been conducted. No consignor has any rights or claims to any assets of the Company. Section 3.28 No Other Representations or Warranties. Except as expressly provided in this Agreement, the Sellers hereby disclaim the making of any representations or warranties. express or implied, regarding the Company. Purchaser acknowledges that, except as otherwise expressly provided in this ...Agreement: (i) the Sellers shall not incur any cost or liability with respect to the content or accuracy of any report, opinion or conclusion of any Person who has examined the Company: (ii) Purchaser is a Person experienced in acquisition transactions of the type contemplated in this Agreement and has entered into this Agreement with the intention of making and relying upon its own investigation of the physical, environmental and economic condition of the Company: and (iii) Purchaser is not relying upon any representations or warranties made by the Sellers or anyone acting or claiming to act on the Sellers' behalf concerning the Company, except as provided in this Agreement. Purchaser further acknowledges that it has not received from the Sellers any accounting, tax, legal or other advice with respect to this transaction and is relying solely upon the advice of its own accounting, tax, legal and other advisors. Section 3.29 Disclosed Matters. If, prior to Closing, a material breach of the Sellers' representations and warranties pursuant to Article III is disclosed to the Purchaser by Sellers in writing, then Purchaser's sole and exclusive right under this Agreement, at its election, is either to (i) proceed with the Closing, the effect of which is to waive such breach of the representations and warranties and any right or claim arising therefrom; or (ii) terminate this Agreement. ARTICLE 4 REPRESENTATIONS OF MAGNOLIA Section 4. Representations of Magnolia. Magnolia represents and warrants to the Purchaser as follows: Section 4.1 Power and Authority. Magnolia has all limited liability company power and authority to enter into the Transaction Documents to which it is a party, and to consummate the transactions contemplated thereby. Each of the Transaction Documents to which Magnolia is a party has been duly executed and delivered by Magnolia and, assuming due execution of such Transaction Document by the other parties thereto, constitutes the valid and binding obligation of Magnolia, enforceable against Magnolia in accordance with its terms, except to the extent that its enforceability may be limited by applicable bankruptcy, insolvency, reorganization moratorium or other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether the issue of enforceability is considered in a proceeding in equity or at law). Section 4.2 Ownership of Stock. Magnolia is the lawful owner, beneficially and of record, of the Stock opposite its name on Schedule 4.2 attached hereto, free and clear of all liens. Magnolia has full legal right, power and authority to enter into this Agreement and to sell, 26 assign, transfer and convey the Stock owned by Magnolia pursuant to this Agreement, and the delivery to Purchaser of the Stock owned by Magnolia pursuant to the provisions of this Agreement will transfer to Purchaser good and marketable title thereto, free and clear of all Liens. Section 4.3 Broker's or Finder's Fees, etc. No agent, broker, person or firm acting on behalf of Magnolia is, or will be, entitled to any commission or broker's or finder's fees from any of the parties hereto, or from any Affiliate of any of the parties hereto, in connection with any of the transactions contemplated by this Agreement. All engagement letters from all professionals (including without limitation, accountants, financial advisors and attorneys) utilized by Magnolia in connection with the transactions contemplated hereby provide that such persons shall look only to Magnolia for payment of their fees and expenses. Section 4.4. Consents and Approvals; No Violations. Other than as set forth on Schedule 4.4 attached hereto, the execution and delivery of the Transaction Documents to which it is a party by Magnolia and the consummation by Magnolia of the transactions contemplated thereby will not: (1) violate any provision of the certificate of formation or limited liability Company's operating agreement (or other organizational document) of Magnolia; (2) violate any statute, ordinance, rule, regulation, order or decree of any court or of any governmental or regulatory body, agency or authority applicable to Magnolia or by which any of its properties or assets may be bound; (3) require any Person to make or obtain any filing with or any permit, consent or approval or give any notice to, any governmental or regulatory body, agency or authority; or (4) result in a violation or breach of, conflict with, constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, payment or acceleration) under, or result in the creation of any Lien upon any of the properties or assets of Magnolia under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, franchise, permit, agreement, lease, franchise agreement, collective bargaining agreement or other agreement, instrument or obligation to which Magnolia is a party, or by which Magnolia or any of its properties or assets are bound. ARTICLE 5 REPRESENTATIONS OF HAWTHORNE TRUST Section 5. Representations of Hawthorne Trust. Hawthorne Trust represents and Warrants to the Purchaser as follows: Section 5.1 Power and Authority. Hawthorne Trust has full legal right, power and authority to enter into the Transaction Documents to which it is a party, and to consummate the transactions contemplated thereby. Each of the Transaction Documents signed by Hawthorne Trust has been duly executed and delivered by Hawthorne Trust and, assuming due execution of such Transaction Document by the other parties thereto, constitutes the valid and binding obligation of Hawthorne Trust, enforceable against Hawthorne Trust in accordance with its terms, except to the extent that its enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether the issue of enforceability is considered in a proceeding in equity or at law). James E. Hawthorne is the duly appointed and 27 presently acting trustee of Hawthorne Trust. Hawthorne Trust places no restrictions upon the trustee of said trust from entering into this transaction. Pursuant to the terms of Hawthorne Trust and all applicable laws, the trustee of Hawthorne Trust has all requisite power and authority to enter into this Agreement on behalf of such trust and to do any and all acts necessary to consummate the transactions contemplated hereby. Section 5.2 Ownership of Stock. Hawthorne Trust is the lawful owner; beneficially and of record of the Stock opposite its name on Schedule 5.2 attached hereto, free and clear of all Liens. Hawthorne Trust has full legal right, power and authority to enter into this Agreement and to sell, assign, transfer and convey the Stock owned by Hawthorne Trust pursuant to this Agreement, and the delivery to Purchaser of the Stock owned by Hawthorne Trust pursuant to the provisions of this Agreement will transfer to Purchaser good and marketable title thereto, free and clear of all Liens. Section 5.3 Broker's or Finder's Fees, etc. No agent, broker, person or firm acting on behalf of Hawthorne Trust is, or will be, entitled to any commission or broker's or finder's fees from any of the parties hereto, or from any Affiliate of any of the parties hereto, in connection with any of the transactions contemplated by this Agreement. All engagement letters from all professionals (including, without limitation, accountants, financial advisors and attorneys) utilized by Hawthorne Trust in connection with the transactions contemplated hereby provide that such Persons shall look only to Hawthorne Trust for payment of their fees and expenses. Section 5.4 Consents and Approvals: No Violations. Other than as set forth on Schedule 5.4 attached hereto, the execution and delivery of the Transaction Documents to which it is a party by Hawthorne Trust and the consummation by Hawthorne Trust of the transactions contemplated thereby will not: (1) violate or conflict with the terms of Hawthorne Trust; (2) require any approval (judicial or otherwise) other than that of the trustee of Hawthorne Trust, (3) violate any statute, ordinance, rule, regulation, order or decree of any court or of any governmental or regulatory body, agency or authority applicable to Hawthorne Trust or by which any of its properties or assets may be bound; (4) require any Person to make or obtain any filing with or any permit, consent or approval or give any notice to, any governmental or regulatory body, agency or authority; or (5) result in a violation or breach of, conflict with, constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, payment or acceleration) under, or result in the creation of any Lien upon any of the properties or assets of Hawthorne Trust under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, franchise, permit, agreement, lease, franchise agreement, collective bargaining agreement or other agreement, instrument or obligation to which Hawthorne Trust is a party, or by which Hawthorne Trust or any of its properties or assets are bound. ARTICLE 6 REPRESENTATIONS OF THE PURCHASER Section 6. Representations of the Purchaser. The Purchaser represents and warrants to the Sellers as follows: 28 Section 6.1 Existence and Good Standing: Power and Authority. (a) The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Purchaser has the requisite corporate power and authority to own, lease, operate its properties and to carry on its business as now being conducted. The Purchaser is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the character or location of the properties owned, leased or operated or the nature of the business conducted by it makes such qualification or license necessary except where the failure to be so duly qualified or licensed or in good standing could not reasonably be expected to have a material adverse effect on the financial condition or results of operations of the Purchaser. (b) The Purchaser has all requisite corporate power and authority to enter into the Transaction Documents to which it is a party and to consummate the transactions contemplated thereby. The execution, delivery and performance by the Purchaser of the Transaction Documents to which it is a party and the consummation by the Purchaser of the transactions contemplated thereby have been duly authorized by all necessary corporate action on the part of the Purchaser and no other action on the part of the Purchaser is necessary. Each Transaction Document to which the Purchaser is a party has been duly executed and delivered by the Purchaser and, assuming due execution of each Transaction Document by the other parties thereto, constitutes the valid and binding obligation of the Purchaser and enforceable against the Purchaser in accordance with its terms, except as the enforceability hereof may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether the issue of enforceability is considered in a proceeding in equity or at law). Section 6.2 No Conflicts. Except as set forth on Schedule 6.2, the execution and delivery by the Purchaser of the Transaction Documents to which it is a party and the consummation by the Purchaser of the transactions contemplated thereby will not (a) violate any provision of the articles of incorporation or the bylaws of the Purchaser; (b) violate any statute, ordinance, rule, regulation, order or decree of any court or of any governmental or regulatory body, agency or authority applicable to the Purchaser or by which its properties or assets may be bound; (c) require the Purchaser to make or obtain any filing with, or permit, consent or approval of, or give any notice to any governmental or regulatory body, agency or authority; or (d) result in a violation or breach of, conflict with, constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, payment or acceleration) under or result in the creation of any Lien upon any of the properties or assets of the Purchaser under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, franchise, permit, agreement, lease, franchise agreement or other instrument or obligation to which the Purchaser is a party or by which the Purchaser or its properties or assets are bound. Section 6.3 Litigation. There is no action, suit, proceeding at law or in equity, arbitration or administrative or other proceeding by or before or, to the best knowledge of the Purchaser, any investigation by any governmental or other instrumentality or agency, pending, or, to the best knowledge of the Purchaser, threatened against or affecting the Purchaser or any of its subsidiaries or any of their respective properties or rights which could reasonably be expected to prohibit or render illegal the transactions contemplated by this Agreement. 29 Section 6.4 Broker's or Finder's Fees, etc. No agent, broker, person or firm acting on behalf of the Purchaser or any of its Subsidiaries is, or will be, entitled to any commission or broker's or finder's fees from any of the parties hereto, or from any Person controlling, controlled by or under common control with any of the parties hereto, in connection with any of the transactions contemplated by this Agreement. Section 6.5 Operation of Business. After the Closing and until the determination of the Closing Date Working Capital, the Purchaser shall conduct the Company's business in accordance with past practices, and follow the accounting practices and policies followed by the Company prior to the Closing in order to insure an accurate comparison of Estimated Working Capital to Closing Date Working Capital. Section 6.6 No Other Representations or Warranties. Except as expressly provided in this Agreement, the Purchaser hereby disclaims the making of any other representations or warranties, express or implied. Each Seller acknowledges that such Seller has not received from the Purchaser any accounting, tax, legal or other advice with respect to this transaction and is relying solely upon the advice of its own accounting, tax, legal and other advisors. ARTICLE 7 CONDUCT OF BUSINESS; EXCLUSIVE DEALING: REVIEW; OTHER AGREEMENTS Section 7.1 Access to Information Concerning Properties and Records. During the period commencing on the date hereof and ending on the Closing Date, the Sellers shall, and shall cause the Company to, upon reasonable notice, afford the Purchaser, its financing sources, and their respective counsel, accountants, consultants and other authorized representatives, reasonable access during normal business hours to the officers, employees, properties, books and records of the Company in order that they may have the opportunity to make such reasonable investigations as they shall desire of the affairs of such entity and all other information concerning its business, properties and personnel as the Purchaser may reasonably request. Such review shall not, however, affect the representations and warranties made by the Sellers in this Agreement or the remedies of the Purchaser for breaches of those representations and warranties. The Sellers agree to cause the Company and its respective officers, employees, counsel, accountants, consultants and other representatives to furnish such additional financial and operating data and other information and respond to such inquiries as the Purchaser, its financing sources, and their respective counsel, accountants, consultants and other authorized representatives, shall from time to time reasonably request. Section 7.2 Conduct of Business of the Company. Except as required or specifically contemplated by this Agreement, during the period from the date of this Agreement until the Closing, the Sellers shall cause the Company to conduct its operations according to its ordinary course of business, consistent with past practice and will cause the Company to use its commercially reasonable efforts to: (i) preserve intact its business organization; (ii) maintain its material rights; (iii) keep available the services of its officers and employees; and (iv) maintain satisfactory relationships with suppliers, distributors, customers, landlords, agents and others having business relationships with it. Without limiting the generality of and in addition to the 30 foregoing, and except as otherwise required or specifically contemplated by this Agreement, prior to the time specified in the preceding sentence, the Sellers shall cause the Company, without the prior written consent of the Purchaser (which consent shall not be unreasonably withheld), to not: (a) amend its certificate of incorporation or bylaws or other organizational documents in any way; (b) authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options or otherwise) any stock of any class or any other securities; (c) split, combine or reclassify any shares of its capital stock, declare, set aside or pay any dividend or other distribution or return any equity capital (in each case whether in cash, stock or property or any combination thereof) in respect of its capital stock or redeem, retire, purchase, or otherwise acquire for consideration, any of its securities; (d) (x) pledge or otherwise encumber shares of its capital stock; (y) (A) incur, assume or prepay any Indebtedness; (B) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for any obligations of any other Person except its wholly owned subsidiaries or (C) make any loans, advances or capital contributions to, or investments in, any other Person; or (z) mortgage or pledge any of its assets or create or permit to exist any Lien thereupon that secures any Indebtedness; (e) enter into, adopt or amend any bonus, profit sharing, compensation, severance, termination, stock option, stock appreciation right, restricted stock, performance unit, pension, retirement, deferred compensation, employment, severance or other employee benefit agreements, trusts, plans, funds or other arrangements of or for the benefit or welfare of any of its employees, or (except for normal increases in the ordinary course of business that are consistent with past practices) increase in any manner the compensation or fringe benefits of any such employee or pay any benefit not required by any existing plan and arrangement (including, without limitation, the granting of stock options, stock appreciation rights, shares of restricted stock or performance units); (f) transfer, sell, lease, license or dispose of any of its lines of business, divisions, operating units or facilities or enter into any material commitment or transaction: (g) acquire or agree to acquire, by merging or consolidating with, by purchasing an equity interest in or a portion of the assets of, or by any, other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets of any other Person (other than the purchase of assets in the ordinary course of business and consistent with past practice); (h) take any action to terminate or materially amend any of its pension plans or retiree medical plans with respect to or for the benefit of any of its employees; 31 (i) modify, amend or terminate any contract identified or which should have been identified on Schedules 3.6 or 3.7 or waive any of its material rights or claims; (j) effect any change in any of its methods of accounting, except as may be required by law or GAAP; (k) take any action, engage in any transaction or enter into any agreement which would cause any of the representations or warranties set forth in Article III hereof to be untrue in any material respect as of the Closing Date; (l) execute any new lease or sublease for real property, or cancel, modify, terminate or amend any Lease; (m) enter into any agreement with any Affiliate; or (n) enter into a legally binding commitment with respect to, or any agreement to take, any of the foregoing actions. Section 7.3 Commercially Reasonable Efforts. Subject to the terms and conditions provided herein, the Sellers and the Purchaser shall. and the Sellers shall cause the Company to cooperate and use their respective commercially reasonable efforts to take, or cause to be taken, all appropriate action, and to make, or cause to be made, all filings necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, their respective commercially reasonable efforts to obtain, prior to the Closing Date, all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts with the Company (including, without limitation, landlords) as are necessary for consummation of the transactions contemplated by this Agreement and to fulfill the conditions to consummation of the transactions contemplated hereby set forth in Articles IX and X hereof. Section 7.4 Exclusive Dealing. During the period commencing on the date of this Agreement and concluding on the earlier of (a) the Closing Date and (b) the date this Agreement is terminated in accordance with its terms, the Sellers shall not take (and the Sellers shall not authorize or permit the Company or its Affiliates, officers, directors, employees, agents, representatives, consultants, financial advisors, attorneys, accountants, or other agents to so take) any action to, directly or indirectly, encourage, solicit, initiate or engage in discussions or negotiations with, or provide any information to, any Person, other than the Purchaser (and its Affiliates and representatives), concerning any acquisition of the Company or any purchase of all or any part of the capital stock of the Company or any merger, sale of substantial assets or similar transaction involving the Company. Section 7.5 Purchase of Kinetics Common Stock. (a) Hawthorne Trust shall purchase, simultaneously with the Closing, from DB Capital Investors, L.P., a Delaware limited partnership, 133,333 shares of Kinetics Class A Common Stock and 1,200,000 shares of Kinetics Class B Common Stock for an aggregate purchase price of Four Million Dollars ($4,000,000). 32 (b) Magnolia shall purchase, simultaneously with the Closing, from DB Capital Investors, L.P., a Delaware limited partnership, 400,000 shares of Kinetics Class A Common Stock and 3,600,000 shares of Kinetics Class B Common Stock for an aggregate purchase price of Twelve Million Dollars ($12,000,000). ARTICLE 8 TAX MATTERS Section 8.1 Tax Returns. (a) The Sellers shall have the exclusive authority and obligation to prepare, execute on behalf of the Company and timely file, or cause to be prepared, executed and timely filed, all Returns of the Company that are due solely with respect to any Pre-Closing Period. Such authority shall include, but not be limited to, the determination of the manner in which any items of income, gain, deduction, loss or credit arising out of the income, properties and operations of the Company shall be reported or disclosed in such Returns; provided, however, that such Returns shall be prepared by treating items thereon in a manner consistent with the past practices of the Company with respect to such items; and provided further, that (i) the Sellers shall provide the Purchaser with draft income tax returns for the Company at least twenty (20) days prior to the due date for filing such Returns, (ii) at least ten (10) days prior to the due date for the filing of such Returns the Purchaser shall notify the Sellers of the existence of any objection the Purchaser may have to any items set forth on such draft Returns, and (iii) if, after consulting in good faith, the Purchaser and the Sellers are unable to resolve such objection(s), such objection(s) shall be resolved by treating items on such Returns in a manner consistent with the past practices of the Company with respect to such items unless otherwise required by law. (b) Except as provided in Section 8.1 (a) above, the Purchaser shall have the exclusive authority and obligation to prepare and timely file, or cause to be prepared and timely filed, all Returns of the Company relating to periods on or after the Closing Date. Such authority shall include, but not be limited to, the determination of the manner in which any items of income, gain, deduction, loss or credit arising out of the income, properties and operations of the Company shall be reported or disclosed on such Returns. Section 8.2 Payment of Taxes. (a) The Sellers shall be responsible and liable for the timely payment of any and all Taxes imposed on or with respect to the properties, income and operations of the Company for all Pre-Closing Periods. (b) All Taxes and Tax liabilities with respect to the income, property or operations of the Company that relate to the Overlap Period shall be apportioned between Pre-Closing Periods and periods after the Closing Date as follows: (i) in the case of Taxes other than income, sales and use and withholding Taxes, on a per diem basis, and (ii) in the case of income, sales and use and withholding Taxes, as determined from the books and records of the Company as though the taxable year of the Company terminated at the close of business on the Closing 33 Date. The Purchaser and the Sellers agree to the extent permitted by applicable law to elect with the relevant taxing authority to treat for all purposes the Closing Date as the last day of a taxable period of the Company. (c) All transfer, sales and use, value added, registration, documentary, stamp and similar Taxes imposed in connection with the sale of the Stock or any other transaction that occurs pursuant to this Agreement shall be borne solely by the Sellers. Section 8.3 Amended Returns. Neither the Sellers nor the Company shall file or cause to be filed any amended Return or claims for refund without the prior written consent of the Purchaser, which consent shall not be unreasonably withheld or delayed. Section 8.4 Prior Tax Agreements. The Company shall terminate or cause to be terminated any and all of the tax sharing, allocation, indemnification or similar agreements, arrangements or undertakings in effect, written or unwritten, on the Closing Date as between the Sellers or any predecessor or Affiliate thereof, on the one hand, and the Company, on the other hand, for all Taxes imposed by any government or taxing authority, regardless of the period in which such Taxes are imposed, and there shall be no continuing obligation to make any payments under any such agreements, arrangements or undertakings. Section 8.5 Non-foreign Person Affidavit. The Sellers shall furnish to the Purchaser on or before the Closing Date a non-foreign person affidavit as required by Section 1445 of the Code. Section 8.6 Post-Closing Access and Cooperation. From and after the Closing Date, the Sellers agree and the Purchaser agrees to cause the Company, to afford the Purchaser (or the Purchaser's representative) or the Sellers, as the case may be, and upon reasonable notice and without undue interruption to the business of the Sellers or the Company, as the case may be. access during normal business hours to the books and records of the Sellers and the Company relating to the Company prior to the Closing Date for a period of seven (7) years following the Closing Date in connection with (i) preparation of the Returns specified in Section 8.1 above, (ii) evaluation of any claim for indemnification under Section 8.7 below, and (iii) investigation or contest of any inquiry, claim, assessment, audit or similar event. The Purchaser shall, from and after the Closing Date, preserve all books and records of the Company relaxing to the Company prior to the Closing Date for such seven (7) year period, and, thereafter, not destroy or dispose of or allow the destruction or disposition of such books and records without first having offered to deliver such books and records to the Sellers at the Sellers' expense. If the Sellers fail to request such books and records within ninety (90) days after receipt of the notice described in the preceding sentence, the Purchaser may dispose of such books and records. Section 8.7 Tax Indemnification. Notwithstanding any provision to the contrary contained in this Agreement, the Sellers, severally, agree to indemnify, defend and hold harmless each Purchaser Indemnitee and its successors on an after-tax basis against (i) all Taxes, losses, claims and expenses resulting from, arising out of, or incurred with respect to, any claims that may be asserted by any party based upon, attributable to, or resulting from the failure of any representation or warranty made pursuant to Section 3.10 of this Agreement to be true and correct as of the Closing Date; (ii) all Taxes imposed on the Company, or for which the 34 Company may be liable, as a result of any transaction contemplated by this Agreement; (iii) all taxes imposed for the Overlap Period for which the Sellers are liable pursuant to Section 8.2(b) hereof; (iv) all Taxes imposed on the Sellers or any Person (other than the Company) in which any of the Sellers or any of their respective Affiliates has or had at any time a direct or indirect majority equity interest for any taxable year or other taxable period; and (v) all Taxes imposed on or asserted against the properties, income or operations of the Company, or for which the Company may otherwise be liable, for all Pre-Closing Periods; it being understood that, with respect to any obligation of the Sellers pursuant to this Section 8.7, such obligation with respect to each Seller shall be limited to such Seller's Remedy Percentage. A Purchaser Indemnitee shall promptly give the Sellers written notice of all Taxes, losses, claims and expenses which such Purchaser Indemnitee has reasonably determined may give rise to a right of indemnification under this Section 8.7, including a computation of the amount of the claimed indemnification with sufficient detail and particularity to enable the Sellers to reasonably determine the amount of such required indemnification. Section 8.8 Tax Controversies. Notwithstanding any other provision of this Agreement regarding third party claims to the contrary, this Section 8.8 shall solely control the procedures with respect to inquiries, claims, assessments, audits or similar events with respect to Taxes of the Company (a "Tax Matter"). The Purchaser shall promptly notify the Sellers upon receipt by the Purchaser of written notice of any Tax Matter relating to Pre-Closing Periods for which the Sellers may be liable under this Agreement. The Purchaser shall have the authority to represent the interests of the Company with respect to any Tax Matter before the Internal Revenue Service, any other taxing authority, any other governmental agency or authority or any court and shall have the sole right to control the defense, compromise or other resolution of any Tax Matter, including responding to inquiries, filing Returns and contesting, defending against and resolving any assessment for additional Taxes or notices of Tax deficiency or other adjustment of Taxes of, or relating to, a Tax Matter; provided, however, that the Purchaser shall not enter into any settlement or otherwise compromise any Tax Matter that affects the Tax liability of the Sellers or the Company for any taxable period ending prior to or ending on and including the Closing Date without the prior written consent of the Sellers, which consent shall not be unreasonably withheld or delayed. The Purchaser shall keep the Sellers fully and timely informed with respect to the commencement, status and nature of any Tax Matter. ARTICLE 9 CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER Section 9. Conditions to the Purchaser's Obligations. The obligations of the Purchaser to purchase the Stock on the Closing Date is subject to the satisfaction, at or prior to the Closing, of the following conditions: Section 9.1 Truth of Representations and Warranties. The representations and warranties of the Sellers contained in this Agreement and on the Schedules shall be true and correct in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date, and the Purchaser shall have received a certificate signed by each Seller, dated the Closing Date, to such effect. 35 Section 9.2 Performance of Agreements. All of the agreements of the Sellers to be performed prior to the Closing pursuant to the terms of this Agreement shall have been duly performed in all material respects, and the Purchaser shall have received a certificate signed by each Seller, dated the Closing Date, to such effect. Section 9.3 No Material Adverse Change. Since September 30, 2000, there shall have been no material adverse change in the business, properties, assets, liabilities, results of operations, condition (financial or otherwise), prospects, customer relationships or supplier relation ships of the Company and the Purchaser shall have received a certificate duly executed by each Seller, dated the Closing Date, to such effect. Section 9.4 No Litigation Threatened. No action or proceedings shall have been instituted or threatened before a court or other government body or by any public authority to restrain or prohibit any of the transactions contemplated hereby, and the Purchaser shall have received a certificate signed by each Seller, dated the Closing Date, to such effect. Section 9.5 Good Standing and Other Certificates. The Sellers shall have delivered to the Purchaser (a) copies of the certificate of incorporation or other organizational documents of the Company, including all amendments thereto, in each case certified by the Secretary of State or other appropriate official of the jurisdiction of organization, (b) certificates from the Secretary of State or other appropriate official of the relevant jurisdiction of organization of the Company to the effect that such entity, is in good standing or subsisting in such jurisdiction and listing all charter documents on file, (c) certificates from the Secretary of State or other appropriate official in each jurisdiction in which the character or location of the properties owned or leased by the Company or the nature of its business makes qualification to do business necessary, to the effect that the Company is in good standing in such jurisdictions, (d) a certificate as to the tax status of the Company from the appropriate officials in the jurisdiction of incorporation of such entity, and (e) a copy of the By-Laws of the Company, certified by the Secretary of such entity as being true and correct and in effect on the Closing Date. Section 9.6 Approvals and Consents. All other governmental and third-party consents, waivers and approvals, if any, disclosed on any Schedule or necessary to permit the consummation of the transactions contemplated by this Agreement shall have been received without the incurrence of any obligation or any payment by the Company in connection with obtaining such consent, waiver or approval. Section 9.7 Resignation of Directors. Each of David Shimmon, James E. Hawthorne, and Carter Wicks shall have resigned from his position as a director of the Company effective on the Closing Date. Section 9.8 Opinion of the Sellers' Counsel. Magnolia shall have furnished the Purchaser with an opinion of Doty Sundheim & Gilmore, a professional corporation, and Hawthorne Trust shall have furnished the Purchaser with an opinion of Farella, Braun & Martel, LLP and Ahrens & DeAngeli, p.l.l.c., with respect to the transactions contemplated hereby, dated the Closing Date, substantially in the form attached hereto as Exhibit D. 36 Section 9.9 Statutes. No statute, rule, regulation, executive order, decree or order of any kind shall have been enacted, entered, promulgated or enforced by any court or governmental authority which prohibits the consummation of the transactions contemplated by this Agreement or has the effect of making them illegal. Section 9.10 Transaction Documents. Each Transaction Document shall have been duly executed and delivered by the Sellers party thereto. Section 9.11 Seller Non-Compete Agreement. The Seller Non-Compete Agreement shall have been duly executed and delivered by James E. Hawthorne. ARTICLE 10 CONDITIONS TO THE OBLIGATIONS OF THE SELLERS Section 10. Conditions to the Obligations of the Sellers. The obligation of the Sellers to sell the Stock on the Closing Date is subject to satisfaction, at or prior to such date, of the following conditions: Section 10.1 Truth of Representations and Warranties. The representations and warranties of the Purchaser contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date, and the Sellers shall have received a certificate signed by an executive officer of the Purchaser, dated the Closing Date, to such effect. Section 10.2 Performance of Agreements. All of the agreements of the Purchaser to be performed prior to the Closing pursuant to the terms of this Agreement shall have been duly performed in all material respects, and the Sellers shall have received a certificate signed by an executive officer of the Purchaser, dated the Closing Date, to such effect. Section 10.3 Approvals and Consents. All other governmental and third-party consents, waivers and approvals, if any, necessary to permit the consummation of the transactions contemplated by this Agreement shall have been received without the incurrence of any obligation or any payment by the Company in connection with obtaining such consent, waiver or approval. Section 10.4 Opinion of the Purchaser's Counsel. The Purchaser shall have furnished the Sellers with an opinion of White & Case LLP with respect to the transactions contemplated hereby, dated the Closing Date, substantially in the form attached hereto as Exhibit E. ARTICLE 11 SURVIVAL OF REPRESENTATIONS: INDEMNIFICATION Section 11.1 Survival of Representations. (a) Except as set forth in paragraph (b) below, the representations and warranties of the Sellers and the Purchaser contained in this Agreement, the Schedules hereto or 37 in any certificate delivered pursuant hereto shall survive the purchase and sale of the Stock pursuant to this Agreement for a period of twelve (12) months after the Closing Date, Covenants shall survive in accordance with their respective terms. (b) The representations and warranties contained in Sections 3.1, 3.2, 3.22, 4.1, 4.2, 4.3, 5.1, 5.2, 5.3, 6.1 and 6.4 shall survive indefinitely. The representations and warranties contained in Sections 3.10, 3.16 and 3.23 shall survive until sixty (60) days after the expiration of the applicable statute of limitations period (after giving effect to any waivers and extensions thereof). Section 11.2 General Indemnification. (a) Subject to the limitations contained in Section 11.2(c) the Sellers, severally, agree to indemnify, defend and hold the Purchaser, its Affiliates and their respective Subsidiaries, officers, directors, employees, and agents (each, a "Purchaser Indemnitee" and, collectively, the "Purchaser Indemnitees") harmless on an after-tax basis from any damages, losses, liabilities, obligations, claims of any kind, interest or expenses (including, without limitation, reasonable attorneys' fees and expenses) (collectively, "Losses") suffered, incurred or paid as a result of (i) any breach by any of the Sellers of any of their covenants or agreements contained in this Agreement, (ii) the failure of any representation or warranty (other than a breach of Section 3.10 with respect to Taxes which shall be governed by Section 8.7) made by any of the Sellers in this Agreement to be true and correct in all respects as of the Closing Date, or (iii) the payment of any and all stay bonuses to any employee of the Company (including, without limitation, to David Hannigan, Mike Bower, Roger Chase and Sandra Lembke) granted on or prior to the Closing Date: it being understood that, with respect to any obligation of the Sellers pursuant to this Section 11.2 (other than with respect to any representation or warranty contained in Article IV with respect to Magnolia or Article V with respect to Hawthorne Trust, or any agreement or covenant which relates to one Seller only), such obligation with respect to each Seller shall be limited to such Seller's Remedy Percentage. (b) Purchaser will indemnify, defend and hold the Sellers and their respective affiliates. Subsidiaries. officers, directors, employees, and agents (each, a "Seller Indemnitee" and collectively, the "Seller Indemnitees") harmless on an after-tax basis from any Losses suffered, incurred or paid as a result of (i) any breach by Purchaser of any of its covenants or agreements contained in this Agreement or (ii) the failure of any representation or warranty made by the Purchaser in this Agreement to be true and correct in all respects as of the Closing Date. (c) Notwithstanding the provisions contained in Section 11.2(a), (i) the Sellers shall be required to indemnify, defend and hold harmless each Purchaser Indemnitee under Section 11.2(a)(ii) only if the aggregate amount of all Losses for which all Purchaser Indemnitees are otherwise entitled to seek indemnification under Section 11.E(a)(11) exceeds One Hundred Thousand Dollars ($100,000) (the "Basket Amount"), whereupon such Losses shall be indemnified pursuant to Section 11.2(a)(ii), including, for greater certainty, the Basket Amount, and (ii) the maximum aggregate indemnification liability of the Sellers to all Purchaser Indemnitees under Section 11.2(a)(ii) shall not exceed Two Million Seven Hundred Thousand Dollars ($2,700,000); provided, however, that the limitation on indemnification contained in this 38 Section 11.2(c) shall not apply to Losses which arise from (A) a breach of representations or warranties contained in Sections 3.1. 3.2, 3.10, 3.16, 3.22, 3.23, 4.1, 4.2, 4.3, 5.1, 5.2, 5.3 and the last sentence of Section 3.11 and (B) the occurrence of any events referenced in Section 11.2(a)(iii). (d) The obligations to indemnify and hold harmless pursuant to Section 11.2(a) shall survive the consummation of the transactions contemplated hereby for the relevant periods set forth in Section 11.1, except for claims for indemnification asserted prior to the end of such periods, which claims and the corresponding indemnity obligations shall survive until final resolution thereof. Section 11.3 Indemnification Procedure. (a) Within a reasonable period of time after the incurrence of any Losses by any Person entitled to indemnification pursuant to Section 11.2 hereof (an "Indemnified Party"), including, without limitation, any claim by a third party described in Section 11.5, which might give rise to indemnification hereunder, the Indemnified Party shall deliver to the party from which indemnification is sought (the "Indemnifying Party") a certificate in the form of Exhibit F (the "Certificate"), which Certificate shall: (i) state that the Indemnified Party has paid or properly accrued Losses or anticipates that it will incur liability for Losses for which such Indemnified Party is entitled to indemnification pursuant to this Agreement; (ii) specify in reasonable detail each individual item of Loss included in the amount so stated, the date such item was paid or properly accrued, the basis for any anticipated liability and the nature of the misrepresentation, breach of warranty, breach of covenant or claim to which each such item is related and the computation of the amount to which such Indemnified Party claims to be entitled hereunder, and (iii) be delivered to the Indemnified Party and, if applicable, the Escrow Agent. (b) In the event that the Indemnifying Party shall object to the indemnification of an Indemnified Party in respect of any claim or claims specified in any Certificate, the Indemnifying Party shall, within ten (10) days after receipt by the Indemnifying Pam, of such Certificate, deliver to the Indemnified Party a notice to such effect and the Indemnifying Party and the Indemnified Party shall, within the thirty (30) day period beginning on the date of receipt of such notice (determined in accordance with Section 13.5), attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims to which the Indemnifying Party shall have so objected. If the Indemnified Party and the Indemnifying Party shall succeed in reaching agreement on their respective rights with respect to any of such claims, the indemnified Party and the Indemnifying Party shall promptly prepare and sign a memorandum setting forth such agreement. Should the Indemnified Party and the Indemnifying Party be unable to agree as to any particular item or items or amount or amounts, then the Indemnified Party and the Indemnifying Party shall submit such dispute to a court of competent jurisdiction; provided, that the parties shall first submit such dispute to a mutually 39 agreed upon mediation service for a period of no longer than sixty (60) days. Should such dispute eventually be submitted to a court of competent jurisdiction, the party which receives a final judgment in such dispute shall be indemnified and held harmless for all reasonable attorney and consultant's fees or expenses by the other party. (c) Claims for Losses specified in any Certificate to which an Indemnifying Party shall not object in writing within ten (10) days after receipt of such Certificate, claims for Losses covered by a memorandum of agreement of the nature described in paragraph (b), claims for Losses the validity and amount of which have been the subject of judicial determination as described in paragraph (b) and claims for Losses the validity and amount of which shall have been the subject of a final judicial determination, or shall have been settled with the consent of the Indemnifying Party, as described in Section 11.5, are hereinafter referred to, collectively, as "Agreed Claims". Within ten (10) days of the determination of the amount of any Agreed Claims, the Indemnifying Party shall pay to the Indemnified Party (except in the case where a payment has been already effected pursuant to the Escrow Agreement for such Agreed Claims) an amount equal to the Agreed Claim by wire transfer in immediately available funds to the bank account or accounts designated by the Indemnified Party in a notice to the Indemnifying Party not less than two (2) business days prior to such payment. Section 11.4 Third Party Claims. If a claim by a third party is made against an Indemnified Party, and if such party intends to seek indemnity with respect thereto under this Article IX, such Indemnified Party shall promptly notify the Indemnifying Party and, if applicable, the Escrow Agent of such claims; provided that the failure to so notify shall not relieve the Indemnifying Party of its obligations hereunder, except to the extent that the Indemnifying Party is actually and materially prejudiced thereby. The Indemnifying Party shall have thirty (30) days after receipt of such notice to assume the conduct and control, through counsel reasonably acceptable to the Indemnified Party at the expense of the Indemnifying Party, of the settlement or defense thereof, and the Indemnified Party shall cooperate with it in connection therewith; provided that the Indemnifying Party shall not be entitled to assume control of such defense and shall pay the fees and expenses of counsel retained by the Indemnified Party if (i) the parties agree, reasonably and in good faith, that such third party claim would give rise to Losses which are more than twice the amount indemnifiable by such Indemnifying Party pursuant to this Article XI; (ii) the claim for indemnification relates to or arises in connection with any criminal proceeding, action, indictment, allegation or investigation: (iii) the claim seeks an injunction or equitable relief against the Indemnified Party; (iv) the Indemnified Party has been advised in writing by counsel that a reasonable likelihood exists of a conflict of interest between the Indemnifying Party and the Indemnified Party; or (v) upon petition by the Indemnified Party, the appropriate court rules that the Indemnifying Party failed or is failing to vigorously prosecute or defend such claim. Any Indemnified Party shall have the right to employ separate counsel in any such action o: claim and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the Indemnifying Party unless (x) the Indemnifying Party shall have failed, within a reasonable time after having been notified by the Indemnified Party of the existence of such claim as provided in the preceding sentence, to assume the defense of such claim, (y) the employment of such counsel has been specifically authorized in writing by the Indemnifying Party, which authorization shall not be unreasonably withheld, or (z) the named parties to any such action (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party and such Indemnified 40 Party shall have been advised in writing by such counsel that there may be one or more legal defenses available to the Indemnified Party which are not available to the Indemnifying Party, or available to the Indemnifying Party the assertion of which would be adverse to the interests of the Indemnified Party. So long as the Indemnifying Party is reasonably contesting any such claim in good faith, the Indemnified Party shall not pay or settle any such claim. Notwithstanding the foregoing, but subject to Section 8.3 hereof, the Indemnified Party shall have the right to pay or settle any such claim, provided that in such event it shall waive any right to indemnity therefor by the Indemnifying Party for such claim unless the Indemnifying Party shall have consented to such payment or settlement. If the Indemnifying Party does not notify the Indemnified Party within thirty (30) days after the receipt of the Indemnified Party's notice of a claim of indemnity hereunder that it elects to undertake the defense thereof, the Indemnified Party shall have the right to contest, settle or compromise the claim but shall not thereby waive any right to indemnity therefor pursuant to this Agreement. The Indemnifying Party shall not, except with the consent of the Indemnified Party, enter into any settlement that is not entirely indemnifiable by the Indemnifying Party pursuant to this Article XI and does not include as an unconditional term thereof the giving by the Person or Persons asserting such claim to all Indemnified Parties of an unconditional release from all liability with respect to such claim or consent to entry of any judgment. Notwithstanding any of the foregoing, in the event that the Indemnified Party is a Purchaser Indemnitee and it is reasonably foreseeable that the amount of any Loss to be incurred by the Indemnified Party with respect to any third party claim is more than twice the amount indemnifiable by any Indemnifying Party, the Indemnified Party shall be entitled to conduct and control the defense and/or settlement of any such claim without the consent of the Indemnifying Party. The Indemnifying Party and the Indemnified Party shall cooperate with each other in all reasonable respects in connection with the defense of any claim including making available records relating to such claim and furnishing, without expense to the Indemnifying Party and/or its counsel, such employees of the Indemnified Party as may be reasonably necessary for the preparation of the defense of any such claim or for testimony as witnesses in any proceeding relating to such claim. ARTICLE 12 TERMINATION AND ABANDONMENT Section 12.1 Termination. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing: (a) by mutual consent of the Sellers and the Purchaser; (b) by the Sellers or by the Purchaser if the Closing shall not have occurred by March 31, 2001; provided that the right to terminate this Agreement under this Section 12.1(b) shall not be available to any party whose failure to fulfill any covenant, obligation or agreement under this Agreement shall be the cause of the failure of the Closing to occur on or before such date; (c) (i) by the Sellers, if there has been a material breach of any covenant or a material breach of any representation or warranty on the part of the Purchaser or (ii) by the Purchaser, if there has been a material breach of any covenant or a material breach of 41 any representation or warranty on the part of either Seller, provided that any such breach of a covenant or representation or warranty has not been cured within ten (10) business days following receipt by the breaching party of written notice of such breach; and (d) by the Sellers or by the Purchaser, if any law or regulation of any competent authority shall be enacted that renders illegal or otherwise permanently prohibits consummation of the transactions contemplated hereby or, if any judgment, injunction, order or decree of any competent authority that renders illegal or otherwise permanently prohibits the transactions contemplated hereby is entered and such judgment, injunction, order or decree shall become final and nonappealable. (e) If any party becomes aware of facts or circumstances that would entitle such party to terminate this Agreement pursuant to this Section 12.1, such party shall immediately notify the other parties of such facts and circumstances. Notwithstanding any other provisions of this Agreement, if rectifiable, such notified party shall have five (5) business days in which to rectify such facts or circumstances and the notifying party shall not be entitled to terminate this Agreement if such facts or circumstances are so rectified. Section 12.2 Effect of Termination. In the event of the termination of this Agreement pursuant to Section 12.1 by the Purchaser, on the one hand, or the Sellers, on the other hand, Written notice thereof shall forthwith be given to the other party specifying the provision hereof pursuant to which such termination is made, and this Agreement shall be terminated and, subject to the immediately succeeding sentence, there shall be no liability hereunder on the part of the Purchaser or either Seller, except that the provisions of Sections 13.1, 13.2, 13.4, 13.5, 13.12 and 13.13 shall survive any termination of this Agreement. Nothing in this Section 12.2 shall relieve any party of liability for breach of this Agreement; provided, however, that neither the Purchaser nor any of the Sellers shall be entitled to claim, and each hereby expressly waives any right to, any consequential, punitive or other special damages. ARTICLE 13 MISCELLANEOUS Section 13.1 Expenses. The parties hereto shall pay all of their own expenses relating to the transactions contemplated by this Agreement, including, without limitation, the fees and expenses of their respective counsel and financial advisors; provided that the Company may pay all the fees and expenses of Sellers' counsel and financial advisors, but only in the event that all liabilities with respect to such fees and expenses are paid in full prior to the Closing Date. Section 13.2 Governing Law. This Agreement, and the legal relations between the parties hereto, shall be governed by and construed in accordance with the laws of the State of California applicable to agreements executed and to be performed solely within such State. Section 13.3 Captions. The Article and Section captions used herein are for reference purposes only, and shall not in any way affect the meaning or interpretation of this Agreement. Section 13.4 Publicity. None of the parties hereto shall, and the Sellers shall not authorize or permit the Company to, issue any press releases nor (except for such disclosure to 42 such party's parent, as applicable, or officers, attorneys, consultants, accountants and other agents who are involved in the transactions contemplated hereby) otherwise disclose any details of the transactions contemplated hereby without all of the other parties' prior written consent, except as may be required by law. Except as set forth in the immediately preceding sentence, none of the parties will notify its employees (except to the extent reasonably necessary to enable those employees to assist the parties in the performance of their obligations hereunder) or the media prior to the joint approval of a press release on a mutually agreed upon date of any details of this contemplated transaction. To the extent that any such disclosure is required by law, the disclosing party will provide the other party with written notice of such required disclosure no less than three (3) business days prior to such disclosure and the other party will review and approve the proposed disclosure, which approval will not be unreasonably withheld. Section 13.5 Notices. All notices and other communications under this Agreement shall be in writing and shall be deemed given (i) when delivered by hand, (ii) when transmitted by telecopier (with confirmation), provided that a copy is sent at about the same time by registered mail, return receipt requested, (iii) one business day after mailed, if sent by Express Mail, Fed Ex, or other nationally recognized express delivery service, or (iv) three days after mailed, if sent by registered or certified mail, return receipt requested, to the addressee at the following addresses or telecopier numbers (or to such other address or telecopier number as a party may specify by notice given to the other party pursuant to this provision): If to the Purchaser, to: Kinetics Electronics Management, Inc. 2805 Mission College Blvd. Santa Clara, CA 95054 Fax: (408) 567-0196 Attention: General Counsel with copies to (which shall not constitute notice): DB Capital Partners, Inc. One Market Plaza Steuart Tower, Suite 2400 San Francisco, CA 94105 Fax: (415) 217-4288 Attention: Jeff Ott Steven Dollinger and Behrman Capital Four Embarcadero Center, Suite 3640 San Francisco, CA 94111 Fax: (415) 434-7310 Attention: Greg Chiate 43 if to Magnolia, to: Magnolia Tree, LLC 13463 Mandoli Drive Los Altos Hills, CA 94022 Attention: David Shimmon with a copy to (which shall not constitute notice): Doty Sundheim & Gilmore 260 Sheridan Avenue, Suite 200 Palo Alto, CA 94306 Fax: (650) 327-0101 Attention: Rodney C. Gilmore, Esq. if to Hawthorne Trust, to James E. Hawthorne, as Trustee of the James and Roberta Hawthorne Family Trust U/T/A dated August 31, 1999 620 Price Avenue Redwood City, CA 94063 Fax: (650) 364-4138 with a copy to (which shall not constitute notice): Farella Braun & Martel Russ Building, 30th Floor 235 Montgomery Street San Francisco, CA 94104 Fax: (415) 954-4480 Attention: Matthew Lewis, Esq. or to such other Person as shall be designated in writing by any such party. Section 13.6 Parties in Interest. This Agreement may not be transferred, assigned, pledged or hypothecated by any party hereto, other than by operation of law, provided that the Purchaser may, at any time, assign its rights under this Agreement to any of its Affiliates, and am such Affiliate shall thereupon assume all of the Purchaser's obligations hereunder, so long as the Purchaser remains primarily liable for its obligations hereunder and, provided, further, that the Purchaser may, at any time, and without the prior consent of any other party hereto, assign its rights under this Agreement to its and its Subsidiaries' financing sources by way of security, to any Person appointed to enforce such security or any Person in connection with such enforcement. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns. Section 13.7 Counterparts. This Agreement may be executed in two or more counterparts. all of which taken together shall constitute one instrument. 44 Section 13.8 Entire Agreement. This Agreement, including the other documents entered into in connection herewith and all Schedules attached hereto, contains the entire understanding of the parties hereto with respect to the subject matter contained herein and therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. Section 13.9 Amendments. This Agreement may not be changed, amended, waived, or modified orally, but only by an agreement in writing signed by the Purchaser and the Sellers. Section 13.10 Severability. In case any provision in this Agreement shall be held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof will not in any way be affected or impaired thereby. Section 13.11 Third Party Beneficiaries. Except as expressly provided in Section 11.2, each party hereto intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any Person other than the parties hereto. Section 13.12 Submission to Jurisdiction; Waiver of Jury Trial. The Sellers and the Purchaser hereby submit to the jurisdiction of the State and Federal courts located within the State of California for purposes of all legal proceedings which may arise hereunder or under any of the other documents entered into in connection herewith. The Sellers and the Purchaser irrevocably waive, to the fullest extent permitted by law, any objection which he/it may have or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. THE SELLERS AND THE PURCHASER HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER DOCUMENTS ENTERED INTO IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR STATEMENTS (WHETHER VERBAL OR WRITTEN), OF THE PURCHASER OR ANY SELLER. Section 13.13 Schedules. Any cross-reference in a Schedule attached hereto to another Schedule attached hereto shall be deemed to incorporate any matter set forth in such other Schedule to the extent such matter relates on its face to such cross-referenced matter. Section 13.14 Gender. All pronouns and all variations thereof shall be deemed to refer to the masculine, feminine, or neuter, singular or plural, as the context so requires. Section 13.15 Attorneys' Fees. If any litigation, arbitration or other proceeding be commenced between the parties concerning the rights or obligations of the parties under this Agreement, the party prevailing in such proceeding shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for its attorneys' fees in such proceeding. This amount shall be determined by the court, arbitrator or other applicable person in such proceeding or in a separate action brought for that purpose. 45 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and near first above written. KINETICS ELECTRONICS MANAGEMENT, INC. By: /s/ John Ferron ------------------------------------- Name: John Ferron Title: Chief Financial Officer MAGNOLIA TREE, LLC By: /s/ David J. Shimmon ------------------------------------- Name: David J. Shimmon Title: Manager JAMES E. HAWTHORNE, AS TRUSTEE OF THE JAMES AND ROBERTA HAWTHORNE FAMILY TRUST U/T/A DATED AUGUST 31, 1999 By: /s/ James E. Hawthorne ------------------------------------- Name: James E. Hawthorne Title: Trustee 1 EXHIBITS Exhibit A Escrow Agreement Exhibit B Seller Non-Compete Agreement Exhibit C Stock Repurchase and Earnout Agreement Exhibit D Opinion Letters of Sellers' Counsel Exhibit E Opinion Letter of Purchaser's Counsel Exhibit F Certificate SCHEDULES Schedule 3.2 Ownership Interests in Other Persons Schedule 3.6 Leases and Owned Real Property Schedule 3.7 Material Contracts Schedule 3.8 Consents and Approvals; Violations Schedule 3.9 Litigation Schedule 3.10(b) Payment of Taxes Schedule 3.10(c)(i) Audits/Examinations Schedule 3.10(c)(ii) Other Tax Matters Schedule 3.10(c)(iii) Consolidated, Unitary or Combined Returns Schedule 3.10(c)(viii) Tax Sharing, Allocation, Indemnification or Similar Agreements Schedule 3.11 Liabilities Schedule 3.12 Insurance Schedule 3.13 Intellectual Properties Schedule 3.14 Accounts Receivable, Material Write-offs/Material Adverse Change Schedule 3.15 Employment Relations Schedule 3.16(a) Employee Benefit Plans Schedule 3.18 Interests in Clients/Suppliers Schedule 3.19 Bank Accounts, Powers of Attorney and Compensation of Employees Schedule 3.20 Changes Schedule 3.23 Environmental Laws and Regulations Schedule 3.24 Customers Schedule 4.2 Ownership of Stock Schedule 4.4 Violations Schedule 5.2 Ownership of Stock Schedule 5.4 Violations Schedule 6.2 Conflicts 1 Exhibit A See Escrow Agreement Attached ESCROW AGREEMENT This ESCROW AGREEMENT is dated as of February 28, 2001 (this "AGREEMENT"), by and among Kinetics Electronics Management, Inc., a California corporation (the "PURCHASER"), Magnolia Tree, LLC, a Delaware limited liability company ("MAGNOLIA"), James E. Hawthorne, as trustee of The James and Roberta Hawthorne Family Trust U/T/A dated August 31, 1999, ("HAWTHORNE TRUST" and, collectively and together with Magnolia, the "SELLERS" and each, a "SELLER") and Chase Manhattan Trust Company, National Association (the "ESCROW AGENT"). W I T N E S S E T H: WHEREAS, as of the date hereof, the Purchaser has acquired control of Marchi Associates, Inc. (d/b/a Marchi Systems, Inc.), a California corporation, pursuant to a Stock Purchase Agreement, dated as of the date hereof, by and among the Purchaser, Magnolia and Hawthorne Trust (the "STOCK PURCHASE AGREEMENT"); WHEREAS, the Stock Purchase Agreement contains (i) certain representations, warranties, covenants and agreements on the part of the Sellers and certain rights on the part of the Purchaser to be indemnified with respect to a breach thereof, and (ii) a purchase price adjustment mechanism; WHEREAS, the Stock Purchase Agreement provides that the Sellers shall deposit into escrow with the Escrow Agent an amount equal to the Escrow Amount, to (i) secure the obligations of the Sellers to indemnify and hold the Purchaser harmless from and against certain Taxes described in Section 8.7 and certain Losses described in Section 11.2 of the Stock Purchase Agreement with respect to any breach by either Seller of any of their respective covenants or agreements or the failure of any representation or warranty of either Seller contained in the Stock Purchase Agreement, and (ii) satisfy the obligations of the Sellers, if any, which may arise upon determination of the Closing Date Working Capital pursuant to Section 2.3(c)(i) of the Stock Purchase Agreement; and WHEREAS, the parties hereto have agreed upon and wish to set forth herein the terms and conditions of this Agreement with respect to the Escrow Fund (as defined herein) to be held by the Escrow Agent. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Purchaser, each Seller, and the Escrow Agent hereby covenant and agree as follows: 1. Definitions. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in the Stock Purchase Agreement. 1 2. Escrow Agent. The Purchaser and the Sellers hereby designate and appoint the Escrow Agent to serve in accordance with the terms, conditions and provisions of this Agreement. The Escrow Agent hereby agrees to act as escrow agent in accordance with the terms, conditions and provisions of this Agreement. 3. Escrow Fund. Pursuant to Section 2.2(b) of the Stock Purchase Agreement, the Sellers hereby deposit into escrow with the Escrow Agent the Escrow Shares (such shares, collectively and together with any distributions thereon, the "ESCROW FUND"). Upon such deposit, all certificates representing such shares of Kinetics Class A Common Stock and Kinetics Class B Common Stock shall be accompanied by stock powers duly executed in blank by the appropriate Seller. For all purposes of determining the value of all or any portion of the Escrow Fund, each share of Kinetics Class A Common Stock and Kinetics Class B Common Stock shall be valued at $3.00. All shares of Kinetics Class A Common Stock and Kinetics Class B Common Stock held by the Escrow Agent pursuant to this Agreement shall constitute trust property for the purposes for which they are held. 4. Liabilities Secured by Escrow Fund. The Escrow Fund shall, subject to the terms and conditions of this Agreement, be held as security for the obligations of the Sellers (i) to indemnify and hold the Purchaser harmless against and in respect of which the Purchaser is indemnified under the provisions of Section 8.7 or, as the case may be, 11.2 of the Stock Purchase Agreement and (ii) which may arise upon determination of the Closing Date Working Capital pursuant to Section 2.3(c)(i) of the Stock Purchase Agreement. 5. Claims. (a) If (i) at any time or from time to time prior to the Termination Date (as defined in Section 7 hereof) the Purchaser determines that it has a claim for Taxes or Losses against the Escrow Fund in respect of the indemnification obligations of either Seller set forth in Section 8.7 or, as the case may be, 11.2 of the Stock Purchase Agreement with respect to the breach by either Seller of any of their respective covenants or agreements or the failure of any representation or warranty of either Seller contained in the Stock Purchase Agreement, or (ii) pursuant to Section 2.3(c)(i) of the Stock Purchase Agreement, the Closing Date Working Capital is less than the amount of the Estimated Working Capital, the Purchaser shall deliver to the Escrow Agent a certificate (the "CERTIFICATE"), which Certificate shall: (x) in the case of Section 5(a)(i) above, be the Certificate described in Section 11.3 of the Stock Purchase Agreement; or (y) in the case of Section 5(a)(ii) above, (A) state the amount by which the Closing Date Working Capital amount is less than the Estimated Working Capital amount and be substantially in the form attached hereto as Schedule 1, and (B) include the statement of Closing Date Working Capital or, as the case may be, the documentation reflecting the final decision of the Arbitrator pursuant to Section 2.3(b)(ii)(y) of the Stock Purchase Agreement; and shall be sent by certified mail, postage prepaid, with a copy of such certificate to both Sellers and shall state the date on which it was sent to each Seller. 2 (b) If, within ten (10) business days after receiving the applicable certificate described in either of clause (x) or clause (y) of Section 5(a) above (such certificate being referred to, for purposes of this Section 5(b) and Section 5(c), as the "CLAIM CERTIFICATE"), the Purchaser and the Escrow Agent shall not have received from the Sellers a written statement denying the existence of all or any part of the Taxes, Losses or, as the case may be, the amount described in such Claim Certificate (such amount, the "CLAIMED AMOUNT"), then the Purchaser may instruct the Escrow Agent in writing to deliver to the Purchaser so much of the Escrow Fund as may be available and as may be necessary in order to pay the Claimed Amount in full, and the Escrow Agent shall promptly follow such instructions. If within ten (10) business days after the sending of the Claim Certificate, the Purchaser and the Escrow Agent shall have received from either Seller a written statement denying all or a portion of the Claimed Amount, then the Purchaser may order the Escrow Agent in writing to deliver to the Purchaser so much of the Escrow Fund as may be available and as may be necessary to pay any portion of the Claimed Amount that is not disputed, and the Escrow Agent shall promptly follow such instructions. (c) If the Purchaser has not delivered to the Escrow Agent a Claim Certificate (and no Claim Certificates are pending) on or prior to the Termination Date (as defined below), then the Escrow Agent shall automatically and without further instructions from the Sellers or the Purchaser promptly release the remaining Escrow Shares to the Sellers. 6. Resolution of Losses and Contribution Claims in Dispute. In the event that a Seller denies all or a portion of (i) any Taxes or Losses described in Section 8.7 or, as the case may be, 11.2 of the Stock Purchase Agreement within the time and in the manner specified in Section 5 hereof, the portion of such Taxes or, as the case may be, Losses in dispute shall be resolved as provided in Section 11.3(b) of the Stock Purchase Agreement or (ii) the amount by which the Estimated Working Capital exceeds the Closing Date Working Capital, the amount in dispute shall be resolved as provided in Section 2.3(b) of the Stock Purchase Agreement. If the Purchaser and the Sellers reach agreement on the disputed portion of the Taxes, losses or, as the case may be, Claimed Amount, the Purchaser and the Sellers shall jointly notify the Escrow Agent thereof and instruct the Escrow Agent in writing to deliver to the Purchaser so much of the Escrow Fund as may be available and as may be necessary to pay the amount of such Taxes, Losses or, as the case may be, Claimed Amount or portion thereof that the Purchaser and the Sellers agreed to be justified, and the Escrow Agent shall promptly follow such instructions. If, in the case of clause (i) of this Section 6, a court determines by final, non-appealable judgment or non-appealable order that all or a portion of such Taxes or, as the case may be, Losses are payable to the Purchaser pursuant to the terms of the Stock Purchase Agreement, the Purchaser may notify the Escrow Agent thereof, with a certified copy of such judgment or order and a certificate from the Purchaser that such judgment or order is final and non-appealable, and may instruct the Escrow Agent in writing to deliver to the Purchaser so much of the Escrow Fund as may be available and as may be necessary to pay the amount of such Taxes or, as the case may be, Losses or portion thereof that such court decided to be justified and the Escrow Agent shall promptly follow such instructions. 7. Release of Escrow Amount: Termination. (a) On the date upon which the Sellers satisfy their obligations, if any, pursuant to Section 2.3(c)(i) of the Stock Purchase Agreement (such date being, the "INITIAL 3 ESCROW FUND RELEASE DATE"), the Escrow Agent shall release the remaining Working Capital Escrow Shares to the Sellers as follows: (i) the remaining Magnolia Working Capital Escrow Shares to Magnolia; and (ii) the remaining Hawthorne Working Capital Escrow Shares to Hawthorne Trust. (b) Following the Initial Escrow Fund Release Date and upon the earlier to occur of (i) the date that is twelve (12) months after the date hereof (the "TERMINATION DATE") and (ii) termination of this Agreement pursuant to Section 10 hereof, the Escrow Agent shall transfer, assign, deliver and pay over to Magnolia and Hawthorne Trust the remaining Magnolia Indemnity Escrow Shares and Hawthorne Indemnity Escrow Shares, respectively, remaining in the Escrow Fund. In the event that, on the Termination Date, there are claims for Taxes or, as the case may be, Losses outstanding which have not been satisfied in full during such period because such claims for Taxes or, as the case may be, Losses are in dispute pursuant to Sections 5 or, as the case may be, 6 hereof, then the Escrow Agent shall retain an amount sufficient to satisfy any such Taxes or, as the case may be, Losses in full and shall transfer the balance of the Escrow Fund to the Sellers. 8. Fees and Expenses. Each of the Purchaser and the Sellers agree to pay the Escrow Agent 50% of the fees set forth on Schedule 2 hereto (incorporated herein by reference). Each of the Purchaser and the Sellers further agree to reimburse the Escrow Agent an amount equal to 50% of any expenses, including reasonable counsel fees and expenses which it may incur in acting hereunder, and the Escrow Agent's claim therefor shall constitute a first lien against the Escrow Fund. 9. Responsibilities of the Escrow Agent. The acceptance by the Escrow Agent of its duties under this Agreement is subject to the following terms and conditions, which the parties to this Agreement hereby agree shall govern and control with respect to such Escrow Agent's rights, duties, liabilities and immunities: (a) The Escrow Agent shall act hereunder as depository only, and it shall not be responsible or liable in any manner whatsoever for the sufficiency of any amount deposited with it. The duties and responsibilities of the Escrow Agent hereunder shall be determined solely by the express provisions of this Agreement, and no further duties or responsibilities shall be implied. Except for the defined terms in the Stock Purchase Agreement, the Escrow Agent shall have not have any liability under, nor duty to inquire into the terms and provisions of any agreements or instructions, other than outlined in this Agreement. (b) The Escrow Agent shall be protected in acting upon any written notice, request, waiver, consent, receipt or other paper or document furnished to it, not only as to its due execution and the validity and effectiveness of its provisions but also as to the truth and acceptability of any information therein contained, which it in good faith believes to be genuine and what it purports to be. 4 (c) The Escrow Agent shall not be liable for any error of judgment, or for any act done or step taken or omitted by it, or for any mistake of fact or law or for anything which it may do or refrain from doing in connection herewith, except for fraud, gross negligence, willful misconduct or for any action taken or omitted in bad faith that a court of competent jurisdiction determines was the primary cause of a loss to the Purchaser or the Sellers. The Escrow Agent shall not incur any liability for following the instructions herein contained or expressly provided for, or written instructions given by both parties hereto. The Purchaser and the Sellers, jointly and severally, covenant and agree to indemnify and hold the Escrow Agent and its directors, officers, agents and employees (collectively, the "INDEMNITEES") harmless from and against any and all liabilities, losses, damages, fines, suits, actions, demands, penalties, costs and expenses, including out-of-pocket, incidental expenses, legal fees and expenses, the allocated costs and expenses of in-house counsel and legal staff and the costs and expenses of defending or preparing to defend against any claim ("DAMAGES") that may be imposed on, incurred by, or asserted against, the Indemnitees or any of them for following any instruction or direction upon which the Escrow Agent is authorized to rely pursuant to the terms of this Agreement. In addition to and not in limitation of the immediately preceding sentence, the Purchaser and the Sellers, jointly and severally, also covenant and agree to indemnify and hold the Indemnitees and each of them harmless from and against any Damages that may be imposed on, incurred by, or asserted against the Indemnitees or any of them in connection with or arising out of the Escrow Agent's performance under this Agreement, provided the Escrow Agent has not acted with fraud, gross negligence or bad faith or engaged in willful misconduct. The provisions of this Section 9(c) shall survive the termination of this Agreement and the resignation or removal of the Escrow Agent for any reason. Anything in this Agreement to the contrary notwithstanding, in no event shall the Escrow Agent be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Escrow Agent has been advised of such loss or damage and regardless of the form of action. (d) In the administration of this Agreement and the Escrow Fund hereunder, the Escrow Agent may consult with counsel or accountants to be selected and retained by it. The Escrow Agent shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the advice or opinion of any such counsel or accountant. (e) The Escrow Agent shall have no duties except those which are expressly set forth herein, and it shall not be bound by any notice of a claim, or demand with respect thereto, or any waiver, modification, amendment, termination or rescission of this Agreement, unless in writing received by it. (f) The Escrow Agent may resign at any time by giving written notice thereof to the Purchaser and the Sellers, but such resignation shall not become effective until a successor Escrow Agent mutually agreed to by the Purchaser and the Sellers shall have been appointed and shall have accepted such appointment in writing. If an instrument of acceptance by a successor Escrow Agent shall not have been delivered to the Escrow Agent within thirty (30) days after the giving of such notice of resignation, the resigning Escrow Agent may, at the joint and several expense of the Purchaser and the Sellers, petition any court of competent jurisdiction for the appointment of a successor Escrow Agent. The Escrow Agent shall have the right to withhold an amount from the Escrow Fund equal to the amount due and owing to the Escrow Agent, plus any costs and expenses the Escrow Agent shall reasonably believe may be incurred by the Escrow 5 Agent in connection with the appointment of a successor Escrow Agent. Any corporation or association into which the Escrow Agent in its individual capacity may be merged or converted or with which it may be consolidated, or any corporation or association resulting from any merger, conversion or consolidation to which the Escrow Agent in its individual capacity shall be a party, or any corporation or association to which all or substantially all of the corporate trust business of the Escrow Agent in its individual capacity may be sold or otherwise transferred, shall be the Escrow Agent under this Agreement without further act. 10. Amendment and Termination. This Agreement may be amended or terminated by and upon written notice to the Escrow Agent at any time given jointly by Purchaser and the Sellers, but the duties or responsibilities of the Escrow Agent may not be amended or modified without its consent. 11. Notices. All notices and other communications under this Agreement shall be in writing and shall be deemed given (1) when delivered by hand, (ii) when transmitted by telecopier (with confirmation), provided that a copy is sent at about the same time by registered mail, return receipt requested. (iii) one business day after mailed, if sent by Express Mail, Fed Ex. or other nationally recognized express delivery service, or (iv) three days after mailed, if sent by registered or certified mail, return receipt requested. to the addressee at the following addresses or telecopier numbers (or to such other address or telecopier number as a party may specify by notice given to the other party pursuant to this provision): if to the Purchaser, to: Kinetics Electronics Management, Inc. 2805 Mission College Blvd. Santa Clara, CA 95054 Fax: (408) 567-0196 Attention: General Counsel with copies to (which shall not constitute notice): DB Capital Partners, Inc. One Market Plaza Steuart Tower, Suite 2400 San Francisco, CA 94105 Fax: (415) 217-4288 Attention: Jeff Ott Steve Dollinger and Behrman Capital Four Embarcadero Center, Suite 3640 San Francisco, CA 94111 Fax: (415) 434-7310 Attention: Greg Chiate if to Magnolia, to: 6 Magnolia Tree, LLC 13463 Mandoli Drive Los Altos, CA 94022 Fax: N/A Attention: David J. Shimmon with a copy to (which shall not constitute notice): Doty Sundheim & Gilmore 260 Sheridan Avenue, Suite 200 Palo Alto, CA 94306 Fax: (650) 327-0101 Attention: Rodney C. Gilmore, Esq. if to Hawthorne Trust, to James E. Hawthorne as Trustee of the James and Roberta Hawthorne Family Trust U/T/A dated August 31, 1999 620 Price Avenue Redwood City, Ca 94063 Fax: (650) 364-4138 with a copy to (which shall not constitute notice): Farella Braun & Martel Russ Building, 30th Floor 235 Montgomery Street San Francisco, CA 94104 Fax: (415) 954-4480 Attention: Matthew Lewis, Esq. if to the Escrow Agent, to: Chase Manhattan Trust Company, N.A. One Oxford Centre, Suite 1100 301 Grant Street Pittsburgh, PA 15219 Attention: Douglas Wilson Fax: (412) 291-2070 or to such other Person as shall be designated in writing by any such party. 12. Parties in Interest. This Agreement shall be binding upon and inure to the benefit of the Sellers, the Purchaser and the Escrow Agent and their respective successors and permitted assigns. 13. Assignment. Neither Seller may assign its respective obligations hereunder: the Purchaser may assign its rights under this Agreement to any Person, including, without limitation. to its or any of its Subsidiaries' financing sources by way of security, to any Person appointed to enforce such security or any Person in connection with such enforcement. 7 14. Execution by Escrow Agent. The execution of this Agreement by the Escrow Agent shall evidence its acceptance and agreement to the terms hereof. 15. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAW OF THE STATE OF CALIFORNIA. 8 IN WITNESS WHEREOF, the parties hereunto have duly caused this Agreement to be executed as of the date first above written. KINETICS ELECTRONICS MANAGEMENT, INC. By: ------------------------------------- Name: Title: MAGNOLIA TREE, LLC By: ------------------------------------- Name: Title: JAMES E. HAWTHORNE AS TRUSTEE OF THE JAMES AND ROBERTA HAWTHORNE FAMILY TRUST U/T/A DATED AUGUST 31, 1999 By: ------------------------------------- Name: Title: 9 CHASE MANHATTAN TRUST COMPANY, NATIONAL ASSOCIATION, as Escrow Agent By: ------------------------------------- Name: Title: SCHEDULE 1 LETTERHEAD OF KINETICS ELECTRONICS MANAGEMENT, INC. [date] Chase Manhattan Trust Company, National Association [Address] Attention: ________________________________ Dear Sirs: With reference to the Stock Purchase Agreement, dated as of February [28], 2001, by and among Kinetics Electronics Management, Inc., Magnolia Tree, LLC and James E. Hawthorne, as Trustee of The James and Roberta Hawthorne Family Trust U/T/A dated August 31, 1999, and the Escrow Agreement dated as of February [28], 2001, by and among Kinetics Electronics Management, Inc., Magnolia Tree, LLC, James E. Hawthorne, as Trustee of The James and Roberta Hawthorne Family Trust U/T/A dated August 31, 1999, and Chase Manhattan Trust Company, National Association, as Escrow Agent, we hereby claim the following amount: [INSERT ANY AMOUNT DUE AND OWING TO THE PURCHASER UNDER SECTION 2.3(c)(i) OF THE STOCK PURCHASE AGREEMENT] Capitalized terms used herein shall have the meaning given to such terms in the Stock Purchase Agreement. Very truly yours, Kinetics Electronics Management, Inc. By: ------------------------------------- Name: Title: cc: [Magnolia] [Hawthorne Trust] SCHEDULE 2 FEES Annual Fee: $3,000 One-time Escrow Agent Review Fee: $1,000 6% Out-of-Pocket Annual Charge: $ 240 ------ Total $2,240 Exhibit B See Seller Non-Competition Agreement Attached SELLER NON-COMPETITION AGREEMENT This SELLER NON-COMPETITION AGREEMENT, is dated as of February 28, 2001 (this "Agreement"), by and between Kinetics Electronics Management, Inc., a California corporation (collectively with its Subsidiaries and Affiliates, the "Company"), and James E. Hawthorne, an individual resident in the State of California ("Seller"). WITNESSETH: WHEREAS, as of the date hereof, the Company has acquired control of Marchi Associates, Inc. (d/b/a Marchi Systems, Inc.), a California corporation ("Marchi"), pursuant to a Stock Purchase Agreement dated as of the date hereof (the "Stock Purchase Agreement") by and among the Company, James E. Hawthorne, as Trustee of The James and Roberta Hawthorne Family Trust U/T/A dated August 31, 1999 ("Hawthorne Trust"), and the other stockholder of Marchi; WHEREAS, Seller, having served in his capacity as an executive employee of Marchi, has had since 1993 significant managerial responsibility for the operations and business affairs of Marchi in such capacity and will remain an executive employee of Marchi subsequent to the consummation of the transactions contemplated by the Stock Purchase Agreement; WHEREAS, Hawthorne Trust will receive significant consideration by reason of the consummation of the transactions contemplated by the Stock Purchase Agreement and the Stock Repurchase and Earnout Agreement, dated as of the date hereof (the "Stock Repurchase and Earnout Agreement"), by and between the Company and Hawthorne Trust; WHEREAS, Seller is a beneficiary of, and is the duly appointed and presently acting Trustee of, Hawthorne Trust; WHEREAS, the Company will be engaged in a number of businesses in numerous jurisdictions throughout North America, Europe, Asia and Australia; WHEREAS, as a result of his affiliations with Marchi, Seller has had, and continues to have, complete access to all confidential and proprietary information concerning the business and operations of the Company; WHEREAS, Seller has developed, and continues to develop, numerous personal contacts with customers, suppliers, and other business relations of the Company which are of great value to the Company, and, as a result of such contacts and relations, Seller is capable of utilizing such nonpublic, confidential and proprietary information, and personal contacts to compete with the Company and could cause great economic damage to the Company thereby; WHEREAS, the Company and Seller are entering into this Agreement for the purpose of preserving the proprietary rights, going concern value and goodwill of the Company for the benefit of the Company by ensuring that Seller does not use any of such nonpublic, confidential, and proprietary information nor personal contacts for the period hereinafter set forth; and WHEREAS, the execution and delivery of this Agreement by Seller is a condition precedent to consummation of the transactions contemplated by the Stock Purchase Agreement. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Seller hereby covenant and agree as follows: 16. Definitions. In addition to the other terms defined elsewhere in this Agreement, unless the context shall expressly or by necessary implication indicate to the contrary, the following terms, as used herein, shall have the following meanings: (a) "Affiliate" shall mean, with respect to any specified Person, (i) any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person or (ii) any Person known by such specified Person to be related to such Person by blood or marriage. (b) "Person" shall mean any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity. (c) "Restricted Period" shall mean the period commencing on the date on which Seller's employment by Marchi is terminated (the "Commencement Date") and ending on the date that is four (4) years following the Commencement Date. (d) "Subsidiaries" shall mean, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock then entitled to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of such Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of such Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or control the sole managing director, manager or general partner of any such limited liability company, partnership, association or other business entity. 17. Non-Competition. The Seller agrees that, during the Restricted Period, he shall not directly or indirectly own, operate, manage, control, participate in, consult with, advise, 2 provide services for, or in any manner engage in any business (including by himself or in association with any person, firm, corporate or other business organization or through any other entity) in competition with any business within the United States or any other geographical area (collectively, the "Geographical Area") in which the Company engages in during the employment of the Seller by the Company (such existing business (which the Company acknowledges and agrees is currently the manufacturing of thermocouples, heaters and sensors for the semiconductor capital equipment industry), the "Lines of Business"). Nothing herein shall prohibit the Seller from being a passive owner of not more than 2% of the outstanding stock of a corporation which is publicly traded, so long as the Seller has no active participation in the business of such corporation. 18. No Solicitation. During the Restricted Period, the Seller shall not, directly or indirectly through another entity, (i) induce or attempt to induce any employee of the Company to leave the employ of the Company, or in any way interfere with the relationship between the Company and any employee thereof; including without limitation, inducing or attempting to induce any union, employee or group of employees to interfere with the business or operations of the Company, (ii) hire any person who was an employee of the Company at any time during the Seller's employment period, or (iii) induce or attempt to induce any customer, supplier, distributor, franchisee, licensee or other business relation of the Company to cease doing business with the Company, or in any way interfere with the relationship between any such customer, supplier, distributor, franchisee, licensee or business relation and the Company. Notwithstanding anything to the contrary in this Section 3, the Seller may (i) provide general advertisements and notices and (ii) respond to unsolicited inquiries from employees, customers or suppliers of the Company; provided, that the Seller does not employ any current or former employee of the Company within two (2) years from the Commencement Date. 19. Inventions, etc. Seller agrees to promptly disclose to the Company all ideas, formulae. programs, systems, devices, processes, business concepts, discoveries and inventions (hereinafter referred to collectively as "discoveries"), whether or not patentable, which he conceived, made, developed, acquired or reduced to practice, whether alone or with others and whether during or after usual working hours, and which are related to the Company's business or interests of the Company and are or have been used by the Company at any time during the two-year period prior to the Commencement Date; provided, however, that "discoveries" shall not include any invention that Seller developed entirely on his own without using the Company's equipment, supplies, facilities or trade secret information, unless that invention, at the time of conception or reduction to practice relates to the business of the Company, to actual or demonstrably anticipated research or development of the Company or results from work performed by Seller for the Company. Seller hereby transfers and assigns to the Company all of Seller's right, title, and interest in and to all "discoveries," including any and all domestic and foreign patent rights therein and any renewals thereof, it being understood that any and all such "discoveries" shall be owned solely by and be the exclusive property of the Company. Upon the request of the Company, Seller shall from time to time during or after the expiration or termination of his employment, execute such further reasonable instruments and do all such other reasonable and legal acts and things as may be deemed necessary or desirable by the Company to protect and/or enforce its rights in respect of the "discoveries". At the Company's request and expense, Seller will assist the Company during the period of the 3 employment of Seller with the Company and thereafter in connection with any controversy or legal proceeding relating to the "discoveries". All expense of filing or prosecuting any patent application shall be borne by the Company, but Seller shall cooperate in filing and/or prosecuting any such application. Seller shall receive no additional compensation for the performance of his obligations hereunder, except as may be agreed to in writing by the Company. 20. Confidentiality. (a) All information about the business and affairs of the Company acquired by Seller prior to or after the date hereof (other than information which is generally available to the public, except as a result of a breach by any Person known by Seller to have any confidentiality obligation to the Company), including, without limitation, its secrets and information about its business, financial conditions, prospects, products, technology, know-how, merchandising and advertising programs and plans, and the names of its suppliers, customers, and lenders and the nature of its dealings with such suppliers, customers and lenders as such dealings may exist from time to time, which Seller has obtained, or which has been disclosed to him as a result of his duties performed in his capacity as president of Marchi, or his past association with or employment by the Company, constitute "Company Confidential Information". Seller acknowledges that he has had and will have access to, and knowledge of, Company Confidential Information, and that improper use or revelation of same by Seller, whether during or after the expiration of his term as an employee of the Company, could cause serious injury to the business of the Company. Accordingly, Seller agrees that, except as required to perform his duties under this Agreement or with the prior written permission of the Company or as required by law, for the period ending at the end of the Restricted Period, he will (i) not use any Company Confidential Information, (ii) keep secret and inviolate all Company Confidential Information which shall come into his possession, and (iii) not disclose the same to any other Person for so long as such Company Confidential Information is not generally known by, or accessible to, the public. This Section 5 shall not be violated by Seller through disclosure of information which (i) at the time of disclosure is publicly available through no act or omission by either Seller or any Affiliate of Seller, (ii) is disclosed pursuant to a court order or as otherwise required by law and upon the written advice of counsel, on condition that, to the extent permitted by applicable law, notice of the requirement for such disclosure is given to the Board of Directors of the Company prior to Seller making or permitting any such disclosure and that Seller and his Affiliates cooperate in such manner as the Company may reasonably request, at the Company's expense, in resisting such disclosure, or (iii) is reasonably necessary in the course of performing his duties as an employee of the Company. Seller further agrees that, for the period ending at the end of the Restricted Period, he will not use any Company Confidential Information for his own benefit or directly or indirectly for the benefit of any Person other than the Company. Seller acknowledges that any copyrightable subject matter created by Seller within the scope of his employment, whether containing or involving Company Confidential Information or not, is deemed a "workmade-for-hire" under the U.S. Copyright Act of 1976, as amended, and the Company shall be deemed the sole author and owner thereof for any purposes whatsoever. To the extent any such copyrightable subject matter is not considered a "work-made-for-hire", all right, title and interest (including all renewal rights) in such copyrightable subject matter is hereby deemed assigned by Seller to the Company. Seller agrees to take all actions (including, without limitation, filing appropriate forms) requested by the Company, at the Company's expense, in order to secure the right, title and interest of the Company in such copyrightable 4 subject matter. In the event of any unauthorized publication of any Company Confidential Information, the Company shall automatically own the copyright in such publication. (b) Seller acknowledges that the operation and conduct of the business of Marchi is special and unique and involves the use of trade secrets and confidential information and that during the period of his employment with Marchi, Seller has acquired and will acquire special knowledge and/or skill that he could effectively utilize in competition with the Company. Seller further acknowledges that the provisions of Sections 4 and 5 hereof are essential to the goodwill and profitability of the Company and have provided substantial inducement to the Company to execute and consummate the transactions contemplated by the Stock Purchase Agreement, and that the application or operation thereof shall not involve a substantial hardship upon his future business or livelihood. (c) All files, records, correspondence, memoranda, notes or other documents (including, without limitation, those in computer-readable form) or property belonging to Marchi, whether prepared by Seller or otherwise coming into his possession in the course of his performance of his duties as an employee of Marchi or under any other employment or consulting agreement with Marchi, shall be promptly surrendered to the Company and not retained by the Seller (including, without limitation, any copies thereof) upon his termination as an employee or consultant of the Company for any reason whatsoever; provided, that Seller may retain a copy of all records relating to Seller's personnel file. (d) The Company and Seller shall, and shall cause their Affiliates and representatives to. treat this Agreement confidentially. Any publication or other public release of this Agreement shall be subject to the mutual written approval of the Company and Seller; provided, however, that this Section 5(d) shall not apply to the publication or other public release of this Agreement if required by law or by any rules of any stock exchange, in which case the releasing party shall, to the extent practicable, consult the non-releasing party in good faith in advance concerning the content of the release. 21. No Disparagement. During the Restricted Period, the Seller shall not take any action to disparage or criticize to any third parties any of the products or services of the Company. 22. Representations and Warranties of Seller. Seller represents and warrants to the Company that: (i) Seller has all legal capacity to enter into this Agreement and to perform his obligations hereunder; (ii) this Agreement has been duly executed and delivered by Seller; (iii) this Agreement constitutes the valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether the issue of enforceability is considered in a proceeding in equity or at law); and (iv) none of the execution, delivery and performance of this Agreement by Seller (x) violates any law, rule, regulation or order of any court or governmental authority with jurisdiction or oversight with respect to Seller, (y) results in any breach of any provision of, or default under, any material agreement or instrument to which Seller is a party or (z) requires Seller to obtain any consent, authorization or approval from any governmental authority or other person. Notwithstanding anything to the 5 contrary in this Section 7, the Seller makes no representation whatsoever in clause (iii) of the immediately preceding sentence with respect to the enforceability of the scope and duration of the non-competition provisions of this Agreement. 23. Remedies. Seller acknowledges and agrees that any breach or threatened breach of this Agreement will cause irreparable harm to the Company and cannot be remedied solely by the recovery of damages. Therefore, in the event of a breach or threatened breach by either Seller or an Affiliate of Seller of Sections 2, 3, 4, 5 or 6 of this Agreement, the Company shall, in addition to any other remedies it may have at law or in equity (including without limitation damages or action for accounting or restitution) be entitled to equitable relief (without being required to post a bond or other undertaking or to prove actual damage) in the form of an injunction and/or restraining order by the courts enumerated in Section 12 hereof. Any and all such remedies shall be cumulative and the election of any remedy, at law or in equity, by the Company shall not be to the exclusion of any other remedy then available to the Company. 24. Judicial Amendments; Severability. The parties hereto agree and intend that the covenants contained in this Agreement shall be construed as a series of separate covenants, and each such separate covenant shall be deemed identical in terms. It is expressly understood and agreed that, although the Company and Seller consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving for the Company's benefit the proprietary rights, going concern value and goodwill of the Company, whenever possible, each provision. term, and covenant of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision, term or covenant of this Agreement, including any of the separate covenants of this Agreement, shall be held to be prohibited by or invalid under such applicable law, then such provision, term or covenant shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or affecting in any manner whatsoever the remainder of such provision, term or covenant or the remaining provisions, terms or covenants of this Agreement; provided that if a court having competent jurisdiction shall find that any covenant contained in this Agreement is not reasonable, such court shall have the power to reduce the duration and/or geographic area and/or scope of such covenant, and the covenant shall be enforceable in such reduced form. Upon determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. 25. Assignment. The rights and obligations of the Company hereunder shall inure to the benefit of, and be binding upon, its successors and assigns. Seller may not assign his obligations hereunder; the Company may, at any time, assign its rights under this Agreement to any Person including, without limitation, to its or any of its Subsidiaries' financing sources by way of security, to any Person appointed to enforce such security or any Person in connection with such enforcement. 26. Notices. All notices and other communications under this Agreement shall be in writing and shall be deemed given (i) when delivered by hand, (ii) when transmitted by telecopier (with confirmation), provided that a copy is sent at about the same time by registered mail, return receipt requested, (iii) one business day after mailed, if sent by Express Mail, 6 Fed-Ex. or other nationally recognized express delivery service, or (iv) three days after mailed, if sent by registered or certified mail, return receipt requested, to the addressee at the following addresses or telecopier numbers (or to such other address or telecopier number as a party may specify by notice given to the other party pursuant to this provision): if to Company, to: Kinetics Electronics Management, Inc. 2805 Mission College Blvd. Santa Clara, CA 95054 Fax: (408) 567-0196 Attention: General Counsel with copies to (which shall not constitute notice): DB Capital Partners, Inc. One Market Plaza Steuart Tower, Suite 2400 San Francisco, CA 94105 Fax: (415) 217-4288 Attention: Jeff Ott Steven Dollinger and: Behrman Capital Four Embarcadero Center, Suite 3640 San Francisco, CA 94111 Fax: (415) 434-7310 Attention: Greg Chiate if to Seller to: James E. Hawthorne 620 Price Avenue Redwood City, CA 94063 Fax: (650) 364-4138 with a copy to (which shall not constitute notice): Farella Braun & Martel Russ Building, 30th Floor 235 Montgomery Street San Francisco, CA 94104 7 Fax: (415) 954-4480 Attention: Matthew Lewis, Esq. or to such other Person as shall be designated in writing by any such party. 27. General. (a) The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. (b) This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, between the parties relating to the subject matter hereof, with the exception of the Stock Purchase Agreement and the other agreements and transactions contemplated therein to which Seller is a party. (c) This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived, only by a written instrument executed by both parties hereto or, in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right of such party at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach. or a waiver of the breach of any other term or covenant contained in this Agreement. (d) This Agreement may be executed in counterparts. each of which shall be deemed to be an original instrument, but all of which taken together shall constitute one agreement. (e) This Agreement, and the legal relations between the parties hereto, shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements executed and to be performed solely within such state. (f) Submission to Jurisdiction, Waiver of Jury Trial. The Company and Seller hereby submit to the jurisdiction of the State and Federal courts located within the State of California for purposes of all legal proceedings which may arise hereunder or under any of the other documents entered into in connection herewith. The Company and Seller irrevocably waive, to the fullest extent permitted by law, any objection which he/it may have or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. THE COMPANY AND SELLER HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER DOCUMENTS ENTERED INTO IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF 8 DEALING, OR STATEMENTS (WHETHER VERBAL OR WRITTEN), OF THE COMPANY OR SELLER. 28. Importance of this Agreement. It is understood by and between the Company and Seller that the provisions of Sections 2, 3, 4, 5 and 6 of this Agreement are an essential element of the Company's agreement to consummate the transactions contemplated by the Stock Purchase Agreement and the Stock Repurchase and Earnout Agreement and that, but for this Agreement, the Company would not have entered into nor consummated the Stock Purchase Agreement or the Stock Repurchase and Earnout Agreement. * * * * * IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. KINETICS ELECTRONICS MANAGEMENT, INC. By: ------------------------------------- Name: Title: JAMES E. HAWTHORNE ---------------------------------------- James E. Hawthorne, Seller 9 Exhibit C See Stock Repurchase and Earnout Agreement Attached STOCK REPURCHASE AND EARNOUT AGREEMENT This STOCK REPURCHASE AND EARNOUT AGREEMENT is dated as of February 28, 2001 (this "Agreement"), by and between Kinetics Electronics Management, Inc., a California corporation (the "Company"), James E. Hawthorne, as Trustee of The James and Roberta Hawthorne Family Trust U/T/A dated August 31, 1999 ("Hawthorne Trust"), Kinetics Group, Inc., a Delaware corporation (with respect solely to Section 16 of this Agreement) and Kinetics Holdings Corporation, a Delaware corporation (with respect solely to Section 17 of this Agreement). Capitalized terms used and not otherwise defined herein shall have the respective meaning assigned to such terms in the Stock Purchase Agreement (as defined below). W I T N E S S E T H: WHEREAS, as of the date hereof, the Company has acquired control of Marchi Associates, Inc. (d/b/a Marchi Systems, Inc.), a California corporation ("Marchi"), pursuant to a Stock Purchase Agreement, dated as of the date hereof (the "Stock Purchase Agreement"), by and among the Company, Hawthorne Trust and the other stockholder of Marchi; WHEREAS, in connection with the transactions contemplated by the Stock Purchase Agreement, James E. Hawthorne (the "Executive") will continue his employment with Marchi, in the role of President; WHEREAS, the Executive is a beneficiary of, and is the duly appointed and presently acting trustee of, Hawthorne Trust; and WHEREAS, as of the date hereof Hawthorne Trust is the lawful owner, beneficially and of record, of 133,333 shares of Kinetics Class A Common Stock and 1,200,000 shares of Kinetics Class B Common Stock. NOW, THEREFORE, for and in consideration of the premises and of the mutual representations, warranties, covenants and agreements contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and upon the terra and subject to the conditions hereinafter set forth, the parties do hereby agree as follows: 1. Definitions. In addition to the other terms defined elsewhere in this Agreement, the following terms, as used herein, shall have the following meanings: "Auditor" shall mean Ernst & Young. "Board" shall mean the Board of Directors of the Company. 1 "Cause" shall mean (i) the Executive's conviction (or pleading guilty or nolo contendere) (A) for fraud, misappropriation, embezzlement or for any other crime involving dishonesty or for any felony involving moral turpitude or (B) for any felony which is reasonably likely to result in a material loss or damage to the reputation of Marchi or KGI, (ii) the failure by Executive to perform his duties with, or comply with the directives of the Board of Directors of, Marchi or KGI, other than any such failure resulting from Executive's death or Disability, which failure is not cured within thirty (30) days after receipt of a written demand delivered to Executive by the Board, which demand specifically identifies the manner in which the Board believes that Executive has not performed his duties, or (iii) gross negligence by the Executive in connection with or related to his employment with Marchi or KGI. "Change In Control" shall mean any transaction or series of related transactions as a result of which (i) any Third Party or "group" (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) of Third Parties becomes, directly or indirectly, a-beneficial owner" (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of more than fifty percent (50%) of the outstanding Kinetics Common Stock or, if and only if Executive is then employed by any Affiliate of KHC, the outstanding common stock of such Affiliate, (ii) KHC or, if and only if Executive is then employed by an Affiliate of KHC, such Affiliate (or any other Affiliate of KHC which, directly or indirectly, "controls" (as such term is defined in the definition of "Affiliate" contained in the Stock Purchase Agreement) such Affiliate) consolidates with or merges into or with any Person and after giving effect to such consolidation or merger any Third Party or "group" (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) of Third Parties owns, directly or indirectly, more than fifty percent (50%) of the outstanding voting securities of the Person surviving such consolidation or merger and, in the case of any Affiliate of KHC, more than fifty percent (50%) of the outstanding voting securities of the Affiliate employing the Executive, (iii) all or substantially all of the assets of KHC or, if and only if Executive is then employed by an Affiliate of KHC, such Affiliate are sold, leased, exchanged or otherwise transferred, directly or indirectly, as an entirety to any Third Party or "group" (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) of Third Parties, or (iv) less than half of the members of the Board of Directors of KHC shall be Continuing Directors. "Continuing Director" shall mean the directors of KHC on the date hereof and each other director if such director's nomination for election to the Board of Directors of KHC is recommended by a majority of the then Continuing Directors. "Disability" shall mean if as a result of the incapacity due to physical or mental illness. Executive is unable to perform the duties of his employment with Marchi or KGI (as determined by the Board) for a continuous period of 60 days or an aggregate of 90 days (whether or not consecutive) during any consecutive 120-day period. "EBITDA" shall mean with respect to Marchi (a) net income (or net loss) plus (b) the sum of (i) interest expense, (ii) income tax expense, (`ii) depreciation expense, (iv) amortization expense and (v) extraordinary or unusual losses deducted in calculating net income (or net loss) less (c) extraordinary or unusual gains added in calculating net income (or net loss), in each case, 2 of Marchi for the twelve months ending on September 30th of the fiscal year in question, in each case determined in accordance with GAAP consistent with past practice. "KGI" shall mean Kinetics Group, Inc., a Delaware corporation, and each of its Subsidiaries and Affiliates. "Kinetics Class A Common Stock" shall mean the shares of voting class A common stock, par value $0.01 per share, of Kinetics Holdings Corporation, a Delaware corporation ("KHC"), which for all purposes of this Agreement shall initially be valued at $3.00 per share. "Kinetics Class B Common Stock" shall mean the shares of nonvoting class B common stock, par value $0.01 per share, of KHC, which for all purposes of this Agreement shall initially be valued at $3.00 per share. "Kinetics Common Stock" shall mean the Kinetics Class A Common Stock and the Kinetics Class B Common Stock. "KHC" shall have the meaning assigned to such term in the definition of Kinetics Class A Common Stock. "Permitted Transferee" shall have the meaning set forth in the Shareholders Agreement, dated as of August 30, 2000, as amended, by and among Kinetics Holdings Corporation, a Delaware corporation, and the Stockholders listed therein. "Person" shall mean any individual, partnership, corporation, trust, unincorporated association or other entity which is recognized as having legal personality. "Purchased Shares" shall mean (i) all shares of Kinetics Common Stock transferred to Hawthorne Trust in connection with the transactions contemplated by that certain purchase agreement, dated as of February 28, 2001, by and between Hawthorne Trust and DB Capital Investors, L.P., a Delaware limited partnership, and (ii) all shares of Kinetics Common Stock issued with respect to the capital stock referred to in clause (i) above by way of stock dividend or stock split or in connection with any conversion, merger, consolidation or recapitalization or other reorganization affecting the capital stock. Purchased Shares may only be transferred by Hawthorne Trust to a Permitted Transferee and such transferred Purchased Shares shall continue to be Purchased Shares as defined herein, and each such Permitted Transferee shall become a party to this Agreement and succeed to the rights and obligations of Hawthorne Trust hereunder. so long as such Permitted Transferee remains a Permitted Transferee. Except as otherwise provided in this .Agreement, the Purchased Shares shall not be subject to any pledge, lien, mortgage, hypothecation, security interest, charge, option or other encumbrance whatsoever. "Shareholders Agreement" shall have the meaning assigned such term in the definition of Third Party. "Subsidiaries" shall mean, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock then entitled to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, 3 by such Person or one or more of the other Subsidiaries of such Person or a combination thereof; or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more Subsidiaries of such Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of limited liability company. partnership, association or other business entity gains or losses or shall be or control the sole managing director, manager or general partner of any such limited liability company, partnership, association or other business entity. "Termination Date" shall mean the date on which Executive's employment with Marchi or KGI is terminated. "Third Party" shall mean any Person who was not (i) a party to the Shareholders Agreement, dated as of August 30, 2000, by and among KHC and the stockholders party thereto (the "Shareholders Agreement") immediately after the date hereof or (ii) an Affiliate of any Person referenced in clause (i) of this definition of Third Party. 2. Option to Repurchase the Purchased Shares Upon Termination of Executive's Employment. (a) Repurchase of the Purchased Shares. If Executive's employment with Marchi or KGI shall terminate at any time prior to the date which is three (3) years from the date hereof as a result of either voluntary termination by the Executive or termination for Cause, then the Company or the Company's designee shall have the right, exercisable in the Company's sole discretion, by notice (the "Election Notice") to the Executive and/or any one or more Permitted Transferees at any time prior to the date which is three (3) years from the date hereof, to repurchase any or all of the amount of Purchased Shares set forth next to the corresponding time period on the table set forth below, whether held by Executive or by one or more Permitted Transferees at the price determined in accordance with the provisions of Section 3 hereof.

Percentage of Purchased Shares Time Period Subject to Repurchase ----------- ------------------------------ For the period beginning on the date hereof and 100% ending on and including the date which is one (1) year from the date hereof: For the period beginning on the date after the 75% hereof. date which is one (1) year from the date hereof and ending on and including the date which is two (2) years from the date For the period beginning on the date after the 50% date which is two (2) years from the date hereof and ending on and including the date

4 which is three (3) years from the date hereof: Anytime after the date which is three (3) years 0% from the date hereof: As shown by the table above, the amount of Purchased Shares subject to the Company's right of repurchase shall decrease each successive full year Executive remains employed by Marchi or KGI. Upon a Change In Control, the Company's repurchase rights shall be deemed to have been automatically terminated on the day immediately preceding the Change In Control without any further action required by Executive or the Company. (b) Closing of the Repurchase of Purchased Shares. In the event the Company elects to repurchase the Purchased Shares, the transaction for the purchase of the Purchased Shares by the Company pursuant to this Section 2 shall be consummated (the "Closing") on or before the thirtieth (30th) day following the date on which the Election Notice was given or deemed given (the "Closing Date"). The Closing shall take place at the Company's executive offices. The Election Notice shall set forth the date and time of the Closing as well as the proposed purchase price. At the Closing, the Company or its designee shall pay the Purchase Price (as defined below) in the manner specified in Section 3(c) and Hawthorne Trust or, as the case may be, one or more Permitted Transferees, shall deliver the certificate or certificates representing such Purchased Shares to the Company, or its nominee, free and clear of any liens or encumbrances and duly endorsed in blank for transfer or accompanied by duly executed stock powers. The Company or its designee shall not be entitled to receive representations and warranties from Hawthorne Trust or, as the case may be, any one or more Permitted Transferees, in connection with the purchase of such Purchased Shares other than representations and warranties with respect to Hawthorne Trust's or such Permitted Transferees' (i) valid ownership of the Purchased Shares free and clear of all liens and encumbrances and (ii) authority, capacity, power and right to enter into and consummate such sale without violation of its organizational documents any applicable law or any other agreement. 3. Purchase Price for Purchased Shares. (a) Purchase Price. The purchase price to be paid by the Company for the Purchased Shares pursuant to Section 2 shall be equal to the lesser of (i) $3.00 multiplied by the number of Purchased Shares, and (ii) the fair market value of the Purchased Shares as determined in good faith by the Board or as conclusively determined pursuant to Section 3(b) (the "Purchase Price"). (b) Objection to Purchase Price. (i) In the event that Hawthorns Trust does not object to the determination by the Board of the Purchase Price by written notice of objection (the "Notice of Objection") delivered to the Company within five (5) business days after Hawthorns Trust's receipt of the Election Notice, such Notice of Objection to describe in 5 reasonable detail Hawthorns Trust's proposed adjustment to the Purchase Price, the Purchase Price set forth in the Election Notice shall be deemed final and binding. (ii) If Hawthorns Trust delivers a Notice of Objection to the Company, then any dispute shall be resolved as follows: (x) Hawthorns Trust and the Company shall promptly endeavor to agree upon the Purchase Price. In the event that a written agreement determining the amount of the Purchase Price has not been reached within ten (10) business days after the date of receipt by the Company from Hawthorns Trust of the Notice of Objection thereto, then the Company's determination of the Purchase Price and Hawthorns Trust's determination of the Purchase Price shall be submitted to Arthur Andersen (the "Arbitrator"). Each of the Company and Hawthorns Trust shall have an opportunity to present to the Arbitrator and the other party its rationales and procedures for determining the Purchase Price. (y) Within ten (10) business days after each party has submitted its presentation to the Arbitrator regarding the determination of the Purchase Price, the Arbitrator shall select either the Purchase Price proposed by the Company or the Purchase Price proposed by Hawthorns Trust. The decision of the Arbitrator shall be final and binding upon each party hereto; provided, that the Company shall have five (5) business days after receipt of the Arbitrator's decision to notify Hawthorns Trust that the Company revokes its Election Notice and has decided not to exercise its option to repurchase granted hereunder. (z) In the event Hawthorns Trust and the Company submit their respective determinations of the Purchase Price to the Arbitrator for resolution, the party against whom the Arbitrator decides will be responsible for the fees and expenses of the Arbitrator. (c) Manner of Payment. The Company shall pay the Purchase Price (less any taxes or other charges required to be withheld pursuant to applicable law) in a lump sum cash payment on the Closing Date. The Company may pay the purchase price for such Purchased Shares by offsetting amounts outstanding under any indebtedness or obligations owed by Executive or, as the case may be, any Permitted Transferee, to the Company. In the event the Company intends to offset the Purchase Price, as set forth herein, the Company shall provide Executive or, as the case may be, any Permitted Transferee, with the amount and reason for the offset, in reasonable particularity, in writing at least ten (10) days prior to the Closing Date. 4. Earnout: Earnout Payment. (a) If any performance test outlined below is met, the Company shall pay or cause to be paid to Hawthorne Trust one of the following amounts (the "Earnout Amount"), in accordance with Section 4(c) hereof: (x) Four Million Dollars ($4,000,000), if the cumulative EBITDA of Marchi for the fiscal years ended September 30, 2001, September 30, 2002, and September 30, 2003, equals or exceeds Thirty Six Million Dollars ($36,000,000); or (y) Three Million Dollars ($3,000,000), if the cumulative EBITDA of Marchi for the fiscal years ended September 30, 2001, September 30, 2002, and September 30, 2003, equals or exceeds Thirty Two Million Dollars ($32,000,000); provided, that, Hawthorne Trust shall not be entitled to the Earnout Amount, if any, pursuant to this Section 4(a), if Executive's employment with Marchi or KGI shall have been 6 terminated at any time prior to the date which is three (3) years from the date hereof as a result of Executive's voluntary termination or termination for Cause. (b) (i) The Earnout Amount shall be determined by reference to a statement of EBITDA for each of the fiscal years ended September 30, 2001, September 30, 2002, and September 30, 2003 (collectively, the "EBITDA Statements'") prepared by the Auditor, which EBITDA Statements shall be based upon the results of operations of Marchi as reported in the consolidated financial statements of KGI (or one of its Affiliates, as the case may be) as audited by the Auditor with respect to such fiscal years and be consistent with the definition of "EBITDA" contained in this Agreement. In the event Hawthorne Trust does not object to the calculation of EBITDA contained in the EBITDA Statements prepared by the Auditor by written notice of objection to the Board (the "EBITDA Objection Notice") delivered to the Company within twenty (20) business days after Hawthorne Trust's receipt of the EBITDA Statements, such EBITDA Objection Notice to describe in reasonable detail Hawthorne Trust's proposed adjustment to the calculation of EBITDA contained in the EBITDA Statements, the EBITDA Statements shall be binding and conclusive upon and deemed to be accepted by the Company and Hawthorne Trust for purposes of determining the Earnout Amount, if any. (ii) Upon delivery of the EBITDA Objection Notice, Hawthorne Trust and its accountants (A) shall be permitted reasonable access to review the books and records and work papers related to the preparation of the EBITDA Statements and the consolidated financial statements of KGI (or one of its Affiliates, as the case may be) and (B) may make inquiries of the Company, KGI (or one of its Affiliates, as the case may be), and/or their respective accountants (including the Auditor) regarding questions or disagreements with any of the EBITDA Statements or consolidated financial statements of KGI (or one of its Affiliates, as the case may be) arising in the course of their review thereof. The Company and Hawthorne Trust shall use commercially reasonable efforts to resolve their differences, and if such differences are not resolved in writing within thirty (30) business days after Hawthorne Trust's delivery of the EBITDA Objection Notice to the Company, then such differences shall be referred to Arthur Andersen (the "Third-Party Accountant"). (iii) The Third-Party Accountant shall only consider those items actually in dispute between the parties and shall otherwise conduct its review and make its determination in accordance with GAAP and the provisions, definitions, terms and conditions of this Agreement. In making its determination, the Third-Party Accountant shall only adopt either the Auditor's or Hawthorne Trust's position on each disputed item. Within twenty (20) business days of the submission of any dispute to the Third-Party Accountant pursuant to this Section 4(b), the Third-Party Accountant shall render a decision in accordance with this Section 4(b), along with a statement of its reasons therefor and a calculation of EBITDA for each of the fiscal years ended September 30, 2001, September 30, 2002, and September 30, 2003 (the "Third-Party EBITDA Statements"). Each party shall provide the Third-Party Accountant with reasonable access to its books, records, work papers, accountants and employees prepared or use in connection with its respective calculation of EBITDA. The Third-Party EBITDA Statements shall be binding and conclusive upon and deemed to be accepted by the Company and Hawthorne Trust for purposes of determining the Earnout Amount, if any. 7 (iv) The fees and expenses of the Third-Party Accountant for any determination pursuant to this Section 4(b) shall be paid by (A) the Company, if the Third-Party EBITDA Statements create a different obligation of the Company with respect to the payment of the Earnout Amount, if any, pursuant to Section 4(a), as the EBITDA Statements would have created had no EBITDA Objection Notice been delivered by Hawthorne Trust and (B) Hawthorne Trust, if the Third-Party EBITDA Statements create the identical obligation of the Company with respect to the payment of the Earnout Amount, if any, pursuant to Section 4(a), as the EBITDA Statements would have created had no EBITDA Objection Notice been delivered by Hawthorne Trust. (c) The Company shall pay to Hawthorne Trust the Earnout Amount, if any, within fifteen (15) business days after the later of (x) the date on which the EBITDA Statements are conclusively determined pursuant to Section 4(b) and (y) the date which is three (3) years from the date hereof, by wire transfer of immediately available funds to an account designated by Hawthorne Trust at least three (3) business days prior to the date of payment. 5. Remedies. The parties hereto shall be entitled to enforce their rights under this Agreement specifically to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights existing in their favor. Hawthorne Trust acknowledges and agrees that money damages would not be an adequate remedy for any breach of its obligations under this Agreement and that the Company may, in its sole discretion, apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief (without posting bond or other security) in order to enforce or prevent any violation of the provisions of this Agreement. Any and all such remedies shall be cumulative, and the election of any remedy, at law or in equity, by the Company shall not be to the exclusion of any other remedy then available to the Company. 6. Amendment. Except as otherwise provided herein, any provision of this Agreement may be amended or waived only with the prior written consent of Hawthorne Trust and the Company. 7. Successors and Assigns. All covenants and agreements contained in this Agreement (including, without limitation, the obligation of the Company to pay the Earnout Amount, if any) by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and permitted assigns of the parties hereto whether so expressed or not. 8. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 9. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall constitute an original, but all of which taken together shall constitute one and the same Agreement. 8 10. Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 11. Governing Law. This Agreement, and the legal relations between the parties hereto, shall be governed by and construed in accordance with the laws of the State of California applicable to agreements executed and to be performed solely within such state. 12. Jurisdiction: Venue. The Company and Hawthorne Trust hereby submit to the jurisdiction of the State and Federal courts located within the State of California for purposes of all legal proceedings which may arise hereunder or under any of the other documents entered into in connection herewith. The Company and Hawthorne Trust- irrevocably waive, to the fullest extent permitted by law, any objection which he/it may have or hereafter have to the laving of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. THE COMPANY AND HAWTHORNE TRUST HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER DOCUMENTS ENTERED INTO IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR STATEMENTS (WHETHER VERBAL OR WRITTEN). OF THE COMPANY OR HAWTHORNE TRUST. 13. Notices. All notices and other communications under this Agreement shall be in writing and shall be deemed given (i) when delivered by hand, (ii) when transmitted by telecopier (with confirmation), provided that a copy is sent at about the same time by registered mail, return receipt requested, (iii) one business day after mailed, if sent by Express Mail, Fed Ex, or other nationally recognized express delivery service, or (iv) three days after mailed, if sent by registered or certified mail, return receipt requested, to the addressee at the following addresses or telecopier numbers (or to such other address or telecopier number as a party may specify by notice given to the other party pursuant to this provision): If to Hawthorne Trust, to: James E. Hawthorne, as Trustee of The James and Roberta Hawthorne Family Trust U/T/A dated August 31, 1999 620 Price Avenue Redwood City, CA 94063 Fax: (650) 364-4138 with a copy to (which shall not constitute notice): Farella Braun & Martel Russ Building, 30th Floor 235 Montgomery Street San Francisco, CA 94104 Fax: (415) 954-4480 9 Attention: Matthew Lewis, Esq. If to the Company, to: Kinetics Electronics Management, Inc. 2805 Mission College Blvd. Santa Clara, CA 95054 Fax: (408) 567-0196 Attention: General Counsel with copies to (which shall not constitute notice): DB Capital Partners, Inc. One Market Plaza Steuart Tower, Suite 2400 San Francisco, CA 94105 Fax: (415) 217-4288 Attention: Jeff Ott Steven Dollinger and: Behrman Capital Four Embarcadero Center, Suite 3640 San Francisco, CA 94111 Fax: (415) 434-7310 Attention: Greg Chiate or to such other address or to the attention of such other Person as the recipient party has specified by prior written notice pursuant to this Section 13 to the sending party. 14. Entire Agreement. This Agreement constitutes the entire understanding between Hawthorne Trust and the Company with respect to the subject matter hereof and supersedes all other agreements, whether written or oral, with respect to the subject matter hereof. 15. Effectiveness. This Agreement shall become effective upon the occurrence of the Closing, as such term is defined in the Stock Purchase Agreement. 16. KGI Guarantee. (a) KGI irrevocably and unconditionally guarantees the obligations of the Company under Section 4 of this Agreement. If the Company shall fail in any respect to fulfill any of such obligations, Hawthorne Trust shall be at liberty to act, and KGI shall be liable, as if KGI were the party principally bound by such obligations. (b) The guarantee contained in this Section 16 is a continuing guarantee and shall remain in force until all obligations of the Company pursuant to this Agreement, if any, have been fulfilled. (c) The obligations of KGI under this Section 16 shall not be affected by any act, omission matter or thing which, but for these provisions, might operate to release or 10 otherwise exonerate KGI from such obligations or affect such obligations, including and whether or not known to KGI: (i) any time, indulgence, waiver or consent at any time given to the Company or any other person; (ii) any compromise or release of, or abstention from perfecting or enforcing, any rights or remedies against the Company or any other person; (iii) any legal limitation, disability, incapacity or other circumstance relating to the Company or any person or any amendment or supplement to or variation of the terms of this Agreement; (iv) any irregularity, unenforceability or invalidity of any obligations of the Company under this Agreement or the dissolution, amalgamation, reconstruction or insolvency of the Company; or (v) any other circumstance whatsoever which may vary the risks of the Company or might otherwise constitute a legal or equitable discharge of a surety or guarantor. (d) The guarantee contained in this Section 16 may be enforced by Hawthorne Trust without first having to take any steps or proceedings against the Company or any other person. (e) With respect to the guarantee contained in this Section 16, KGI hereby waives all of its rights of subrogation, reimbursement, indemnification and contribution and any other rights and defenses that are or may become available to KGI by reason of Sections 2787 to 2855, inclusive, of the California Civil Code. KGI acknowledges that to the extent it has had any questions or concerns regarding the effect of the foregoing waivers, it has consulted its attorney and resolved all questions and concerns to its satisfaction. With respect to the guarantee contained in this Section 16, KGI waives all rights and defenses arising out of an election of remedies by Hawthorne Trust, even though that election of remedies, such as nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed KGI's rights of subrogation and reimbursement against the Company by the operation of Section 580d of the Code of Civil Procedure or otherwise follows: 17. KHC Matters. (a) KHC represents and warrants to Hawthorne Trust as (i) As of the date hereof, KHC has the authorized and issued capital stock set forth on Exhibit A hereto. Except as set forth on Exhibit A hereto, there are no outstanding (x) options, warrants or other rights to purchase Kinetics Common Stock, (y) agreements or other obligations of KHC to issue Kinetics Common Stock, or (z) other rights to convert any obligation into, or exchange any securities for, Kinetics Common Stock. (ii) Since September 30, 2000, there has been no material adverse change in the business, properties, assets, liabilities, results of operations, condition 11 (financial or otherwise), customer relationships or supplier relationships of KHC, and Hawthorne Trust shall have received a certificate duly executed by KHC, dated the Closing Date, to such effect. KHC makes no representations and expresses no opinion regarding the effect an industry or general economic slowdown or recession might have on the business, properties, assets, liabilities, results of operations, condition (financial or otherwise), customer relationships or supplier relationships of KHC, and Hawthorne Trust hereby agrees and acknowledges that such industry or general economic slowdown or recession shall not constitute a material adverse change for all purposes herein. (b) Notwithstanding any other provision of the Shareholders Agreement, in the event of a sale transaction pursuant to Section 2.5 of the Shareholders Agreement that for federal or California income tax purposes is deemed to have occurred on or before the first anniversary of the Closing Date (as such term is defined in the Stock Purchase Agreement), KHC shall indemnify, defend and hold harmless Hawthorne Trust, on an after tax basis, from any Tax Loss (as defined below) incurred by Hawthorne Trust solely as a result of such sale transaction. "Tax Loss" means (i) an amount equal to one-half of the excess of the tax actually payable by Hawthorne Trust at Hawthorne Trust's combined federal and California rates on such sale transaction over the tax that would have been actually payable by Hawthorne Trust at Hawthorne Trust's combined federal and California rates on such sale transaction had such sale transaction been deemed to have occurred immediately after the first anniversary of the Closing Date, and (ii) any losses, costs, liabilities and expenses, including reasonable attorney fees, incurred in connection with the enforcement of this indemnification provision. All amounts payable under this provision shall be payable free and clear of all taxes thereon save only as may be required by law. If any taxes are required by law to be paid by Hawthorne Trust on account of any amount received hereunder, Hawthorne Trust shall be paid such amount as will, after such taxes have been paid by Hawthorne Trust, leave Hawthorne Trust with the same amount as Hawthorne Trust would have been entitled to receive in the absence of any such requirement to pay tax on account of an amount payable hereunder. 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. KINETICS ELECTRONICS MANAGEMENT, INC. By: ------------------------------------- Name: Title: KINETICS GROUP, INC. (with respect solely to Section 16 of this Agreement) By: ------------------------------------- Name: Title: KINETICS HOLDINGS CORPORATION (with respect solely to Section 17 of this Agreement) By: ------------------------------------- Name: Title: JAMES E. HAWTHORNE, AS TRUSTEE OF THE JAMES AND ROBERTA HAWTHORNE FAMILY TRUST U/T/A DATED AUGUST 31, 1999 By: ------------------------------------- Name: Title: 13 EXHIBIT A Capitalization The authorized capital stock of KHC consists of 230,000,000 shares of Kinetics Class A Common Stock, par value $.01, of which shares 9,241,149 are issued and outstanding and 230,000,000 shares of Kinetics Class B Common Stock, par value $.01, of which shares 83,170,385 are issued and outstanding. The table below sets forth all of the outstanding options, warrants or other rights to purchase Kinetics Class A and Kinetics Class B Common Stock.

Warrants: Amount - --------- ------ Initial Warrants (Exercise Price - $3.00) Class A - 9,894,954 Class B - 89,054,586 Note Warrants (Exercise Price - $3.00) Class A - 715,009 Class B -- 6,435,085 Senior Subordinated Debt Warrants (Exercise Class A - 332,489 Price - $0.01) Class B -- 2,992,402 Options, others: Convertible Promissory Note (Conversion Price - Class A - 833,333 $3.00) Class B -- 7,500,000 Employee Participation Stock Options Up to 15% of the Issuer's total common equity (Exercise Price - $3.00)

1 -----END PRIVACY-ENHANCED MESSAGE-----

EX-2.02

                                                                    Exhibit 2.02

                              SEPARATION AGREEMENT


         This Separation Agreement ("AGREEMENT") is entered into effective as of
_________, 2002 by and between Celerity Group, Inc., a Delaware corporation (the
"COMPANY", formerly known as Kinetics Holdings Corporation), Kinetic Systems,
Inc., a California corporation ("KSI"), and Kinetics Biopharm, Inc., a Delaware
corporation ("KBI"). The Company, KSI and KBI are sometimes referred to herein
individually as a "PARTY" and collectively as the "PARTIES."



                                    RECITALS


         WHEREAS, KSI and KBI are direct or indirect wholly owned subsidiaries
         of the Company;

         WHEREAS, the Board of Directors of the Company has determined that it
is in the best interests of the Company and its stockholders to separate the
Company Business, the KSI Business and the KBI Business in connection with the
consummation of the Company's Initial Public Offering, by distributing to the
holders of the Company's Common Stock on a pro rata basis all of the shares of
KSI capital stock and KBI capital stock owned by the Company (the
"DISTRIBUTION") (capitalized terms having the meanings set forth below); and

         WHEREAS, it is appropriate and desirable to set forth the principal
corporate transactions and agreements required with respect to the Distribution
and the relationship of the parties and their respective subsidiaries following
such events.

         NOW, THEREFORE, in consideration of the foregoing premises and the
mutual agreements, provisions and covenants contained in this Agreement, the
parties hereby agree as follows:

ARTICLE I

                                   DEFINITIONS

         Section 1.1 Definitions. As used herein, the following terms have the
following meanings:

         "ACTION" means any claim, action, cause of action, suit, arbitration,
proceeding, inquiry or investigation by or before any court, arbitrator,
governmental or regulatory or administrative agency or commission, or any other
tribunal or other Governmental Authority.

         "AFFILIATE" of any specified Person means any other Person that,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with such specified Person.

         "AGREEMENT" has the meaning specified in the preamble hereto, as such
agreement may be amended from time to time.


                                       1



         "ANCILLARY AGREEMENTS" means the Confidential Disclosure Agreement, the
Employee Matters Agreement, the Management Services Agreement, the Tax Sharing
Agreement, and the Trademark License Agreement.

         "ASSIGNED ASSET" has the meaning set forth in Section 3.1.

         "ASSIGNED CONTRACTS" means the following contracts and agreements to
which an Assigning Party or its subsidiaries is a party or by which it or any of
its subsidiaries or their respective assets is bound, whether or not in writing,
except for any such contract or agreement that is to be retained by the
Assigning Party or its subsidiaries pursuant to any provision of this Agreement
or any Ancillary Agreement:

         (a) [all contracts or agreements listed or described on Schedule _____
(as such Schedule may be supplemented by mutual agreement of the parties hereto
after the date hereof and prior to the Distribution Date);]

         (b) any contracts or agreements entered into in the name of, or
expressly on behalf of, the Receiving Party or any of its subsidiaries;

         (c) any contract or agreement that relates exclusively to the Receiving
Party's Business;

         (d) any guarantee, indemnity, representation, warranty or other
Liability of a party in respect of any other contract, any Liability or the
Business of the Receiving Party; and

         (e) any contract or agreement that is otherwise expressly contemplated
pursuant to this Agreement or any of the Ancillary Agreements to be assigned to
the Receiving Party.

         "ASSIGNING PARTY" has the meaning set forth in Section 3.1.

         "CLOSING" means the initial sale of shares of Common Stock by the
Company to the Underwriters pursuant to the Initial Public Offering in
accordance with the terms of the Underwriting Agreement between the Company and
the Underwriters.

         "CLOSING DATE" means the time of the Closing.

         "CODE" means the Internal Revenue Code of 1986, as amended.

         "COMMISSION" means the Securities and Exchange Commission.

         "COMMON STOCK" means the common stock, par value $0.01 per share, of
the Company.

         "COMPANY BALANCE SHEET" means the audited balance sheet of the Company,
including the notes thereto, as of ____________, 2002.

         "COMPANY BUSINESS" means the business and operations of the Company and
its various divisions and subsidiaries engaged in the design and production of
high performance gas and


                                       2



chemical delivery modules for semiconductor fabrication, but excludes the KSI
Business and the KBI Business.

         "COMPANY GROUP" means the Company and each Person (other than KSI, KBI
and their respective subsidiaries and the LLC and its subsidiaries) that is an
Affiliate of the Company immediately after the Distribution Date.

         "COMPANY INDEMNITEES" has the meaning specified in Section 4.2.

         "COMPANY LIABILITIES" has the meaning specified in Section 3.2, but
shall exclude the KBI Liabilities and the KSI Liabilities.

         "CONFIDENTIAL DISCLOSURE AGREEMENT" means the Confidential Disclosure
Agreement dated the date hereof between the Company, KSI and KBI providing for
the confidential treatment of certain information, as such agreement may be
amended from time to time.

         "CONSENTS" means any consents, waivers or approvals from, or
notification requirements to, any third parties.

         "COVERED CLAIMS" means any claim that is of a type covered by insurance
or self insurance of the Company in effect on the Distribution Date and that is
a type of claim specified as a covered claim on Schedule 5.4(a).

          "DISTRIBUTION" has the meaning specified in the Recitals.

         "DISTRIBUTION DATE" means the date on which the Distribution shall be
consummated, which is contemplated to occur concurrent with the Closing.

         "EFFECTIVE TIME" means the time as of which the Registration Statement
is declared effective by the Commission.

         "EMPLOYEE MATTERS AGREEMENT" means the Employee Matters Agreement dated
the date hereof between the Company, KSI and KBI regarding certain employment
and benefits matters, as such agreement may be amended from time to time.

         "ENTITLED PARTY" has the meaning set forth in Section 3.3.

          "ESCALATION NOTICE" has the meaning set forth in Section 7.2.

         "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

         "EXCLUDED ASSETS" has the meaning set forth in Section 3.1(b).

         "EXCLUDED LIABILITIES" has the meaning set forth in Section 3.2(b).

         "GOVERNMENTAL APPROVALS" means any notices, reports or other filings to
be made, or any consents, registrations, approvals, permits or authorizations to
be obtained from, any Governmental Authority.


                                       3



         "GOVERNMENTAL AUTHORITY" means any federal, state, local, foreign or
international court, government, department, commission, board, bureau, agency,
official or other regulatory, administrative or governmental authority.

         "INDEMNIFIED PARTY" has the meaning set forth in Section 4.5(a).

         "INDEMNIFYING PARTY" has the meaning set forth in Section 4.5(a).

         "INITIAL PUBLIC OFFERING" means the Company's issuance of shares of
Common Stock to the public in an offering registered under the Securities Act.

         "INTELLECTUAL PROPERTY" means (a) inventions, whether or not
patentable, whether or not reduced to practice or whether or not yet made the
subject of a pending patent application or applications, (b) ideas and
conceptions of potentially patentable subject matter, including, without
limitation, any patent disclosures, whether or not reduced to practice and
whether or not yet made the subject of a pending patent application or
applications, (c) national (including the United States) and multinational
statutory invention registrations, patents, patent registrations and patent
applications (including all reissues, divisions, continuations,
continuations-in-part, extensions and reexaminations) and all rights therein
provided by multinational treaties or conventions and all improvements to the
inventions disclosed in each such registration, patent or application, (d)
trademarks, service marks, trade dress, logos, trade names and corporate names,
whether or not registered, including all common law rights, and registrations
and applications for registration thereof, including, but not limited to, all
marks registered in the United States Patent and Trademark Office, the Trademark
Offices of the States and Territories of the United States of America, and the
trademark offices of other nations throughout the world, and all rights therein
provided by multinational treaties or conventions, (e) copyrights (registered or
otherwise) and registrations and applications for registration thereof, and all
rights therein provided by multinational treaties or conventions, (f) moral
rights (including, without limitation, rights of paternity and integrity), and
waivers of such rights by others, (g) computer software, including, without
limitation, source code, operating systems and specifications, data, data bases,
files, documentation and other materials related thereto, data and
documentation, (h) trade secrets and confidential, technical or business
information (including ideas, formulas, compositions, inventions, and
conceptions of inventions whether patentable or unpatentable and whether or not
reduced to practice), (i) whether or not confidential, technology (including
know-how and show-how), manufacturing and production processes and techniques,
research and development information, drawings, specifications, designs, plans,
proposals, technical data, copyrightable works, financial, marketing and
business data, pricing and cost information, business and marketing plans and
customer and supplier lists and information, (j) copies and tangible embodiments
of all the foregoing, in whatever form or medium, (k) all rights to obtain and
rights to apply for patents, and to register trademarks and copyrights, and (1)
all rights to sue and recover and retain damages and costs and attorneys' fees
for present and past infringement of any of the Intellectual Property rights
hereinabove set out.

         "INVENTORY" means all inventory, merchandise, finished goods, and raw
materials, packaging, supplies, works-in-progress and other personal property
and any prepaid deposits for any of the same.


                                       4



         "KBI BALANCE SHEET" means the audited balance sheet of KBI, including
the notes thereto, as of ____________, 2002.

         "KBI BUSINESS" means the business and operations of KBI and KMS and
their respective divisions and subsidiaries engaged in the design, engineering
and construction of turnkey and design/build process systems for the
biotechnology and pharmaceutical industries.

          "KBI GROUP" means KBI and each Person (other than the Company and KSI
and their respective subsidiaries) that is an Affiliate of KBI immediately after
the Distribution Date.

         "KBI INDEMNITEES" has the meaning specified in Section 4.2.

         "KBI LIABILITIES" has the meaning set forth in Section 3.2.

         "KGI" means Kinetics Group, Inc., a Delaware corporation.

         "KMS" means Kinetics Modular Systems, Inc., a company chartered under
         the laws of Ontario, Canada.

         "KSI BALANCE SHEET" means the audited balance sheet of KSI, including
the notes thereto, as of ____________, 2002.

         "KSI BUSINESS" means the business and operations of KSI and KTS and
their respective divisions and subsidiaries engaged in the delivery of turnkey
high purity process systems, including the construction of high purity
installations and after-market operating services to the electronics and other
industries, but excluding the KBI Business.

          "KSI GROUP" means KSI and each Person (other than the Company and KBI
and their respective subsidiaries) that is an Affiliate of KSI immediately after
the Distribution Date.

         "KSI INDEMNITEES" has the meaning specified in Section 4.3.

         "KSI LIABILITIES" has the meaning set forth in Section 3.2.

         "KTS" means Kinetics Thermal Systems, Inc., a New York corporation.

         "LIABILITIES" means any and all losses, claims, charges, debts,
demands, Actions, causes of action, suits, damages, obligations, payments, costs
and expenses, accounts, bonds, indemnities and similar obligations, covenants,
contracts, agreements, promises, guarantees and other liabilities, including all
contractual obligations, whether absolute or contingent, matured or not matured,
liquidated or unliquidated, accrued or not accrued, known or unknown, whenever
arising, and including those arising under any law, rule, regulation, Action,
threatened or contemplated Action (including the costs and expenses of demands,
assessments, judgments, settlements and compromises relating thereto and
attorneys' fees and any and all costs and expenses (including allocated costs of
in-house counsel and other personnel), whatsoever reasonably incurred in
investigating, preparing or defending against any such Actions or threatened or
contemplated Actions), order or consent decree of any Governmental Authority or
any award of any arbitrator or mediator of any kind, and those arising under any
contract,


                                       5



commitment or undertaking, including those arising under this Agreement or any
Ancillary Agreement, in each case, whether or not recorded or reflected or
required to be recorded or reflected on the books and records or financial
statements of any Person.

         "LICENSED INTELLECTUAL PROPERTY" means all Intellectual Property
licensed or sublicensed from a third party.

         "LLC" means a limited liability corporation created and owned by the
Stockholders for the purpose of holding (directly or indirectly) all the
outstanding capital stock of KSI and KBI.

         "MANAGEMENT SERVICES AGREEMENT" means the Management Services Agreement
dated the date hereof between the Company, KSI and KBI regarding the provision
of certain services among the parties, as such agreement may be amended from
time to time.

         "MEDIATION DEMAND DATE" has the meaning set forth in Section 7.3.

         "MEDIATION DEMAND NOTICE" has the meaning set forth in Section 7.3.

         "MERGER" has the meaning set forth in Section 2.1.

         "NEW KSI CREDIT FACILITY" means the credit facility in the aggregate
commitment amount of $210,000,000 to be entered into by KSI and KBI, as
co-borrowers, and various lenders including the Bank of Nova Scotia as arranger
and administrative agent, the proceeds of which will be used to satisfy KSI's
obligations under the KSI Note.

         "KSI NOTE" means the Promissory Note in the principal amount of
$150,000,000 to be executed by KSI, as maker, in favor of KGI, as payee, which
shall mature and require the payment by KSI of all outstanding principal and
accrued interest on the Closing Date.

         "OWNER INTELLECTUAL PROPERTY" means all Intellectual Property in and to
which a party or its subsidiaries holds, or has a right to hold, right, title
and interest.

         "PERSON" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity, any other entity and any Governmental Authority.

         "POLICY" and "POLICIES" have the meanings specified in Section 5.4(a).

         "PROSPECTUS" means each preliminary, final or supplemental prospectus
forming a part of the Registration Statement.

         "RECEIVABLES" means any and all accounts receivable, notes and other
amounts receivable from third parties, including, without limitation, customers
and employees, whether or not in the ordinary course, together with any unpaid
financing charges accrued thereon.

         "RECEIVING PARTY" has the meaning specified in Section 3.1.


                                       6



         "RECEIVING PARTY'S BUSINESS", "BUSINESS OF THE RECEIVING PARTY" and
"BUSINESS" shall mean the Company Business, the KSI Business or the KBI
Business, as applicable.

         "REGISTRATION STATEMENT" means the registration statement on Form S-1
filed by the Company with the Commission to effect the registration of the
Common Stock pursuant to the Securities Act, as such registration statement may
be amended from time to time.

         "RETAINING PARTY" has the meaning set forth in Section 3.3.

         "SECURITIES ACT" means the Securities Act of 1933, as amended.

         "STOCKHOLDERS" means the holders of the issued and outstanding capital
stock of the Company as of __________, 2002 (the "RECORD DATE").

         "TANGIBLE PERSONAL PROPERTY" means all machinery, equipment, tools,
supplies, furniture, fixtures, personalty, vehicles and other tangible personal
property.

         "TAX" and "TAXES" shall have the meanings given to such terms in the
Tax Sharing Agreement.

         "TAX SHARING AGREEMENT" means the Tax Sharing Agreement dated the date
hereof between the Company, KSI and KBI (or in the case of KSI and KBI, their
respective shareholders) providing for certain tax related matters, as such
agreement may be amended from time to time.

         "THIRD-PARTY CLAIM" has the meaning set forth in Section 4.6.

         "TRADEMARK LICENSE AGREEMENT" means the Trademark License Agreement
dated the date hereof between the Company, KSI and KBI providing for certain
trademark matters, as such agreement may be amended from time to time.

         Unless otherwise specified, any reference to any "SUBSIDIARY" or
"SUBSIDIARIES" of the Company shall not include KSI or KBI or their respective
subsidiaries, but shall include Kinetics Japan K.K.

                                   ARTICLE II

                     TRANSACTIONS TO EFFECT THE DISTRIBUTION

Section 2.1 Restructuring and Separation of Businesses. Subject only to the
occurrence of the Closing following the Commission's declaration of
effectiveness of the Registration Statement, each of the Company, KSI and KBI
(as applicable) shall consummate the following transactions to effect the
Distribution on the Distribution Date, to the extent that such transactions have
not been consummated prior to the date hereof:

         (a) KGI shall contribute all of the issued and outstanding capital
stock of KMS to KBI.


                                       7



         (b) KGI shall distribute all of the issued and outstanding capital
stock of KBI to the Company.

         (c) The Company shall distribute all of the issued and outstanding
capital stock of KBI to the Stockholders in accordance with Section 2.5.

         (d) KGI shall contribute all of the issued and outstanding capital
stock of KTS to KSI.

         (e) KGI shall distribute all of the issued and outstanding capital
stock of KSI to the Company.

         (f) The Company shall distribute all of the issued and outstanding
capital stock of KSI to the Stockholders in accordance with Section 2.5.

         (g) KGI shall merge into the Company in a statutory merger under
Section 251 of the Delaware General Corporation Law, with the Company as the
surviving corporation of the merger (the "MERGER"). The Merger shall have all of
the effects provided under applicable law.

         (h) KSI shall pay to the Company all amounts due under the KSI Note.

The parties anticipate that the Stockholders will either (i) contribute the
capital stock of KSI and KBI to certain newly formed holding corporations owned
by the Stockholders, and that the Stockholders will exchange the capital stock
of such holding corporations for membership interests in the LLC, or (ii)
contribute the capital stock of KSI and KBI to the LLC in exchange for
membership interests in the LLC, which will form the holding corporations and
then contribute the KSI and KBI stock to such holding corporations.

Section 2.2 Acknowledgment of Certain Actions and Events. Upon entry into this
Agreement, the parties shall acknowledge that the following actions, events and
transactions have occurred, and to the extent that one or more of the following
actions, events or transactions have not occurred, take all reasonable steps
necessary to cause such actions, events or transactions to occur prior to the
Effective Time:

         (a) All necessary Governmental Approvals and Consents shall have been
received, subject only to the Registration Statement being declared effective by
the Commission (and no stop-order being in effect with respect thereto);

         (b) The Common Stock shall have been approved for quotation in the
Nasdaq National Market, subject to official notice of issuance;

         (c) All necessary corporate governance actions shall have been taken
with respect to KSI and KBI to facilitate the Distribution, including any
elections or appointments of directors and officers of KSI and KBI and any
amendments to such entities' charters or bylaws;


                                       8



         (d) The definitive documentation for the New KSI Credit Facility
transaction shall have been executed and placed in escrow and the KSI Note shall
have been executed and delivered by KSI to KGI;

         (e) The Company's Board of Directors shall have formally approved the
Distribution and shall not have abandoned, deferred or modified the
Distribution;

         (f) The transactions contemplated by this Agreement to be consummated
on or prior to the Effective Time shall have been consummated, each of the
Ancillary Agreements, in form and substance satisfactory to the Company, shall
have been executed by the parties thereto, and each of the transactions
contemplated by the Ancillary Agreements to be consummated on or prior to the
Effective Time shall have been consummated;

         (g) No preliminary or permanent injunction or other order, decree or
ruling issued by a Governmental Authority, and no statute, rule, regulation or
executive order promulgated or enacted by any Governmental Authority, shall be
in effect preventing the consummation of the Distribution or the Initial Public
Offering or any of the other transactions contemplated by this Agreement or any
Ancillary Agreement;

         (h) Such other actions shall have been taken as the parties hereto may,
based upon the advice of counsel, reasonably request to be taken prior to the
Distribution in order to assure the successful completion of the Distribution
and the other transactions contemplated by this Agreement;

         (i) Resignations of each person who is an officer or director of KSI or
KBI or their respective subsidiaries who will be an employee of only the Company
or its subsidiaries from and after the Distribution Date, shall have been
received by the Company;

         (j) This Agreement shall not have been terminated; and

         (k) The Company shall have been released from any Liabilities,
guarantees or other obligations with respect to any indebtedness or otherwise of
KSI or KBI or their respective subsidiaries;

provided, however, that the occurrence of all or a portion the foregoing
actions, events and transactions shall not create any obligation on the part of
the Company to seek to have the Registration Statement declared effective or to
effect the Distribution or the Closing, or in any way limit the Company's power
of termination set forth in Section 8.2 or alter the consequences of any such
termination from those specified in such Section.

         Section 2.3 Voiding of Transactions. If the Company in its sole
discretion elects not to proceed with the Closing, then in the Company's sole
discretion and upon written request to KSI and KBI, any transactions and actions
that have been consummated under this Agreement prior to the Closing to effect
the Distribution (including those under Article II, Article III, and Article V)
shall be (in whole or in part) revoked, rescinded, annulled or otherwise voided
and caused to be of no further force or effect.


                                       9


         Section 2.4 Sole Discretion of Company. The Company's Board of
Directors shall, in its sole discretion, establish (i) any appropriate
procedures and sequence of transactions and actions in connection with the
Distribution, (ii) the Distribution Date and all terms of the Distribution,
including, without limitation, the form, structure and terms of any
transaction(s) and/or offering(s) to effect the Distribution and (iii) the
timing of and conditions to the consummation of the Distribution (including
those terms and conditions described in this Article II), and may any time and
from time to time until the completion of the Distribution modify or change any
of the foregoing; provided, however, that the sole condition to the consummation
of the Distribution following the Effective Time shall be the occurrence of the
Closing. KSI and KBI shall cooperate with the Company in all respects to
accomplish the Distribution and shall, at the Company's direction, promptly take
any and all actions necessary or desirable to effect the Distribution.

         Section 2.5 Distribution of KSI and KBI Stock. Subject to Section 2.2
above, the Company, KSI and KBI shall use their reasonable commercial efforts to
consummate the Distribution. Such efforts shall include, but not necessarily be
limited to, those specified in this Section 2.5.

                  (a) Blue Sky. The parties shall take all such actions as may
be necessary or appropriate under the securities or blue sky laws of the United
States (and any comparable laws under any foreign jurisdiction) in connection
with the Distribution.

                  (b) Shares Received. Each Stockholder (or such holder's
designated transferee or transferees) will be entitled to receive in the
Distribution a number of shares of capital stock of KSI and KBI, respectively,
equal to the number of shares of Common Stock of the Company held by such
Stockholder (on an as-converted basis), multiplied by a fraction the numerator
of which is the number of shares of capital stock of KSI and KBI, respectively,
beneficially owned by the Company on the Record Date and the denominator of
which is the number of shares of Common Stock of the Company outstanding on the
Record Date.



                                  ARTICLE III

                             TRANSFER OF ASSETS AND
                            ASSUMPTION OF LIABILITIES

         Section 3.1 Transfer of Assets.

                  (a) Subject only to the occurrence of the Closing following
the Commission's declaration of the effectiveness of the Registration Statement,
and effective as of the Distribution Date, each party (the "ASSIGNING PARTY")
hereby assigns, transfers, conveys and delivers to another party (the "RECEIVING
PARTY"), and agrees to cause each of its subsidiaries to assign, transfer,
convey and deliver to the Receiving Party, and the Receiving Party hereby
accepts from the Assigning Party and its subsidiaries, all of the Assigning
Party's and its subsidiaries' respective right, title and interest in or under
the following, in each case as owned or held by the Assigning Party immediately
prior to the Distribution Date and (except in the case of clause


                                       10

(xiii) below) used exclusively in the Receiving Party's Business immediately
prior to the Distribution Date (each such asset being an "ASSIGNED ASSET"):

                  (i) all Tangible Personal Property;

                  (ii) all Inventory;

                  (iii) all Receivables;

                  (iv) all books of account, general, financial and tax records
(except, as to tax records, as may otherwise be provided in the Tax Sharing
Agreement), invoices, shipping records, supplier lists, correspondence and other
documents, records and files, and all personnel records of persons employed by a
party that become employees of another party as of the Distribution Date or
thereafter;

                  (v) all goodwill exclusively relating to the Receiving Party's
Business;

                  (vi) all of the Owned Intellectual Property and Licensed
Intellectual Property that is to be transferred or licensed pursuant to the
Trademark License Agreement;

                  (vii) all of the Assigned Contracts;

                  (viii) all claims, causes of action, choses in action, rights
of recovery and rights of set-off of any kind (including rights to insurance
proceeds and rights under and pursuant to all warranties, representations and
guarantees made by suppliers of products, materials or equipment, or components
thereof), pertaining to, arising out of, and inuring to the benefit of the
Assigning Party;

                  (ix) all sales and promotional literature, customer lists and
other sales-related materials owned, used, associated with or employed by the
Assigning Party relating exclusively to the Receiving Party's Business;

                  (x) all municipal, state and federal franchises, permits,
licenses, agreements, waivers, exemptions, approvals and authorizations, in each
case to the extent transferable;

                  (xi) any assets reflected in the Receiving Party's Balance
Sheet as "Assets" of the Receiving Party, subject to any dispositions of such
assets subsequent to the date of the Receiving Party's Balance Sheet;

                  (xii) any and all other assets, rights and claims of every
kind and nature owned or held immediately prior to the Distribution Date by the
Assigning Party and used exclusively in the Receiving Party's Business. The
intention of this clause (xii) is only to rectify any inadvertent omission of
transfer or conveyance of any asset, right or claim that, had the parties hereto
given specific consideration to such asset, right or claim as of the date
hereof, would have otherwise been classified as an Assigned Asset. No asset,
right or claim shall be deemed an Assigned Asset solely as a result of this
clause (xii) if such asset, right or claim is within the category or type of
asset, right or claim expressly covered by the subject matter of an


                                       11

Ancillary Agreement. In addition, no asset, right or claim shall be deemed an
Assigned Asset solely as a result of this clause (xii) unless a claim with
respect thereto is made by a Receiving Party on or prior to the first
anniversary of the Distribution Date; and

                  (xiii) the assets, rights and claims of the Company listed in
Schedule 3.1(a)(xiii) to be assigned, transferred, conveyed and delivered to KBI
and KSI as provided in such Schedule.

         The parties may agree to prepare and attach to this Agreement
additional Schedules (having numbers corresponding to the applicable
subsections) specifically listing Assigned Assets in one or more categories.
Notwithstanding the foregoing, the Assigned Assets shall not include the
applicable Excluded Assets referred to in Section 3.1(b) below.

                  (b) For the purposes of this Agreement, "EXCLUDED ASSETS"
shall mean:

                           (i) [The assets, rights and claims listed or
described on Schedule 3.1(b)(i), if any, with respect to each party]; and

                           (ii) Any and all assets, rights and claims that are
expressly contemplated by this Agreement or any Ancillary Agreement (or the
Exhibits and Schedules hereto or thereto) as assets, rights or claims to be
retained by a party.

         Section 3.2 Assignment to and Assumption of Liabilities.

                  (a) Except as set forth in an Ancillary Agreement, from and
after the Distribution Date, each party hereby assumes and agrees faithfully to
pay, perform and fulfill all obligations under the following in accordance with
their respective terms (the "COMPANY LIABILITIES" in the case of the Company,
the "KSI LIABILITIES" in the case of KSI, and the "KBI LIABILITIES" in the case
of KBI):

                           (i) any and all Liabilities that are expressly
contemplated by this Agreement or any Ancillary Agreement (or the Exhibits or
Schedules hereto or thereto) as Liabilities to be assumed by such party and all
Liabilities under this Agreement or any Ancillary Agreement;

                           (ii) all Liabilities, including but not limited to
any employee-related, environmental and hazardous waste-related Liabilities,
primarily relating to, arising out of or resulting from:

                                    (A) the operation of such party's Business,
as conducted at any time prior to, on or after the Distribution Date (including
any Liability relating to, arising out of or resulting from any act or failure
to act by any director, officer, employee, agent or representative of such party
(whether or not such act or failure to act is or was within such Person's
authority));

                                    (B) the operation of any business conducted
by such party or any of its subsidiaries at any time after the Distribution Date
(including any Liability relating to, arising out of or resulting from any act
or failure to act by any director, officer, employee, agent


                                       12

or representative of such party (whether or not such act or failure to act is or
was within such Person's authority));

                                    (C) any Assigned Assets (as assigned to such
party hereunder); and

                                    (D) in the case of KSI, the New KSI Credit
Facility and KSI Note; and

                           (iii) all Liabilities reflected as "Liabilities" or
obligations of such party in the Company Balance Sheet, the KSI Balance Sheet or
the KBI Balance Sheet, as applicable, subject to any discharge of such
Liabilities subsequent to the date of any such Balance Sheet.

         Notwithstanding the foregoing, the Company Liabilities, the KSI
Liabilities and the KBI Liabilities shall not in any event include the
applicable Excluded Liabilities referred to in Section 3.2(b) below.

                  (b) For the purposes of this Agreement, "EXCLUDED LIABILITIES"
shall mean:

                           (i) [the Liabilities listed or described on Schedule
3.2(b)(i), if any, with respect to each party;]

                           (ii) any and all Liabilities that are expressly
contemplated by this Agreement or any Ancillary Agreement (or Exhibits or
Schedules hereto or thereto) as Liabilities to be retained or assumed by a
party; and

                           (iii) all agreements and obligations of a party under
this Agreement or any of the Ancillary Agreements.

                  (c) Each of KSI and KBI shall be responsible for all KSI
Liabilities and KBI Liabilities, as the case may be, regardless of when or where
such Liabilities arose or arise, or whether the facts on which they are based
occurred prior to or subsequent to the date hereof, regardless of where or
against whom such Liabilities are asserted or determined (including any KSI
Liabilities or KBI Liabilities, as the case may be, arising out of claims made
by a party's directors, officers, employees, agents or Affiliates) or whether
asserted or determined prior to the date hereof, and regardless of whether
arising from or alleged to arise from negligence, recklessness, violation of
law, fraud or misrepresentation by KSI or KBI or any of its directors, officers,
employees, agents or Affiliates (in the case of Affiliates, other than the
Company and its subsidiaries).

         Section 3.3 Transfers Not Effected On or Prior to the Distribution
Date. The parties agree that, as of the Distribution Date, each party hereto
shall be deemed to have acquired complete and sole beneficial ownership over all
of the assets, together with all of the rights, powers and privileges incidental
thereto, that such party is entitled to acquire pursuant to the terms of this
Agreement. To the extent any transfers contemplated by this Article III shall
not have been fully effected on or prior to the Distribution Date, the parties
and their respective subsidiaries shall cooperate to effect such transfers as
promptly as possible following the Distribution Date. Nothing herein shall be
deemed to require the transfer of any assets or the


                                       13

assignment or assumption of any Liabilities that by their terms or by operation
of law cannot be so transferred, assigned or assumed; provided, however, that
any such assets shall be deemed an Assigned Asset for purposes of determining
whether any Liability is a Company Liability, a KSI Liability or a KBI
Liability, as the case may be; and provided, further, that the parties and their
respective Affiliates shall cooperate in seeking to obtain any necessary
Consents for the transfer of all assets and the assignment or assumption of all
Liabilities as contemplated by this Article III. In the event that any transfer
of assets or assignment or assumption of Liabilities contemplated by this
Article III has not been consummated effective as of the Distribution Date, (i)
the party retaining such assets (at the expense of the party entitled thereto);
and (ii) the party retaining such Liabilities shall thereafter hold such assets
or Liabilities for the account of the party entitled thereto or assuming such
Liability or to whom such asset or Liability is to be assigned pursuant hereto,
and in each such case shall take such other actions as may be reasonably
required in order to place the parties, insofar as reasonably possible, in the
same position as would have existed had such asset been transferred, or such
Liability been assigned or assumed as contemplated hereby. As and when any such
asset or Liability becomes transferable, assignable or assumable, as the case
may be, such transfer, assignment or assumption, as the case may be, shall be
effected forthwith. If any Consent is not obtained with respect to the transfer,
assumption or assignment of any such asset or Liability, then the parties will
cooperate to establish an arrangement under which the party entitled to such
asset or to assume such Liability (the "ENTITLED PARTY") would obtain, to the
extent practicable, the claims, rights and benefits and assume the corresponding
Liabilities thereunder in accordance with this Agreement or under which the
party retaining such asset or liability (the "RETAINING PARTY") would enforce
for the benefit of the Entitled Party, with the Entitled Party assuming and
agreeing to pay the Retaining Party's obligations, any and all claims, rights
and benefits of the Retaining Party against a third party thereto. In such event
(i) the Retaining Party will promptly pay to the Entitled Party when received
all moneys received by it under any such asset or any claim, right or benefit
arising thereunder and (ii) the Entitled Party will promptly pay, perform or
discharge when due any obligation or liability arising thereunder or under any
such Liability.

         Section 3.4 No Representations or Warranties; Consents.

                  (a) Each of the parties hereto understands and agrees that no
party hereto is, in this Agreement, any Ancillary Agreement or any other
agreement or document contemplated by this Agreement, any Ancillary Agreement or
otherwise, representing or warranting in any way as to the value or freedom from
encumbrance of, or any other matter concerning, any assets of such party, or as
to the legal sufficiency to convey title to an asset transferred pursuant to
this Agreement or any Ancillary Agreement, including, without limitation, any
conveyancing or assumption instruments. It is also agreed and understood that
there are no warranties whatsoever, express or implied, given by any party to
this Agreement or any Ancillary Agreement as to the condition, quality,
merchantability, fitness or non-infringement of any of the assets, businesses or
other rights transferred or retained by the parties, as the case may be, and all
such assets, businesses and other rights shall be "as is, where is" and "with
all faults" (provided that the absence of warranties given by the parties shall
not affect the allocation of Liabilities under this Agreement and shall have no
effect on any manufacturers, sellers, or other third party warranties that are
intended to be transferred with such assets), and each Receiving Party shall
bear the economic and legal risks that any conveyance shall prove to be
insufficient to vest in it good and marketable title, free and clear of any
security interest, pledge, lien, charge, claim,


                                       14

option, right to acquire, covenant, condition, restriction on transfer or other
encumbrance of any nature whatsoever.

                  (b) Each party hereto understands and agrees that no party
hereto is, in this Agreement, any Ancillary Agreement or any other agreement or
document contemplated by this Agreement, any Ancillary Agreement or otherwise,
representing or warranting in any way that the obtaining of any Governmental
Approvals or Consents, the execution and delivery of any amendatory agreements
and the taking of any filings or applications contemplated by this Agreement
will satisfy the provisions of any or all applicable laws or judgments or other
instruments or agreements relating to such assets.

         Notwithstanding the foregoing, the parties shall use their reasonable
commercial efforts to obtain all Governmental Approvals and Consents, to enter
into all reasonable amendatory agreements and to make all filings and
applications contemplated by this Agreement, and shall take all such further
actions as shall be deemed reasonably necessary to preserve for each party, to
the greatest extent reasonably feasible, consistent with this Agreement, the
economic and operational benefits of the allocation of assets and Liabilities
provided for in this Agreement. In case at any time after the Distribution Date
any further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and directors of each party to this Agreement
shall take all such necessary or desirable action, provided that any financial
cost shall be borne by the party receiving the benefit of the action.

         Section 3.5 Documents Relating to Transfer of Assigned Assets and
Assignment and Assumption of Liabilities. In connection with the transfer of the
Assigned Assets pursuant to Section 3.1 of this Agreement and the assignment and
assumption of Liabilities pursuant to Section 3.2 of this Agreement,
simultaneously with the execution and delivery hereof or as promptly as
practicable thereafter, (i) the Assigning Party shall execute and deliver such
bills of sale, deeds, stock powers, certificates of title, assignments of
contracts and other instruments of transfer, conveyance and assignment as and to
the extent necessary to evidence the transfer, conveyance and assignment of all
of the Assigning Party's right, title and interest in and to the Assigned Assets
to the Receiving Party and (ii) the Receiving Party shall execute and deliver to
the Assigning Party such bills of sale, certificates of title, assumptions of
contracts and other instruments or assumption as may be necessary to evidence
the valid and effective assumption of the Company Liabilities, the KSI
Liabilities and the KBI Liabilities by the Company, KSI and KBI, respectively.

         Section 3.6 Termination of Agreements.

                  (a) Except as set forth in Section 3.6(b), in furtherance of
the releases and other provisions of Section 4.1, the parties hereby terminate,
effective as of the Distribution Date, any and all agreements, arrangements,
commitments or understandings, whether or not in writing, between them;
provided, however, that to the extent any such agreement, arrangement,
commitment or understanding is inconsistent with any Ancillary Agreement, such
termination shall be effective as of the date of the effectiveness of the
applicable Ancillary Agreement. No such terminated agreement, arrangement,
commitment or understanding (including any provision thereof which purports to
survive termination) shall be of any further force or effect after the
Distribution Date (or, to the extent contemplated by the proviso to the
immediately preceding


                                       15

sentence, after the effectiveness of the applicable Ancillary Agreement). Each
party shall, at the reasonable request of the other party, take, or cause to be
taken, such other actions as may be necessary to effect the foregoing.

                  (b) The provisions of Section 3.6(a) shall not apply to those
matters described in Section 4.1(d) or any of the following agreements,
arrangements, commitments or understandings (or any of the provisions thereof):

                           (i) this Agreement and the Ancillary Agreements (and
each other agreement or instrument expressly contemplated by this Agreement or
any Ancillary Agreement, including the KSI Note);

                           (ii) any agreements, arrangements, commitments or
understandings to which any Person other than the parties hereto or their
respective Affiliates is a party;

                           (iii) any inter-company accounts payable or accounts
receivable accrued as of the Distribution Date that are reflected in the books
and records of the parties or otherwise documented in writing in accordance with
past practices, and any warranty or other Liabilities arising from any purchase
and sale transactions for goods or services between the parties entered into on
or before the Distribution Date, and

                           (iv) any other agreements, arrangements, commitments
or understandings that this Agreement or any Ancillary Agreement expressly
contemplates will survive the Distribution Date [, including those listed or
described on Schedule 3.6(b)].

         Section 3.7 Proceeds of the Initial Public Offering; Costs. The Initial
Public Offering will include a primary offering of Common Stock by the Company.
Other than certain of the Company's indebtedness that will be repaid concurrent
with the Closing, the Company will retain the net proceeds of such offering.

                                   ARTICLE IV

                                 INDEMNIFICATION

         Section 4.1 Release of Claims.

                  (a) Except as provided in Section 4.1(d), effective as of the
Distribution Date, KSI does hereby, for itself and its Affiliates (other than
any member of the Company Group or the KBI Group), and its successors and
assigns, and all Persons who at any time prior to the Distribution Date have
been shareholders, directors, officers, agents or employees of KSI and its
Affiliates (other than any member of the Company Group or the KBI Group) (in
each case, in their respective capacities as such), remise, release and forever
discharge (i) the Company and each member of the Company Group, their respective
successors and assigns, and all Persons who at any time prior to the
Distribution Date have been shareholders, directors, officers, agents or
employees of the Company or any member of the Company Group (in each case, in
their respective capacities as such), and their respective heirs, executors,
administrators, successors and assigns, and (ii) KBI and each member of the KBI
Group, their respective successors and assigns, and all Persons who at any time
prior to the Distribution Date have been shareholders,


                                       16

directors, officers, agents or employees of KBI or any member of the KBI Group
(in each case, in their respective capacities as such), and their respective
heirs, executors, administrators, successors and assigns, from any and all
Liabilities whatsoever, whether at law or in equity (including any right of
contribution), whether arising under any contract or agreement, by operation of
law or otherwise, existing or arising from any facts or events occurring or
failing to occur or alleged to have occurred or to have failed to occur or any
conditions existing or alleged to have existed on or before the Distribution
Date, including in connection with the transactions and all other activities to
implement the Distribution and the Initial Public Offering.

                  (b) Except as provided in Section 4.1(d), effective as of the
Distribution Date, KBI does hereby, for itself and its Affiliates (other than
any member of the Company Group or the KSI Group), and its successors and
assigns, and all Persons who at any time prior to the Distribution Date have
been shareholders, directors, officers, agents or employees of KBI and its
Affiliates (other than any member of the Company Group or the KSI Group) (in
each case, in their respective capacities as such), remise, release and forever
discharge (i) the Company and each member of the Company Group, their respective
successors and assigns, and all Persons who at any time prior to the
Distribution Date have been shareholders, directors, officers, agents or
employees of the Company or any member of the Company Group (in each case, in
their respective capacities as such), and their respective heirs, executors,
administrators, successors and assigns, and (ii) KSI and each member of the KSI
Group, their respective successors and assigns, and all Persons who at any time
prior to the Distribution Date have been shareholders, directors, officers,
agents or employees of KSI or any member of the KSI Group (in each case, in
their respective capacities as such), and their respective heirs, executors,
administrators, successors and assigns, from any and all Liabilities whatsoever,
whether at law or in equity (including any right of contribution), whether
arising under any contract or agreement, by operation of law or otherwise,
existing or arising from any facts or events occurring or failing to occur or
alleged to have occurred or to have failed to occur or any conditions existing
or alleged to have existed on or before the Distribution Date, including in
connection with the transactions and all other activities to implement the
Distribution and the Initial Public Offering.

                  (c) Except as provided in Section 4.1(d), effective as of the
Distribution Date, the Company does hereby, for itself and each member of the
Company Group, and its successors and assigns, and all Persons who at any time
prior to the Distribution Date have been shareholders, directors, officers,
agents or employees of the Company or any member of the Company Group (in each
case, in their respective capacities as such), remise, release and forever
discharge (i) KSI and its subsidiaries, their respective successors and assigns,
and all Persons who at any time prior to the Distribution Date have been
shareholders, directors, officers, agents or employees of KSI or any of its
subsidiaries (in each case, in their respective capacities as such), and their
respective heirs, executors, administrators, successors and assigns, and (ii)
KBI and its subsidiaries, their respective successors and assigns, and all
Persons who at any time prior to the Distribution Date have been shareholders,
directors, officers, agents or employees of KBI or any of its subsidiaries (in
each case, in their respective capacities as such), and their respective heirs,
executors, administrators, successors and assigns, from any and all Liabilities
whatsoever, whether at law or in equity (including any right of contribution),
whether arising under any contract or agreement, by operation of law or
otherwise, existing or arising from any facts or events occurring or failing to
occur or alleged to have occurred or to have failed to occur or any conditions
existing or alleged to have existed on or before the Distribution Date,
including in


                                       17

connection with the transactions and all other activities to implement the
Distribution and the Initial Public Offering.

                  (d) Nothing contained in Section 4.1(a), (b) or (c) shall
impair any right of any Person to enforce this Agreement, any Ancillary
Agreement or any agreements, arrangements, commitments or understandings that
are specified in Section 3.6(b) or the applicable Schedule thereto not to
terminate as of the Distribution Date, in each case in accordance with its
terms. In addition, nothing contained in Section 4.1(a), (b) or (c) shall
release any Person from:

                           (i) Any Liability provided in or resulting from any
agreement between the parties that is specified in Section 3.6(b) or the
applicable Schedule thereto as not to terminate as of the Distribution Date, or
any other Liability specified in Schedule 3.6(b) as not to terminate as of the
Distribution Date;

                           (ii) Any Liability, contingent or otherwise, assumed,
transferred or assigned to such Person in accordance with, or any other
Liability of any Person under, this Agreement or any Ancillary Agreement;

                           (iii) Any Liability for the sale, lease or receipt of
goods, property or services purchased, obtained or used in the ordinary course
of business between the parties or their respective subsidiaries;

                           (iv) Any Liability that the parties may have with
respect to indemnification or contribution pursuant to this Agreement for claims
brought against the parties by third Persons, which Liability shall be governed
by the provisions of this Article IV and, if applicable, the appropriate
provisions of the Ancillary Agreements; or

                           (v) Any Liability the release of which would result
in the release of any Person other than a Person released pursuant to this
Section 4.1; provided that the parties agree not to bring suit or permit any of
their subsidiaries to bring suit against any Person with respect to any
Liability to the extent that such Person would be released with respect to such
Liability by this Section 4.1 but for the provision of this clause (v).

                  (e) Each party agrees that it shall not make, and shall not
permit any of its subsidiaries to make, any claim or demand or commence any
Action asserting any claim or demand, including any claim of contribution or
indemnification, against another party or any member of such party's Group or
any other Person released pursuant to Section 4.1(a), (b) or (c), as applicable,
with respect to any Liabilities released pursuant thereto.

                  (f) It is the intention of each of the parties by virtue of
the provisions of this Section 4.1 to provide for a full and complete release
and discharge of all Liabilities existing or arising from all acts and events
occurring or failing to occur or alleged to have occurred or failed to occur and
all conditions existing or alleged to have existed on or before the Distribution
Date, between or among the parties (including any contractual agreements or
arrangements existing or alleged to exist between or among such Persons on or
before the Distribution Date), except as expressly set forth in Section 4.1(d).
At any time, at the request of any other party, each party


                                       18

shall execute and deliver, or shall cause such other appropriate Persons to
execute and deliver, releases reflecting the provisions hereof.

         Section 4.2 Indemnification by KSI. Except as provided in Section 4.6
and except as otherwise expressly provided in any of the Ancillary Agreements,
from and after the Distribution Date, KSI shall indemnify, defend and hold
harmless (i) the Company, each member of the Company Group and each of their
respective directors, officers and employees and each of the heirs, executors,
successors and assigns of any of the foregoing (collectively, the "COMPANY
INDEMNITEES") and (ii) KBI, each member of the KBI Group and each of their
respective directors, officers and employees and each of the heirs, executors,
successors and assigns of any of the foregoing (collectively, the "KBI
INDEMNITEES"), from and against any and all Liabilities of the Company
Indemnitees and KBI Indemnitees, respectively, relating to, arising out of or
resulting from any of the following items (without duplication):

                  (a) The failure of KSI or any other Person to pay, perform or
otherwise promptly discharge any KSI Liability or Assigned Contract (as assigned
to KSI) in accordance with their respective terms, whether prior to or after the
Distribution Date or the date hereof;

                  (b) The KSI Business, any KSI Liability or any Assigned
Contract (as assigned to KSI); and

                  (c) Any breach by KSI or any of its subsidiaries of this
Agreement or any of the Ancillary Agreements.

         Section 4.3 Indemnification by KBI. Except as provided in Section 4.6
and except as otherwise expressly provided in any of the Ancillary Agreements,
from and after the Distribution Date, KBI shall indemnify, defend and hold
harmless (i) the Company Indemnitees and (ii) KSI, each member of the KSI Group
and each of their respective directors, officers and employees and each of the
heirs, executors, successors and assigns of any of the foregoing (collectively,
the "KSI INDEMNITEES"), from and against any and all Liabilities of the Company
Indemnitees and KSI Indemnitees, respectively, relating to, arising out of or
resulting from any of the following items (without duplication):

                  (a) The failure of KBI or any other Person to pay, perform or
otherwise promptly discharge any KBI Liability or Assigned Contract (as assigned
to KBI) in accordance with their respective terms, whether prior to or after the
Distribution Date or the date hereof;

                  (b) The KBI Business, any KBI Liability or any Assigned
Contract (as assigned to KBI); and

                  (c) Any breach by KBI or any of its subsidiaries of this
Agreement or any of the Ancillary Agreements.

         Section 4.4 Indemnification by the Company. Except as provided in
Section 4.6 and except as otherwise expressly provided in any of the Ancillary
Agreements, from and after the Distribution Date, the Company shall indemnify,
defend and hold harmless (i) the KSI Indemnitees and (ii) the KBI Indemnitees,
from and against any and all Liabilities of the KSI


                                       19

Indemnitees and KBI Indemnitees, respectively, relating to, arising out of or
resulting from any of the following items (without duplication):

                  (a) The failure of the Company or any other member of the
Company Group or any other Person to pay, perform or otherwise promptly
discharge any Company Liability in accordance with its terms, whether prior to
or after the Distribution Date or the date hereof;

                  (b) The Company Business, any Company Liability or any
Assigned Contract (to the Company);

                  (c) Any breach by the Company or any member of the Company
Group of this Agreement or any of the Ancillary Agreements.

         Section 4.5 Notice and Payment of Claims. If any Company Indemnitee,
KSI Indemnitee or KBI Indemnitee (the "INDEMNIFIED PARTY") determines that it is
or may be entitled to indemnification under this Article IV (other than in
connection with any Action subject to Section 4.6), the Indemnified Party shall
deliver to the Person from whom such indemnification is sought (the
"INDEMNIFYING PARTY"), a written notice specifying, to the extent reasonably
practicable, the basis for its claim for indemnification and the amount for
which the Indemnified Party reasonably believes it is entitled to be
indemnified. After the Indemnifying Party shall have been notified of the amount
for which the Indemnified Party seeks indemnification, the Indemnifying Party
shall, within 30 days after receipt of such notice, either (i) pay the
Indemnified Party such amount in cash or other immediately available funds (or
reach agreement with the Indemnified Party as to a mutually agreeable
alternative payment schedule) or (ii) object to the claim for indemnification or
the amount thereof by giving the Indemnified Party written notice setting forth
the grounds therefor. Any objection shall be resolved in accordance with Article
VII. If the Indemnifying Party does not give such notice within such 30-day
period, the Indemnifying Party shall be deemed to have acknowledged its
liability for such claim and the Indemnified Party may exercise any and all of
its rights under applicable law to collect such amount.

         Section 4.6 Notice and Defense of Third-Party Claims. Promptly
following the earlier of (A) receipt of written notice of the commencement by a
third party of any Action against or otherwise involving any Indemnified Party
or (B) receipt of written information from a third party alleging the existence
of a claim against an Indemnified Party, in either case, with respect to which
indemnification may be sought pursuant to this Agreement (a "THIRD-PARTY
CLAIM"), the Indemnified Party shall give the Indemnifying Party prompt written
notice thereof. Failure of the Indemnified Party to give notice as provided in
this Section 4.6 shall not relieve the Indemnifying Party of its obligations
under this Agreement, except to the extent that the Indemnifying Party is
prejudiced by such failure to give notice. Such notice shall describe the
Third-Party Claim in reasonable detail.

                  (a) Within 30 days after receipt of such notice, the
Indemnifying Party may by giving written notice thereof to the Indemnified
Party, (i) elect to assume the defense of such Third-Party Claim at its sole
cost and expense or (ii) object to the claim of indemnification for such
Third-Party Claim setting forth the grounds therefor. Any objection shall be
resolved in accordance with Article VII. If the Indemnifying Party does not
within such 30-day period give


                                       20

the Indemnified Party such notice, the Indemnifying Party shall be deemed to
have acknowledged its liability for such Third-Party Claim.

                  (b) Any defense of a Third-Party Claim as to which the
Indemnifying Party has elected to assume the defense shall be conducted by
counsel employed by the Indemnifying Party and reasonably satisfactory to the
Company in the case of Company Indemnitees, KSI in the case of KSI Indemnitees,
and KBI in the case of KBI Indemnitees. The Indemnified Party shall have the
right to participate in such proceedings and to be represented by counsel of its
own choosing at the Indemnified Party's sole cost and expense; provided that if
the defendants or parties against which relief is sought in any such claim
include both the Indemnifying Party and one or more Indemnified Parties and, in
the reasonable judgment of the Company in the case of Company Indemnitees, KSI
in the case of KSI Indemnitees, or KBI in the case of KBI Indemnitees, a
conflict of interest between such Indemnified Parties and such Indemnifying
Party exists in respect of such claim, such Indemnified Parties shall have the
right to employ one firm of counsel selected by the Company for Company
Indemnitees, KSI for KSI Indemnitees, and KBI for KBI Indemnitees, as the case
may be, and in that event the reasonable fees and expenses of such separate
counsel (but not more than one separate counsel reasonably satisfactory to the
Indemnifying Party) shall be paid by such Indemnifying Party.

                  (c) If the Indemnifying Party assumes the defense of a
Third-Party Claim, the Indemnifying Party may settle or compromise the claim
without the prior written consent of the Indemnified Party; provided that
without the prior written consent of the Company in the case of Company
Indemnitees, KSI in the case of KSI Indemnitees, and KBI in the case of KBI
Indemnitees, the Indemnifying Party may not agree to any such settlement unless
as a condition to such settlement the Indemnified Party receives a written
release from any and all liability relating to such Third-Party Claim and such
settlement or compromise does not include any remedy or relief to be applied to
or against the Indemnified Party, other than monetary damages for which the
Indemnifying Party shall be responsible hereunder.

                  (d) If the Indemnifying Party does not assume the defense of a
Third-Party Claim for which it has acknowledged liability for indemnification
under this Article IV, the Company in the case of Company Indemnitees, KSI in
the case of KSI Indemnitees, and KBI in the case of KBI Indemnitees, as the case
may be, may pursue the defense of such Third-Party Claim and choose one firm of
counsel in connection therewith. The Indemnifying Party is required to reimburse
the Company, KSI or KBI, as the case may be, on a current basis for its
reasonable expenses of investigation, reasonable attorney's fees and reasonable
out-of-pocket expenses incurred by the Company in the case of Company
Indemnitees, KSI in the case of KSI Indemnitees, and KBI in the case of KBI
Indemnitees, in defending against such Third-Party Claim and the Indemnifying
Party shall be bound by the result obtained with respect thereto, provided that
the Indemnifying Party shall not be liable for any settlement effected without
the consent of the Indemnifying Party, which consent shall not be unreasonably
withheld.

                  (e) The Indemnifying Party shall pay to the Indemnified Party
in cash the amount for which the Indemnified Party is entitled to be indemnified
(if any) no later than the later of (i) the date on which the Indemnified Party
makes any payment in satisfaction (partial or otherwise) of the Third-Party
Claim or (ii) the date on which such Indemnifying Party's objection, if any, to
its responsibility for indemnification under this Article IV has been resolved


                                       21

pursuant to Article VII or by settlement or compromise or the final
nonappealable judgment of a court of competent jurisdiction.

                  (f) Notwithstanding the foregoing provisions of this Section
4.6, an Indemnified Party shall have the right to defend any Action (or claim or
cause of action asserted therein) seeking injunctive or other non-monetary
relief affecting the Indemnified Party. Sections 4.6(a), (d) and (e) above shall
apply with respect to any such Action (or claim or cause of action asserted
therein), except that the Indemnifying Party shall not have the right to elect
to assume the defense of such Action (or claim or cause of action asserted
therein).

         Section 4.7 Insurance Proceeds. The amount that any Indemnifying Party
is or may be required to pay to any Indemnified Party pursuant to this Article
IV shall be reduced (including, without limitation, retroactively) by any
insurance proceeds or other amounts actually recovered by or on behalf of such
Indemnified Parties in reduction of the related Liability. If an Indemnified
Party shall have received the payment required by this Agreement from an
Indemnifying Party in respect of a Liability and shall subsequently actually
receive insurance proceeds, or other amounts in respect of such Liability as
specified above, then such Indemnified Party shall pay to such Indemnifying
Party a sum equal to the amount of such insurance proceeds or other amounts
actually received after deducting therefrom all of the Indemnifying Party's
costs and expenses associated with such Liability.

         Section 4.8 Contribution. If the indemnification provided for in this
Article IV is unavailable to an Indemnified Party in respect of any Liability
arising out of or related to information contained in or omitted from the
Registration Statement or the Prospectus, then the Indemnifying Party, in lieu
of indemnifying the Indemnified Party, shall contribute to the amount paid or
payable by the Indemnified Party as a result of such Liability in such
proportion as is appropriate to reflect the relative fault of the parties in
connection with the statements or omissions which resulted in such Liability.
The relative fault of the parties shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information concerning the Company, KSI or KBI.

         Section 4.9 Subrogation. In the event of payment by an Indemnifying
Party to any Indemnified Party in connection with any Third-Party Claim, such
Indemnifying Party shall be subrogated to and shall stand in the first place of
such Indemnified Party as to any events or circumstances in respect of which
such Indemnified Party may have any right or claim relating to such Third-Party
Claim. Such Indemnified Party shall cooperate with such Indemnifying Party in a
reasonable manner, and at the cost and expense of such Indemnifying Party, in
prosecuting any subrogated right or claim.

         Section 4.10 No Third-Party Beneficiaries. This Article IV shall inure
to the benefit of, and be enforceable by the Company, the Company Indemnitees,
KSI and the KSI Indemnitees, and KBI and the KBI Indemnitees, and their
respective successors and permitted assigns. The indemnification provided for by
this Article IV shall not inure to the benefit of any other third party or
parties and shall not relieve any insurer who would otherwise by obligated to
pay any claim of the responsibility with respect thereto or, solely by virtue of
the indemnification


                                       22

provisions hereof, provide any subrogation rights with respect thereto and each
party agrees to waive such rights against the other to the fullest extent
permitted.

         Section 4.11 Remedies Cumulative. The remedies provided in this Article
IV shall be cumulative and shall not preclude assertion by any Indemnified Party
of any other rights or the seeking of any and all other remedies against an
Indemnifying Party. The procedures set forth in this Article IV, however, shall
be the exclusive procedures governing any indemnity action brought under this
Article IV or otherwise relating to Liabilities.

         Section 4.12 Survival. The rights and obligations of each party and
their respective Indemnitees under this Article IV shall survive the sale or
other transfer by it of any assets or businesses or the assignment by it of any
Liabilities.

         Section 4.13 After-Tax Indemnification Payments. Except as otherwise
expressly provided herein or in an Ancillary Agreement, indemnification payments
made by a party under this Article shall give effect to, and be reduced by the
value of, any and all applicable deductions, losses, credits, offsets or other
items for Federal, state or other tax purposes attributable to the payment of
the indemnified liability by the Indemnified Party.

                                   ARTICLE V

                           CERTAIN ADDITIONAL MATTERS

         Section 5.1 Ancillary Agreements. At or prior to the Effective Time,
each party shall execute and deliver the Ancillary Agreements.

         Section 5.2 Corporate Governance Matters. At or prior to the Effective
Time, the Company shall take all action necessary to appoint or elect directors
and amend the charter documents and bylaws of KSI and KBI as necessary to
facilitate the Distribution.

         Section 5.3 New KSI Credit Facility.

                  (a) At or prior to the Effective Time, the parties shall take
all necessary action for KSI to execute and place into escrow definitive
documentation for the New KSI Credit Facility. The delivery of such definitive
documentation and the consummation of the New KSI Credit Facility transaction
may be subject to the occurrence of the Closing.

                  (b) At or prior to the Effective Time, KSI and KBI and their
respective subsidiaries shall take all necessary action to release the Company
from any Liabilities, guarantees, or other obligations with respect to
indebtedness or other obligations of KSI or KBI or their respective subsidiaries
(provided that the release of the Company's guarantee and related obligations in
respect of certain indebtedness of KSI, KBI and their respective subsidiaries
will not be effective until concurrent with the Closing).

         Section 5.4 Insurance Policies and Claims Administration.

                  (a) Maintenance of Insurance Coverage Prior to Distribution
Date. Each party shall use reasonable efforts to maintain in full force and
effect at all times up to and


                                       23

including the Distribution Date its current property and casualty programs,
including, without limitation, primary and excess general liability, automobile,
workers' compensation, property and crime insurance policies (collectively, the
"POLICIES" and individually, a "POLICY"). The Company and its subsidiaries shall
retain with respect to any Covered Claims as set forth on Schedule 5.4(a)
relating to periods prior to the Distribution Date all of their respective
rights, benefits and privileges, if any, under such Policies. To the extent not
already provided for by the terms of a Policy, the Company shall use reasonable
efforts to cause KSI or KBI or their respective subsidiaries, as appropriate, to
be named as additional insureds under such Policy in respect of Covered Claims
arising or relating to periods prior to the Distribution Date; provided,
however, that nothing contained herein shall be construed to require the Company
or any of its subsidiaries to pay any additional premium or other charges in
respect to, or waive or otherwise limit any of its rights, benefits or
privileges under, any such Policy to effect the naming of KSI or KBI or their
respective subsidiaries as such additional insureds.

                  (b) Responsibility for Establishing Insurance Coverage On and
After Distribution Date. Commencing on and as of the Distribution Date, KSI and
KBI and their respective subsidiaries shall be responsible for establishing and
maintaining their own separate insurance programs (including, without
limitation, primary and excess general liability, automobile, workers,
compensation, property, director and officer liability, fire, crime, surety and
other similar insurance policies) for activities and claims relating to any
period on or after the Distribution Date involving KSI or KBI or their
respective subsidiaries. Notwithstanding any other agreement or understanding to
the contrary, except as set forth in Section 5.4(c) with respect to claims
administration and financial administration of the Policies, neither the Company
nor any of its subsidiaries shall have any responsibility for or obligation to
KSI or KBI or their respective subsidiaries relating to liability and casualty
insurance matters for any period, whether prior to, at or after the Distribution
Date.

                  (c) Administration and Procedure.

                           (i) KSI or a subsidiary of KSI, or KBI or a
subsidiary of KBI, as appropriate, shall be responsible for the claims
administration and financial administration of all Policies for Covered Claims
relating to the assets, ownership or operation prior to the Distribution Date of
the KSI Business and the KBI Business, as the case may be; provided, however,
that such retention by KSI and KBI of the Policies and the responsibility for
claims administration and financial administration of the Policies are in no way
intended to limit, inhibit or preclude any right to insurance coverage for any
Covered Claims under the Policies by the Company. KSI or a subsidiary thereof,
or KBI or a subsidiary thereof, as appropriate, shall be responsible for all
administrative and financial matters relating to insurance policies established
and maintained by KSI and its subsidiaries and KBI and its subsidiaries, as the
case may be, for claims relating to any period on or after the Distribution Date
involving KSI or any of its subsidiaries, or KBI or its subsidiaries, as the
case may be.

                           (ii) KSI and KBI, as appropriate, shall notify the
Company of any Covered Claims relating to KSI or KBI or a subsidiary thereof
under one or more of the Policies relating to a period prior to the Distribution
Date, and KSI and KBI agree to cooperate and coordinate with the Company
concerning any strategy the Company may reasonably elect to pursue to secure
coverage and payment for such Covered Claim by the appropriate insurance


                                       24




carrier. Notwithstanding anything contained herein, in any other agreement or
applicable Policy or any understanding to the contrary, KSI or KBI, as the case
may be, or an appropriate subsidiary thereof assumes responsibility for, and
shall pay to the appropriate insurance carriers or otherwise, any premiums,
retrospectively-rated premiums, defense costs, indemnity payments, deductibles,
retentions or other charges, as appropriate (collectively, "INSURANCE CHARGES"),
whenever arising, which shall become due and payable under the terms and
conditions of any applicable Policy in respect of any liabilities, losses,
claims, actions or occurrences, whenever arising or becoming known, involving or
relating to any of the assets, businesses, operations or liabilities of KSI or
any of its subsidiaries, or KBI or any of its subsidiaries, to the extent set
forth in Section 5.4(a) and any such charges that relate to the period after the
Distribution Date. To the extent that the terms of any applicable Policy provide
that the Company or a subsidiary thereof, as appropriate, shall have an
obligation to pay or guarantee the payment of any Insurance Charges, the Company
or such subsidiary shall be entitled to demand that KSI or KBI or a subsidiary
thereof, as appropriate, make such payment directly to the person or entity
entitled thereto. In connection with any such demand, the Company shall submit
to such party or its subsidiary a copy of any invoice received by the Company or
its subsidiary pertaining to such Insurance Charges, together with appropriate
supporting documentation, if available. In the event that KSI or KBI or its
subsidiary, as the case may be, fails to pay any Insurance Charges when due and
payable, whether at the request of the party entitled to payment or upon demand
by the Company or a subsidiary of the Company, the Company or a subsidiary of
the Company may (but shall not be required to) pay such Insurance Charges for
and on behalf of KSI or KBI or its subsidiary, as appropriate, and, thereafter,
KSI or KBI or its subsidiary shall forthwith reimburse the Company or such
subsidiary of the Company for such payment.

         Section 5.5 Non-solicitation of Employees. During the one-year period
following the Distribution Date, each party agrees not to solicit or to cause
the solicitation of, or to seek or make an offer for, the employment or
consulting services of any employee of another party, or to interfere with,
disrupt or attempt to disrupt the relationship between another party and any
employees thereof; provided, however, that a party shall not be prevented from
engaging in general solicitation and public advertising for employment or from
hiring or engaging an employee of another party whose employment or consulting
services were not solicited or sought in violation of this Section 5.5. In the
event of a breach of this Section 5.5, the aggrieved party shall be entitled to
an injunction against the soliciting party or its affiliates restraining such
breach, in addition to any other remedies provided by law or equity. In the
event that any covenant in this Section is held to be invalid, illegal or
unenforceable by any court of competent jurisdiction or any other Governmental
Authority, it is agreed and understood that such covenant will not be voided but
rather shall be construed to impose limitations upon the soliciting party's
activities no greater than allowable under then applicable law.

                                   ARTICLE VI

                              ACCESS TO INFORMATION

         Section 6.1 Provision of Corporate Records. Each party shall arrange as
soon as practicable following the Distribution Date for the provision to the
other of existing corporate


                                       25

governance documents (e.g. minute books, stock registers, stock certificates,
documents of title, etc.) in its possession relating to the other or to its
business and affairs.

         Section 6.2 Access to Information. From and after the Distribution
Date, each party shall afford the other, including its accountants, counsel and
other designated representatives, reasonable access (including using reasonable
efforts to give access to persons or firms possessing information) and
duplicating rights during normal business hours to all records, books,
contracts, instruments, computer data and other data and information in such
party's possession relating to the business and affairs of the other (other than
data and information subject to an attorney/client or other privilege), insofar
as such access is reasonably required by the other party including, without
limitation, for audit, accounting and litigation purposes, as well as for
purposes of fulfilling disclosure and reporting obligations.

         Section 6.3 Litigation Cooperation. Each party shall use reasonable
efforts to make available to the other, upon written request, its officers,
directors, employees and agents as witnesses to the extent that such persons may
reasonably be required in connection with any legal, administrative or other
proceedings arising out of the business of the other prior to the Distribution
Date in which the requesting party may from time to time be involved.

         Section 6.4 Reimbursement. Each party providing witnesses under Section
6.3 to the other shall be entitled to receive from the party for whom the
witness is provided, upon the presentation of invoices therefor, payment for all
out-of-pocket costs and expenses as may be reasonably incurred in providing such
witnesses.

         Section 6.5 Retention of Records. Except as otherwise required by law
or agreed to in writing, each party shall, and shall cause each of its
respective subsidiaries to, retain all information relating to another party's
business in accordance with such party's written record retention policy or, if
no such policy exists, the past practice of such party. Notwithstanding the
foregoing, any party may destroy or otherwise dispose of any such information at
any time, provided that, prior to such destruction or disposal, (i) such party
shall provide no less than 30 days prior written notice to the other party,
specifying the information proposed to be destroyed or disposed of and (ii) if
the recipient of such notice shall request in writing prior to the scheduled
date for such destruction or disposal that any of the information proposed to be
destroyed or disposed of be delivered to such requesting party, the party
proposing the destruction or disposal shall promptly arrange for the delivery of
such of the information as was requested at the expense of the requesting party.

         Section 6.6 Internal Accounting Controls, Financial Information;
Ownership. Until the fifth anniversary of the Distribution Date, (i) each party
shall maintain in effect at its own cost and expense adequate systems and
controls for its business to the extent necessary to enable the other party to
satisfy its reporting, accounting, audit and other obligations, and (ii) each
party shall provide, or cause to be provided, to the other party and its
subsidiaries in such form as such requesting party shall request, at no charge
to the requesting party, all financial and other data and information as the
requesting party determines necessary or advisable in order to prepare its
financial statements and reports or filings with any Governmental Authority. Any
information owned by a party that is provided to a requesting party to this
Section 6.6 shall be deemed to remain the property of the providing party.
Unless specifically set forth herein, nothing


                                       26

contained in this Agreement shall be construed as granting or conferring rights
of license or otherwise in any such information. No party shall release or
disclose any such information to any other person, except its auditors,
attorneys, financial advisors, bankers and other consultants and advisors who
shall be advised of and agree to comply with the provisions of this Section 6.6;
provided, that with respect to the matters identified on Schedule 6.6 hereof, no
information may be disclosed by a party under any circumstance without the prior
written consent of the other party hereto. No party shall have any liability to
any other party in the event that any information exchanged or provided pursuant
to this Section 6.6 is found to be inaccurate, in the absence of willful
misconduct by the party providing such information, or if any information is
destroyed or lost after reasonable commercial efforts by such party to comply
with the provisions of this Section 6.6. The rights and obligations granted
under this Section 6.6 are subject to any specific limitations, qualifications
or additional provisions on the sharing, exchange or confidential treatment of
information set forth in this Agreement, the Confidential Disclosure Agreement
and any other Ancillary Agreement.

         Section 6.7 Mail. After the Distribution Date, each party may receive
mail, telegrams, facsimiles, packages and other communications property
belonging to another party. Accordingly, at all times after the Distribution
Date, each party authorizes the other to receive and open all mail, telegrams,
facsimiles, packages and other communications received by it and not
unambiguously intended for another party or any of such other party's officers
or directors specifically in their capacities as such, and to retain the same to
the extent that they relate to the business of the receiving party or, to the
extent that they do not relate to the business of the receiving party and do
relate to the business of such other party, or to the extent that they relate to
both businesses, the receiving party shall promptly contact such other party by
telephone for delivery instructions and such mail, telegrams, facsimiles,
packages or other communications (or, in case the same relate to both
businesses, copies thereof) shall promptly be forwarded to the other party in
accordance with its delivery instructions. The foregoing provisions of this
Section 6.7 shall constitute full authorization to the postal authorities, all
telegraph and courier companies and all other persons to make deliveries to the
Company, KSI and KBI, as the case may be, addressed to either of them or to any
of their officers or directors specifically in their capacities as such. The
provisions of this Section 6.7 are not intended to and shall not be deemed to
constitute an authorization by any party to permit another party to accept
service of process on its behalf, and no party is or shall be deemed to be the
agent of another party for services of process purposes or for any other
purpose.

                                   ARTICLE VII

                               DISPUTE RESOLUTION

         Section 7.1 Agreement to Mediate. Except as otherwise specifically
provided in any Ancillary Agreement, the procedures for discussion, negotiation
and mediation set forth in this Article VII shall apply to all disputes,
controversies or claims (whether sounding in contract, tort or otherwise) that
may arise out of or relate to, or arise under or in connection with this
Agreement or any Ancillary Agreement, or the transactions contemplated hereby or
thereby (including all actions taken in furtherance of the transactions
contemplated hereby or thereby on


                                       27

or prior to the date hereof), or the commercial or economic relationships of the
parties relating hereto or thereto, between the Company and its subsidiaries,
KSI and its subsidiaries, and KBI and its subsidiaries.

         Section 7.2 Escalation. It is the intent of the parties to use their
respective reasonable best efforts to resolve expeditiously any dispute,
controversy or claim between or among them with respect to the matters covered
hereby that may arise from time to time on a mutually acceptable negotiated
basis. In furtherance of the foregoing, any party involved in a dispute,
controversy or claim may deliver a notice (an "ESCALATION NOTICE") demanding an
in person meeting involving representatives of the parties at a senior level of
management of the parties (or if the parties agree, of the appropriate strategic
business unit or division within such entity). A copy of any such Escalation
Notice shall be given to the General Counsel, or like officer or official, (or
if no General Counsel or like officer or official has been appointed, to the
Chief Financial Officer) of each party involved in the dispute, controversy or
claim (which copy shall state that it is an Escalation Notice pursuant to this
Agreement). Any agenda, location or procedures for such discussions or
negotiations between the parties may be established by the parties from time to
time; provided, however, that the parties shall use their reasonable best
efforts to meet within 30 days of the Escalation Notice.

         Section 7.3 Demand for Mediation. At any time after the first to occur
of (i) the date of the meeting actually held pursuant to the applicable
Escalation Notice or (ii) 90 days after the delivery of an Escalation Notice (as
applicable, the "MEDIATION DEMAND DATE"), any party involved in the dispute,
controversy or claim (regardless of whether such party delivered the Escalation
Notice) may make a written demand (the "MEDIATION DEMAND NOTICE") that the
dispute be submitted to mediation. Any opinion expressed by the mediator shall
not be binding on the parties, nor shall any opinion expressed by the mediator
be admissible in any subsequent proceedings. The mediator may be chosen from a
list of mediators previously selected by the parties or by other agreement of
the parties. Costs of the mediation shall be borne equally by the parties
involved in the matter, except that each party shall be responsible for its own
attorney's fees and other costs and expenses. The site of the mediation shall be
Santa Clara, California, unless otherwise agreed by the parties. No party may
assert that the failure to resolve any matter during any discussions or
negotiations, the course of conduct during the discussions or negotiations or
the failure to agree on a mutually acceptable time, agenda, location or
procedures for the meeting, in each case, as contemplated by Section 7.2, is a
prerequisite to a demand for mediation under Section 7.3.

         Section 7.4  Certain Additional Matters.

                  (a) Notwithstanding anything herein to the contrary, either
party may apply to any court having jurisdiction and seek injunctive or other
non-monetary relief so as to maintain the status quo until such time as any
mediation or arbitration is concluded or the dispute, controversy or claim is
otherwise resolved.

                  (b) Except as required by law, the parties shall hold, and
shall cause their respective officers, directors, employees, agents and other
representatives to hold, the existence, content and result of mediation in
confidence in accordance with the provisions of the


                                       28

Confidential Disclosure Agreement. Each of the parties shall request that any
mediator comply with such agreement.

                  (c) In the event that a dispute, controversy or claim is not
settled by the parties within thirty (30) days after the conclusion of the
mediation as described in Section 7.3, such dispute, controversy or claim shall
be submitted to binding arbitration, to be held in Santa Clara County,
California, in accordance with the Commercial Arbitration Rules of the American
Arbitration Association, before a single arbitrator selected in accordance with
such Commercial Arbitration Rules. After affording the parties a reasonable
opportunity to present written and testimonial evidence in support of their
respective positions, the arbitrator shall issue his/her decision and award,
which shall be (i) in writing, stating the reasons therefor; (ii) based solely
on the terms and conditions of this Agreement or the applicable Ancillary
Agreement(s) (or other applicable agreements relating to the relevant
transaction(s)), as interpreted under the laws of the State of California; and
(iii) final and binding upon the parties. The decision and award of the
arbitrator in any arbitration proceeding under this Section 7.4(c) may be
enforced in any court of competent jurisdiction. The affected parties shall make
reasonable good faith efforts to resolve any such dispute, controversy or claim
prior to the commencement, and during the pendency of, any such arbitration.

                  (d) Notwithstanding anything herein to the contrary, in the
event that any party determines in good faith that the amount in controversy in
any dispute, controversy or claim (or any series of related disputes,
controversies or claims) under this Agreement or any Ancillary Agreement is, or
is reasonably likely to be, in excess of $10 million, the provisions of Section
7.3 and Section 7.4(c) shall not apply and any party may elect, in lieu of
mediation and arbitration, to commence an Action with respect to such dispute,
controversy or claim (or such series of related disputes, controversies or
claims) in any court of competent jurisdiction; provided, however, that the
affected parties shall make reasonable good faith efforts to resolve any such
dispute, controversy or claim prior to the commencement, and during the pendency
of, any such Action.

         Section 7.5 Continuity of Service and Performance. Unless otherwise
agreed in writing, the parties will continue to provide service and honor all
other commitments under this Agreement and each Ancillary Agreement during the
course of dispute resolution pursuant to the provisions of this Article VII with
respect to all matters not subject to such dispute, controversy or claim.

                                  ARTICLE VIII

                                  MISCELLANEOUS

         Section 8.1 LIMITATION OF LIABILITY. IN NO EVENT SHALL ANY MEMBER OF
THE COMPANY GROUP BE LIABLE TO ANY MEMBER OF THE KSI GROUP OR THE KBI GROUP, NOR
SHALL ANY MEMBER OF THE KSI GROUP BE LIABLE TO ANY MEMBER OF THE COMPANY GROUP
OR THE KBI GROUP, NOR SHALL ANY MEMBER OF THE KBI GROUP BE LIABLE TO AMY MEMBER
OF THE COMPANY GROUP OR THE KSI GROUP, FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT,
INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER


                                       29

CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY
OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING LIMITATIONS
SHALL NOT LIMIT EACH PARTY'S INDEMNIFICATION OBLIGATIONS FOR LIABILITIES TO
THIRD PARTIES AS SET FORTH IN ARTICLE IV OR SECTION 5.4 OF THIS AGREEMENT.

         Section 8.2 Termination. This Agreement may be terminated and the
Distribution and/or the Initial Public Offering may be deferred, modified or
abandoned at any time prior to Distribution Date or the Closing Date, as
applicable, by and in the sole discretion of the Board of Directors of the
Company without the approval of KSI or KBI. In the event of such termination, no
party hereto (or any of its respective directors or officers) shall have any
liability to any other party pursuant to this Agreement.

         Section 8.3 Expenses.

                  (a) Except as specifically provided in this Agreement or in an
Ancillary Agreement, all costs and expenses incurred in connection with the
execution, delivery and implementation of this Agreement and with the
consummation of the transactions contemplated by this Agreement shall be paid by
the party incurring the expense. The determination of who has incurred an
expense shall be made by the Chief Financial Officer of the Company, which
determination shall be binding and final upon each of the parties hereto and not
subject to further review.

                  (b) Underwriting commissions and discounts attributable to the
shares of Common Stock sold by the Company in the Initial Public Offering shall
be paid by the Company.

                  (c) It is understood and agreed that the Company shall pay the
legal, filing, accounting, printing and other out-of-pocket expenditures in
connection with (i) the preparation, printing and filing of the Registration
Statement and Prospectus and (ii) sale of the shares of Common Stock in the
Initial Public Offering, including, without limitation, third party costs, fees
and expenses relating to the Initial Public Offering, all of the reimbursable
expenses of the Underwriters pursuant to the Underwriting Agreement, and all of
the costs of producing, printing, mailing and otherwise distributing the
Prospectus.

                  (d) The costs and expenses incurred in connection with
obtaining the New KSI Credit Facility, and the KSI Note, shall be paid by such
party or parties as determined by the Chief Financial Officer of the Company,
which determination shall be binding and final upon each of the parties hereto
and not subject to further review.

         Section 8.4 Notices. Any notice, demand, offer, request or other
communication required or permitted to be given by a party pursuant to the terms
of this Agreement shall be in writing and shall be deemed effectively given the
earlier of (i) when received, (ii) when delivered personally, (iii) one (1)
Business Day after being delivered by facsimile (with receipt of appropriate
confirmation), (iv) one (1) Business Day after being deposited with a nationally


                                       30

recognized overnight courier service or (v) four (4) days after being deposited
in the U.S. mail, First Class with postage prepaid, and addressed to the
attention of:

                  (a)      If to the Company, to:



                  (b)      If to KSI, to:



                  (c)      If to KBI, to:



         Or to such other addresses or telecopy numbers as may be specified by
like notice to the other parties.

         Section 8.5 Amendment and Waiver. This Agreement may not be altered or
amended, nor may rights hereunder be waived, except by an instrument in writing
executed by the party or parties to be charged with such amendment or waiver. No
waiver of any terms, provision or condition of or failure to exercise or delay
in exercising any rights or remedies under this Agreement, in any one or more
instances shall be deemed to be, or construed as, a further or continuing waiver
of any such term, provision, condition, right or remedy or as a waiver of any
other term, provision or condition of this Agreement.

         Section 8.6 Counterparts. This Agreement may be executed in one or more
counterparts each of which shall be deemed an original instrument, but all of
which together shall constitute but one and the same Agreement.

         Section 8.7 Governing Law; Jurisdiction; Forum. This Agreement shall be
construed in accordance with the laws of the State of California, excluding its
conflict of law rules and the United Nations Convention on Contracts for the
International Sale of Goods. The Superior Court of Santa Clara County,
California and/or the United States District Court for the Northern District of
California, San Jose Division, shall have jurisdiction and venue over all
disputes between the parties that are permitted to be brought in a court of law
pursuant to Article VII hereof.

         Section 8.8 Entire Agreement. This Agreement, including the Schedules
hereto, together with the Ancillary Agreements and the Exhibits and Schedules
thereto, constitute the entire understanding of the parties hereto with respect
to the subject matter hereof, superseding all negotiations, prior discussions
and prior discussions and prior agreements and understandings relating to such
subject matter. To the extent that the provisions of this Agreement are
inconsistent with the provisions of any Ancillary Agreements, the provisions of
such Ancillary Agreement shall prevail.

         Section 8.9 Nonassignability; Binding Effect. A party may not assign or
transfer this Agreement or any of its rights or obligations hereunder
(including, without limitation, in


                                       31

connection with a sale of all or substantially all of such party's assets),
without the prior written consent of each of the other parties. This Agreement
shall be binding upon, and shall inure to the benefit of, the parties hereto and
their respective legal representatives, successors and permitted assigns.
Nothing contained in this Agreement, express or implied, is intended to confer
any benefits, rights or remedies upon any person or entity other than the
Company, KSI and KBI, and their respective Indemnitees under Article IV hereof,
or as expressly provided in this Agreement.

         Section 8.10 Tax Sharing Agreement. Notwithstanding any other provision
of this Agreement to the contrary, any and all matters relating to Taxes shall
be exclusively governed by the Tax Sharing Agreement.

         Section 8.11 Further Assurances and Consents. In addition to the
actions specifically provided for elsewhere in this Agreement, each of the
parties hereto will use its reasonable efforts to (i) execute and deliver such
further instruments and documents and take such other actions as any other party
may reasonably request in order to effectuate the purposes of this Agreement and
to carry out the terms hereof and (ii) take, or cause to be taken, all actions,
and to do, or cause to be done, all things, reasonably necessary, proper or
advisable under applicable laws, regulations and agreements or otherwise to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, using its reasonable efforts to obtain any
Governmental Approvals and Consents and to make any filings and applications
necessary or desirable in order to consummate the transactions contemplated by
this Agreement; provided that no party hereto shall be obligated to pay any
consideration therefor (except for filing fees and other similar charges) to any
third party from whom such Governmental Approvals, Consents and amendments are
requested or to take any action or omit to take any action if the taking of or
the omission to take such action would be unreasonably burdensome to the party
or its business.

         Section 8.12 Exhibits and Schedules. The Exhibits and Schedules shall
be construed with and as an integral part of this Agreement to the same extent
as if the same had been set forth verbatim herein.

         Section 8.13 Authority. Each of the parties hereto represents to the
other that (a) it has the corporate or other requisite power and authority to
execute, deliver and perform this Agreement, (b) the execution, delivery and
performance of this Agreement by it have been duly authorized by all necessary
corporate or other actions, (c) it has duly and validly executed and delivered
this Agreement, and (d) this Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equity principles.

         Section 8.14 Legal Enforceability. Any provision of this Agreement that
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. Without prejudice
to any rights or remedies otherwise available to any party hereto, each party
hereto acknowledges that damages


                                       32

would be an inadequate remedy for any breach of the provisions of this Agreement
and agrees that the obligations of the parties hereunder shall be specifically
enforceable.

         Section 8.15 Gender and Number. Whenever the context of this Agreement
requires, the gender of all words herein shall include the masculine, feminine
and neuter, and the number of all words herein shall include the singular and
plural.

         Section 8.16 Titles and Headings. Titles and headings to Sections
herein are inserted for convenience of reference only and are not intended to be
a part of or to affect the meaning or interpretation of this Agreement.

         Section 8.17 Force Majeure. A party shall not be liable or deemed to
be in default for any delay or failure in performance under this Agreement or
other interruption of service deemed to result, directly or indirectly, from
acts of God, civil or military authority, acts of public enemy, war, accidents,
explosions, earthquakes, floods, failure of transportation, strikes or other
work interruptions by a party's employees, or any other similar cause beyond
the reasonable control of a party unless such delay or failure in performance
is expressly addressed elsewhere in this Agreement.

         IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement on the day and year first above written.

                                   CELERITY GROUP, INC. (formerly known
                                   as Kinetics Holdings Corporation)


                                   By:
                                   Name:
                                   Title:


                                   KINETIC SYSTEMS, INC.


                                   By:
                                   Name:
                                   Title:


                                   KINETICS BIOPHARM, INC.


                                   By:
                                   Name:
                                   Title:



                    [SIGNATURE PAGE TO SEPARATION AGREEMENT]


                                       33

                              SCHEDULE 3.1(a)(xiii)

                   CERTAIN ASSETS TO BE TRANSFERRED BY COMPANY

         The detailed list of Assigned Assets being transferred by the Company
will be specifically agreed to by the parties on or before the Distribution
Date.


                                       34

                               SCHEDULE 3.1(b)(i)

                                 EXCLUDED ASSETS

         The detailed list of Excluded Assets will be specifically agreed to by
the parties on or before the Distribution Date.


                                       35

                               SCHEDULE 3.2(b)(i)

                              EXCLUDED LIABILITIES

         The detailed list of Excluded Liabilities will be specifically agreed
to by the parties on or before the Distribution Date.


                                       36

                                 SCHEDULE 3.6(b)

                           AGREEMENTS NOT TO TERMINATE

         The detailed list of agreements not to terminate will be specifically
agreed to by the parties on or before the Distribution Date.


                                       37

                                 SCHEDULE 5.4(a)

                                 COVERED CLAIMS

         The detailed list of Covered Claims will be specifically agreed to by
the parties on or before the Distribution Date.


                                       38

                                  SCHEDULE 6.6

                     NON-DISCLOSURE CONFIDENTIAL INFORMATION

         The detailed list of non-disclosure confidential information will be
agreed to by the parties on or before the Distribution Date.


                                       39

EX-2.03

                                                                    Exhibit 2.03

                          MANAGEMENT SERVICES AGREEMENT



         This Management Services Agreement (this "AGREEMENT") is entered into
effective as of _________, 2002 by and between Celerity Group, Inc., a Delaware
corporation (the "COMPANY", formerly known as Kinetics Holdings Corporation),
Kinetic Systems, Inc., a California corporation ("KSI"), and Kinetics Biopharm,
Inc., a Delaware corporation ("KBI"). The Company, KSI and KBI are sometimes
referred to herein individually as a "PARTY" and collectively as the "PARTIES."



                                    RECITALS


         WHEREAS, the Company is issuing shares of common stock to the public in
an offering (the "INITIAL PUBLIC OFFERING") registered under the Securities Act
of 1933, as amended;

         WHEREAS, in connection with the Initial Public Offering, the Company
intends to distribute the capital stock of KSI and KBI to the Company's
stockholders and thereby separate the businesses of the Company, KSI and KBI;

         WHEREAS, the parties have heretofore shared certain administrative,
financial, management, supply chain and other services;

         WHEREAS, on the terms and subject to the conditions set forth herein,
the Company, KSI and KBI desire to retain one another as independent contractors
to provide, directly or indirectly, certain of those services after the Closing
Date (as defined below); and

         WHEREAS, on the terms and subject to the conditions set forth herein,
the parties, as applicable, desire to provide such services.



                                    AGREEMENT


         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:

                                   ARTICLE I
                                   DEFINITIONS

         Section 1.01. Definitions. As used in this Agreement, the following
terms will have the following meanings, applicable both to the singular and the
plural forms of the terms described:

         "ACTIONS" has the meaning ascribed thereto in Section 4.02.

         "ADDITIONAL SERVICES" has the meaning ascribed thereto in Section 2.02.

         "AGREEMENT" has the meaning ascribed thereto in the preamble hereto, as
such agreement may be amended and supplemented from time to time in accordance
with its terms, and includes the Service Schedules.

         "CLOSING DATE" means the date of the closing of the initial sale of
common stock in the Initial Public Offering.

         "COMPANY" has the meaning ascribed thereto in the preamble hereto.

         "COMPANY ENTITIES" mean the Company and its Subsidiaries and "COMPANY
ENTITY" shall mean any of the Company Entities.

         "EVENT OF FORCE MAJEURE" has the meaning ascribed thereto in Section
2.06.

         "EXPIRATION DATE" has the meaning ascribed thereto in Section 5.01.

         "IMPRACTICABILITY" has the meaning ascribed thereto in Section 2.06.

         "INITIAL PUBLIC OFFERING" has the meaning ascribed thereto in the
recitals to this Agreement.

         "INITIAL TERM" has the meaning ascribed thereto in Section 5.01.

         "KBI" has the meaning ascribed thereto in the preamble hereto.

         "KSI" has the meaning ascribed thereto in the preamble hereto.

         "KBI ENTITIES" means KBI and its Subsidiaries and "KBI ENTITY" shall
mean any of the KBI Entities.

         "KSI ENTITIES" means KSI and its Subsidiaries and "KSI ENTITY" shall
mean any of the KSI Entities.

         "OUTSOURCED SERVICE" has the meaning ascribed thereto in Section 2.04.

         "PERSON" means any individual, partnership, limited liability company,
joint venture, corporation, trust, unincorporated organization, government (and
any department or agency thereof) or other entity.

         "PROVIDER INDEMNIFIED PERSON" has the meaning ascribed thereto in
Section 4.01.

         "RECIPIENT INDEMNIFIED PERSON" has the meaning ascribed thereto in
Section 4.03.

         "SEPARATION AGREEMENT" means the Separation Agreement dated the date
hereof between the Company, KSI and KBI pursuant to which, among other things,
the business and operations of the Company, KBI and KSI will be separated.

         "SERVICE CHARGES" has the meaning ascribed thereto in Section 3.01(c).


                                       2

         "SERVICE PROVIDER" has the meaning ascribed thereto in Section 2.01.

         "SERVICE RECIPIENT" has the meaning ascribed thereto in Section 2.01.

         "SERVICE SCHEDULE" has the meaning ascribed thereto in Section 2.01.

         "SERVICES" has the meaning ascribed thereto in Section 2.01.

         "SUBSIDIARY" means, as to any Person, any corporation, limited
liability company, association, partnership, joint venture or other business
entity of which more than 50% of the voting capital stock or other voting
ownership interests is owned or controlled directly or indirectly by such Person
or by one or more of the Subsidiaries of such Person or by a combination
thereof. The term "Subsidiary" shall, as to the Company, also include Kinetics
Japan K.K.

                                   ARTICLE II
                          PURCHASE AND SALE OF SERVICES

         Section 2.01. Purchase and Sale of Services. On the terms and subject
to the conditions of this Agreement and in consideration of the Service Charges
described in Article III below, the Company, KSI and KBI, as applicable, agree
to provide to the other parties the services described in the Service Schedules
(each service schedule, a "SERVICE SCHEDULE") attached to this Agreement. Each
Service shall be covered by this Agreement upon execution of a Service Schedule
in the form attached hereto. Collectively, the services described on all the
Service Schedules (including Additional Services) shall be referred to herein as
"SERVICES." The party providing a particular Service shall be referred to herein
as the "SERVICE PROVIDER," and the party receiving a particular Service shall be
referred to herein as the "SERVICE RECIPIENT." The Service Provider with respect
to Services to be performed under or in connection with (i) the Tax Sharing
Agreement between the parties (or in the case of KSI and KBI, their respective
shareholders) dated the date hereof and (ii) the Stock Purchase Agreement
between Kinetics Group, Inc. and United States Filter Corporation, dated August
20, 2000, shall be the "Representative of the Affiliated Group and the Combined
Group," as such term is defined in the Tax Sharing Agreement.

         For each Service, the Service Schedule shall set forth, among other
things, the names of the Service Provider and Service Recipient; the time period
during which the Service will be provided if different from the term of this
Agreement determined pursuant to Article 5 hereof; a description of the Service;
and the estimated charge, if any, for the Service and any other terms applicable
thereto. Obligations regarding each Service Schedule shall be effective upon
execution of this Agreement, or, if a particular Service Schedule is amended or
a new Service Schedule is executed after the execution of this Agreement, the
obligations created by such amendment or new Service Schedule shall be effective
upon execution of such amendment or such new Service Schedule.

         At its option, the Service Provider may cause any Service it is
required to provide hereunder to be provided by any of its Subsidiaries. Unless
otherwise specifically agreed by the Service Provider and the Service Recipient,
the Services to be provided hereunder shall be


                                       3

substantially similar in scope, quality and nature to those provided by the
Company prior to the Closing Date, shall be performed by the same or similarly
qualified personnel, and shall be provided only at the locations such Services
are being provided by the Company prior to the Closing Date; provided, however,
that the selection of personnel to perform the Services shall be at the sole
discretion of the Service Provider; and provided, further, that, except as
expressly provided in this Agreement, the Service Provider shall not be required
to increase the volume, scope or quality of the Services provided beyond that
which has been provided by the Company prior to the Closing Date. The Service
Recipient shall use reasonable efforts, in connection with receiving Services,
to follow the policies, procedures and practices in effect before the Closing
Date including providing information and documentation sufficient for the
Service Provider to perform the Services as they were performed before the
Closing Date and making available, as reasonably requested by the Service
Provider, adequate personnel and timely decisions, approvals and acceptances in
order that the Service Provider may accomplish its obligations hereunder in a
timely manner.

         Section 2.02. Additional Services. From time to time after the Closing
Date, the parties may identify Services other than those described on the
Service Schedules attached hereto, that a party will provide to another party in
accordance with the terms of this Agreement (the "ADDITIONAL SERVICES").
Accordingly, the parties shall execute additional Service Schedules for such
Additional Services pursuant to this Article II. Each Service Schedule for an
Additional Service shall be signed by a duly authorized representative of the
Service Provider and Service Recipient.

         Section 2.03. Obligations as to Additional Services. Except as set
forth in the next sentence, a party shall be obligated to perform, at a charge
determined using the principles consistent with those used for determining fees
for other Services, any Additional Service that: (a) was provided by such party
immediately prior to the Closing Date and that another party reasonably believes
was inadvertently or unintentionally omitted from the list of Services described
in the Service Schedules attached hereto, or (b) is in the reasonable opinion of
the parties necessary or desirable to effectuate an orderly transition of the
parties' businesses under the Separation Agreement unless such performance would
significantly disrupt a party's operations or materially increase the scope of
its responsibility under this Agreement. If a party reasonably believes the
performance of an Additional Service required under subparagraphs (a) or (b)
would significantly disrupt its operations or materially increase the scope of
its responsibility under this Agreement, such party shall negotiate in good
faith with the party seeking such Additional Service to establish terms under
which such Additional Service may be provided, but such party shall not be
obligated to provide such Additional Service if, following good faith
negotiation, the affected parties are unable to reach agreement on such terms.

         Section 2.04. Services Performed by Third Parties. At its option, the
Service Provider may cause any Service it is required to provide hereunder to be
provided by any third-party that is providing, or may from time to time provide,
the same or similar services for Service Provider (an "OUTSOURCED SERVICE"). The
Service Provider shall remain responsible, in accordance with the terms of this
Agreement, for performance of any Service it causes to be so provided; provided,
however, that Service Providers and Service Recipients may, by mutual agreement,
seek to effectuate the partial assignment to Service Recipients of any
third-party contracts with Service Providers for Outsourced Services; and
provided further, that Service Recipients of


                                       4

Outsourced Services may seek to enter into new contracts for, or otherwise
obtain from alternate sources, the Outsourced Services.

         Section 2.05. Additional Resources. Except as provided in a Service
Schedule for a specific Service, in providing the Services, the Service Provider
shall not be obligated to: (i) hire any additional employees; (ii) maintain the
employment of any specific employee; (iii) purchase, lease or license any
additional equipment or software; or (iv) pay any costs related to the transfer
or conversion of the Service Recipient's data to the Service Recipient or any
alternate supplier of Services. Prior to executing a Service Schedule, the
parties shall in good faith attempt to determine whether any of actions
described in immediately preceding clauses (i), (ii), (iii) of (iv) would be
required for the Service Provider to perform the contemplated Services.

         Section 2.06 Impracticability and Force Majeure. A Service Provider
shall not be required to provide any Service to the extent the performance of
such Services becomes impracticable as a result of a cause or causes outside the
reasonable control of the Service Provider or to the extent the provision of
such Service would require the Service Provider to violate any applicable laws,
rules or regulations or would result in the breach of any applicable contract or
contracts (collectively, "IMPRACTICABILITY"), subject to Section 2.09 below. A
Service Provider shall have no obligation to perform or cause a Service to be
performed if its failure to do so is caused by or results from any act of God,
governmental action, natural disaster, strike, failure of essential equipment or
any other cause or circumstance beyond the control of the Service Provider or,
if applicable, any third-party provider of services to the Service Provider (an
"EVENT OF FORCE MAJEURE"). The Service Provider will notify the Service
Recipient of any Event of Force Majeure affecting its Services. The Service
Provider agrees that following any Event of Force Majeure, the Service Recipient
shall have no obligation to pay for the Services affected thereby and the
Service Provider will use its reasonable best efforts to restore such Services.

         Section 2.07. Responsibility for Errors; Delays. A Service Provider's
sole responsibility to a Service Recipient:

                  (a) for errors or omissions in a Service (including an
Outsourced Service), other than errors or omissions attributable to the Service
Provider's willful misconduct, shall be to furnish correct information, payment
and/or adjustment in the Service, at no additional cost or expense to the
Service Recipient; provided, the Service Recipient must promptly advise the
Service Provider of any such error or omission of which it becomes aware.
Without in any way limiting the generality of the preceding sentence, a Service
Provider shall have no liability for the negligence, gross negligence or willful
misconduct of a third-party providing an Outsourced Service except as provided
in the preceding sentence; provided that such Service Provider shall provide
reasonable cooperation to the Service Recipient in the exercise of any remedies
sought by the Service Recipient against such third-party.

                  (b) for failure to deliver any Service because of
Impracticability, shall be to use reasonable efforts to make any portion of the
Services which are not Impracticable available and/or to resume performing the
Services which are or have become Impracticable as promptly as reasonably
practicable.


                                       5

         Section 2.08. Good Faith Cooperation; Consents. The parties will use
good faith efforts to cooperate with each other in all matters relating to the
provision and receipt of Services. Such cooperation shall include exchanging
information, performing true-ups and adjustments, and obtaining all third-party
consents, licenses, sublicenses or approvals necessary to permit each party to
perform its obligations hereunder and under any Service Schedule (including by
way of example, not by way of limitation, rights to use third party software
needed for the performance of Services). The reasonable and documented costs of
obtaining such third party consents, licenses, sublicenses or approvals shall be
borne by the Service Recipient, as applicable. The parties will maintain in
accordance with their respective standard document retention procedures,
documentation supporting the information relevant to cost calculations contained
in the Service Schedules and cooperate with each other in making such
information available as needed in the event of a tax audit, whether in the
United States or any other country.

         Section 2.09. Alternatives. If a Service Provider reasonably believes
it is unable to provide any Service because of a failure to obtain necessary
consents, licenses, sublicenses or approvals pursuant to Section 2.08 or because
of Impracticability, the Service Provider and Service Recipient shall mutually
and reasonably determine the best alternative approach. Until such alternative
approach is found or the problem is otherwise resolved to the satisfaction of
the affected parties, the Service Provider shall use reasonable efforts to
continue providing the Service. To the extent a mutually agreed upon alternative
approach requires payment above and beyond that which is included in the charge
for the Service in question, the affected parties shall share equally in making
any such payment unless they otherwise agree in writing.



                                  ARTICLE III
                                 SERVICE CHARGES

Section 3.01.     Service Charges.

                  (a) The charge for each Service provided hereunder directly by
a Service Provider or its Subsidiary shall be equal to the amount indicated, or
determined as set forth, in the Service Schedule for such Service, as adjusted
from time to time in accordance with Section 3.01(c).

                  (b) The charge for each Outsourced Service provided hereunder
shall be equal to the third-party costs and expenses incurred by the Service
Provider or its Subsidiary on behalf of the Service Recipient, plus all direct
costs, if any, incurred by the Service Provider or its Subsidiary in providing
such Outsourced Service. If the Service Provider incurs third-party costs or
expenses on behalf of the Service Recipient as well as any Subsidiary of such
Service Provider, the Service Provider will allocate any such costs or expenses
in good faith between the Service Recipient and the Subsidiaries on behalf of
which such costs or expenses were incurred as the Service Provider shall
determine in the exercise of its reasonable judgment. The Service Provider shall
apply usual and accepted accounting conventions in making such allocations and
the Service Provider or its agents shall keep and maintain such books and
records as may be reasonably necessary to make such allocations. The Service
Provider shall make copies of such books and records available to the Service
Recipient upon request and with reasonable notice.


                                       6

                  (c) The parties intend for the Service charges pursuant to
paragraphs (a) and (b) above (collectively, the "SERVICE CHARGES") to allow the
Service Provider and its Subsidiaries to recover the fully allocated direct
costs of providing the Services hereunder (not to exceed commercially reasonable
rates) plus all out-of-pocket, third-party costs, charges and expenses. The
parties also intend for charges to be easy to administer and justify and,
therefore, the parties acknowledge that it may be counterproductive to try to
recover every cost, charge or expense, particularly those that are insignificant
or de minimis. The parties shall use good faith efforts to discuss any situation
in which any charge, or the methodology for determining any charge, set forth in
the Service Schedules is insufficient to cover or exceeds, or is reasonably
expected to be insufficient to cover or exceed, the actual costs incurred by the
Service Provider and its Subsidiaries in providing any Service hereunder, and on
the basis of such discussions the parties may from time to time, upon mutual
agreement, adjust the charges or methodologies set forth in applicable Service
Schedules.

         Section 3.02. Invoicing and Settlement of Costs.

                  (a) The Service Provider shall invoice the Service Recipient
for all Service Charges for each calendar month within thirty (30) days
following the end of such month, provided that any failure by the Service
Provider to provide an invoice within such time period shall not relieve the
Service Recipient of its obligation to pay an invoice received after such date.
All invoices shall reflect in reasonable detail a description of the Service
performed.

                  (b) The Service Recipient shall pay within thirty (30) days
following its receipt of any invoice from the Service Provider pursuant to
paragraph (a), by wire transfer of immediately available funds payable to the
order of the Company and without set off (except as such parties may agree to
set off mutual obligations), all amounts invoiced by the Service Provider during
the preceding calendar month. If the Service Recipient fails to pay any monthly
payment within 30 days following its receipt of any invoice from the Service
Provider pursuant to paragraph (a), the Service Recipient shall pay, in addition
to the amount indicated in such invoice, interest on such amount at the prime
interest rate announced by [______] plus 2% per annum compounded monthly for the
period such amount remains unpaid.

                  (c) In the event of a bona fide dispute as to the propriety of
the amount invoiced, the Service Recipient shall pay all undisputed amounts, but
shall be entitled to withhold payment of any amount in dispute (and shall not be
obligated to pay interest on the amount so withheld) and shall notify the
Service Provider within ten (10) business days from receipt of any disputed
invoice of the disputed amount and the reasons each such charge its disputed by
the Service Recipient. The Service Provider shall provide to the Service
Recipient, or shall cause its Subsidiaries to so provide, records relating to
the disputed amount so as to enable the parties to resolve the dispute. The
parties shall use reasonable efforts to resolve any such dispute promptly.

                  (d) Any invoice or payment not disputed in writing by either
party within 90 days of such invoice or payment, as the case may be, shall be
considered final and no longer subject to adjustment.


                                       7

         Section 3.03. Error Corrections; True-Ups; Accounting. The parties
shall reasonably agree in writing on a process and procedure for conducting
internal audits and making adjustments to charges as a result of the movement of
employees and functions between parties, the discovery of errors or omissions in
charges, as well as a true-up of amounts owed. In no event shall such processes
and procedures extend beyond one (1) year after completion of a Service.

         Section 3.04. Pricing Adjustments. In the event of a tax audit
adjustment relating to the pricing of any or all Services provided pursuant to
this Agreement in which it is determined by a taxing authority that any of the
charges, individually or in combination, did not result in an arm's-length
payment, as determined under internationally accepted arm's-length standards,
then the parties, including any subcontractor providing Outsourced Services
hereunder, may agree to make corresponding adjustments to the charges in
question for such period to the extent necessary to achieve arm's-length
pricing. Any adjustment made pursuant to this Section 3.04 at any time during
the term of this Agreement or after termination of this Agreement shall be
reflected in the parties' legal books and records, and the resulting
underpayment or overpayment shall create, respectively, an obligation to be paid
in the manner specified in Section 3.02, or shall create a credit against
amounts owed under this Agreement.

                                   ARTICLE IV
                    LIMITATION OF LIABILITY; INDEMNIFICATION

         Section 4.01. Limitation of Liability. Each party (as a Service
Recipient) agrees that the other parties (as Service Providers) and their
respective Subsidiaries and their respective directors, officers, agents, and
employees (each, a "PROVIDER INDEMNIFIED PERSON") shall not have liability,
whether direct or indirect, in contract or tort or otherwise, for or in
connection with the Services rendered or to be rendered by any Provider
Indemnified Person pursuant to this Agreement, the transactions contemplated
hereby or any Provider Indemnified Person's actions or inactions in connection
with any such Services or transactions, except for damages which have resulted
from such Provider Indemnified Person's willful misconduct in connection with
any such Services, actions or inactions.

         Section 4.02. Indemnification by Service Recipients. Each party (as a
Service Recipient) agrees to indemnify and hold harmless each other party (as a
Service Provider) from and against any damages, and to reimburse each Provider
Indemnified Person for all reasonable expenses as they are incurred in
investigating, preparing, pursuing, or defending any claim, action, proceeding,
or investigation, whether or not in connection with pending or threatened
litigation and whether or not any Provider Indemnified Person is a party
(collectively, "ACTIONS"), arising out of or in connection with Services
rendered or to be rendered by any Provider Indemnified Person pursuant to this
Agreement, the transactions contemplated hereby or any Provider Indemnified
Person's actions or inactions in connection with any such Services or
transactions; provided that a party will not be responsible for any damages of
any Provider Indemnified Person that have resulted from such Provider
Indemnified Person's willful misconduct in connection with any of the actions,
inactions, or Services referred to above.

         Section 4.03. Indemnification by Service Providers. Each party (as a
Service Provider) agrees to indemnify and hold harmless each other party (as a
Service Recipient) and its


                                       8

Subsidiaries and their respective directors, officers, agents, and employees
(each, a "RECIPIENT INDEMNIFIED PERSON") from and against any damages, and will
reimburse each Recipient Indemnified Person for all reasonable expenses as they
are incurred in investigating, preparing, or defending any Action, arising out
of the willful misconduct of any Provider Indemnified Person in connection with
the Services rendered or to be rendered pursuant to this Agreement.

         Section 4.04. Further Indemnification. To the extent that any other
Person has agreed to indemnify any Provider Indemnified Person or to hold a
Provider Indemnified Person harmless and such Person provides service to the
Service Provider or any affiliate of the Service Provider relating directly or
indirectly to any employee plan or benefit arrangement for which Services are
provided under this Agreement, the Service provider will exercise reasonable
efforts (x) to make such agreement applicable to any Recipient Indemnified
Person so that each Recipient Indemnified Person is held harmless or indemnified
to the same extent as any Provider Indemnified Person or (y) otherwise make
available to each Recipient Indemnified Person the benefits of such agreement.

         Section 4.05. Disclaimer of Warranties. EACH SERVICE PROVIDER DISCLAIMS
ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT
TO THE SERVICES. EACH SERVICE PROVIDER MAKES NO REPRESENTATIONS OR WARRANTIES AS
TO THE QUALITY, SUITABILITY OR ADEQUACY OF THE SERVICES FOR ANY PURPOSE OR USE.

         Section 4.06 Limitation of Liability. IN NO EVENT SHALL A PARTY OR ITS
SUBSIDIARIES BE LIABLE TO ANOTHER PARTY OR ITS SUBSIDIARIES FOR ANY SPECIAL,
CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER
CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY
OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.

                                   ARTICLE V
                              TERM AND TERMINATION

         Section 5.01. Term. Except as otherwise provided in this Article V or
as otherwise agreed in writing by the parties, this Agreement shall have an
initial term (the "INITIAL TERM") of one year from the Closing Date (the last
day of the Initial Term being the "EXPIRATION DATE"). This Agreement may be
extended beyond the Expiration Date by the parties in writing, either in whole
or with respect to one or more of the Services; provided, however, that such
extension shall only apply to the Services and the parties for which the
Agreement was extended. The parties shall be deemed to have extended this
Agreement with respect to a specific Service if the Service Schedule for such
Service specifies a completion date beyond the Expiration Date. The parties may
agree on an earlier expiration date respecting a specific Service by specifying
such date on the Service Schedule for that Service.

         Section 5.02. Termination.


                                       9

                  (a) Notwithstanding the Initial Term or any extension of this
Agreement, a Service Recipient may at any time terminate this Agreement with
respect to one or more of the Services, in whole or in part, upon giving at
least 30 days prior written notice to the Service Provider.

                  (b) After the Initial Term of this Agreement, a Service
Provider may from time to time terminate this Agreement with respect to one or
more of the Services, in whole or in part, upon giving at least 60 days prior
written notice to a Service Recipient.

                  (c) This Agreement will be subject to early termination by a
Service Provider on 30 days prior written notice to a Service Recipient if there
is a change in the person or persons with power to direct, or to cause the
direction of, management or policies of such Service Recipient, or such Service
Recipient is a party to a merger, consolidation or business combination in which
it is not the surviving entity, or such Service Recipient sells or otherwise
disposes of all or a substantial portion of its assets.

                  (d) A Service Provider may terminate any affected Service at
any time if (i) a Service Recipient shall have failed to perform any of its
material obligations under this Agreement relating to any such Service, the
Service Provider has notified the Service Recipient in writing of such failure,
and such failure shall have continued for a period of 30 days after receipt by
the Service Recipient of notice of such failure or (ii) a Service Recipient
shall become a debtor in a bankruptcy or insolvency proceeding, shall make an
assignment for the benefit of creditors, shall have a receiver or trustee
appointed with respect to any of its assets, or shall become the subject of a
voluntary or involuntary liquidation or dissolution.

                  (e) Each party agrees that prior to exercising its rights
under this Section 5.02 it will consult for a reasonable period with the other
affected party or parties in advance of such termination as to its
implementation.

                  (f) In the event of termination of an Outsourced Service under
subsections (a) or (d) above, the Service Recipient shall reimburse, and
indemnify and hold harmless, the Service Provider for any claims, damages,
losses or other amounts incurred by the Service Provider due to the failure to
meet minimum purchase commitments as a result of the Service Recipient's
termination of the Outsourced Service.

         5.03.    Effect of Termination.

                  (a) Other than as required by law, upon termination of any
Service pursuant to Section 5.01 or Section 5.02, and upon termination of this
Agreement in accordance with its terms, a Service Provider will have no further
obligation to provide the terminated Service (or any Service, in the case of
termination of this Agreement) and the Service Recipient will have no obligation
to pay any fees relating to such Service or make any other payments hereunder;
provided that notwithstanding such termination, (i) the Service Recipient shall
remain liable to the Service Provider for fees owed and payable in respect of
Services provided prior to the effective date of the termination; (ii) the
Service Provider shall continue to charge the Service Recipient for
administrative and program costs relating to benefits paid after but incurred
prior to the termination of any Services and other services required to be
provided after the termination


                                       10

of such Services and the Service Recipient shall be obligated to pay such
expenses in accordance with the terms of this Agreement; and (iii) the
provisions of Articles III, IV, V and VI shall survive any such termination. All
program and administrative costs attributable to associates of a Service
Recipient for Service Provider plans that relate to any period after the
effective date of any such termination shall be for the account of the Service
Recipient.

                  (b) Following termination of this Agreement with respect to
any Service, the affected parties agree to cooperate in providing for an orderly
transition of such Service to the Service Recipient or to a successor service
provider. Without limiting the foregoing, the Service Provider agrees to (i)
provide, within 90 days of the termination, copies in a format designated by the
Service Provider, of all records relating directly or indirectly to benefit
determinations of Service Recipient associates, including but not limited to
compensation and service records, correspondence, plan interpretive policies,
plan procedures, administration guidelines, minutes, or any data or records
required to be maintained by law, and (ii) work with the Service Recipient in
developing a transition schedule. Each of the parties shall use good faith
efforts at the termination or expiration of this Agreement, any specific Service
hereunder or any Service Schedule to ensure that all applicable user IDs and
passwords issued to such party by another party are canceled or returned, as
applicable.

                                   ARTICLE VI
                                  MISCELLANEOUS

         Section 6.01. Performance under Ancillary Agreements. Notwithstanding
anything to the contrary contained herein, a Service Recipient shall not be
charged anything under this Agreement for any Services that are specifically
required to be performed under the Separation Agreement or any other Ancillary
Agreement (as defined in the Separation Agreement) and any such other Services
shall be performed and charged for in accordance with the terms of the
Separation Agreement or such other Ancillary Agreement.

Section 6.02. Relationship Between the Parties. It is expressly acknowledged
that the parties are "independent contractors," and nothing in this Agreement is
intended and nothing shall be construed to allow one party to exercise control
or direction over the manner or method by which the another party performs the
Services that are the subject matter of this Agreement; provided, that the
Services to be provided hereunder shall be furnished in a manner consistent with
the standards governing such Services and the provisions of this Agreement. Each
party understands and agrees that (i) a party will not withhold on behalf of
another party any sums for income tax, unemployment insurance, social security
or any other withholding pursuant to any law or requirement of any governmental
body or make available any of the benefits afforded to its employees, (ii) all
of such payments, withholdings and benefits, if any, are the sole responsibility
of the party incurring the liability, and (iii) each party will indemnify and
hold the other harmless from any and all loss or liability arising with respect
to such payments, withholdings and benefits, if any. Nothing in this Agreement
shall constitute or be deemed to constitute a partnership or joint venture
between the parties hereto or constitute or be deemed to constitute any party
the agent or employee of another party for any purpose whatsoever and a party
shall not have authority or power to bind another party or to contract in the
name of, or create a liability against, another party in any way or for any
purpose.


                                       11

         Section 6.03. Sole Beneficiary. Each party acknowledges that the
Services shall be provided only with respect to its (and its Subsidiaries')
business as currently operated or as mutually agreed by the parties hereto. A
party shall not request performance of any Service for the benefit of any entity
other than itself and its Subsidiaries. Each party represents and agrees that it
will use the Services only in accordance with all applicable federal, state and
local laws and regulations, and in accordance with the reasonable conditions,
rules, regulations and specifications which may be set forth in any manuals,
materials, documents and instructions furnished from time to time by a Service
Provider to a Service Recipient. Each party reserves the right to take all
actions, including termination of any particular Service, that it reasonably
believes to be necessary to assure compliance with applicable laws and
regulations. A Service Provider will notify a Service Recipient of the reasons
for any such termination of Services.

         Section 6.04. Entire Agreement. This Agreement (including the Service
Schedules constituting a part of this Agreement) and any other writing signed by
the parties that specifically references this Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements, understandings and negotiations, both written
and oral, between the parties with respect to the subject matter hereof. This
Agreement is not intended to confer upon any Person other than the parties
hereto any rights or remedies hereunder.

         Section 6.05. Information. Subject to applicable law and privileges,
each party hereto covenants and agrees to provide the other parties with all
information regarding itself and transactions under this Agreement that the
other party reasonably believes are required to comply with all applicable
federal, state, county and local laws, ordinances, regulations and codes,
including, but not limited to, securities laws and regulations.

         Section 6.06. Confidential Information. Each party hereby covenants and
agrees to hold in trust and maintain confidential all confidential information
relating to the other parties, including all information disclosed by one party
to the other(s) in connection with this Agreement, in accordance with the
Confidential Disclosure Agreement entered into by the parties of even date
herewith. A Service Provider shall require that any third-party performing an
Outsourced Service agree in writing to be bound by confidentiality obligations
at least as protective as the confidentiality terms applicable to the Service
Provider.

         Section 6.07. Dispute Resolution. Article VII of the Separation
Agreement shall be applicable with respect to any claims, controversies or
disputes arising under or related to this Agreement; provided, however, that any
dispute regarding the following is not required to be negotiated prior to
seeking relief from a court of competent jurisdiction: breach of any obligation
of confidentiality; infringement, misappropriation, or misuse of any
intellectual property right; or any other claim where interim relief from the
court is sought to prevent serious and irreparable injury to a party.

         Section 6.08. Notices. Any notice, demand, offer, request or other
communication required or permitted to be given by a party pursuant to the terms
of this Agreement shall be in writing and shall be deemed effectively given the
earlier of (i) when received, (ii) when delivered personally, (iii) one (1)
Business Day after being delivered by facsimile (with receipt of appropriate
confirmation), (iv) one (1) Business Day after being deposited with a nationally


                                       12

recognized overnight courier service or (v) four (4) days after being deposited
in the U.S. mail, First Class with postage prepaid, and addressed to the
attention of:

                           (a)      If to the Company, to:

                                    -----------------------------------
                           (b)      If to KSI, to:

                                    -----------------------------------
                           (c)      If to KBI, to:

                                    -----------------------------------

         Or to such other addresses or telecopy numbers as may be specified by
like notice to the other parties.

         Section 6.09. Governing Law. This Agreement shall be construed in
accordance with the laws of the State of California, excluding its conflict of
law rules and the United Nations Convention on Contracts for the International
Sale of Goods. The Superior Court of Santa Clara County, California and/or the
United States District Court for the Northern District of California, San Jose
Division, shall have jurisdiction and venue over all disputes between the
parties that are permitted to be brought in a court of law pursuant to Section
6.07 hereof.

         Section 6.10. Severability. The parties hereto have negotiated and
prepared the terms of this Agreement in good faith with the intent that each and
every one of the terms, covenants and conditions herein be binding upon and
inure to the benefit of the respective parties. Accordingly, if any one or more
of the terms, provisions, promises, covenants or conditions of this Agreement or
the application thereof to any person or circumstance shall be adjudged to any
extent invalid, unenforceable, void or voidable for any reason whatsoever by a
court of competent jurisdiction, such provision shall be as narrowly construed
as possible, and each and all of the remaining terms, provisions, promises,
covenants and conditions of this Agreement or their application to other persons
or circumstances shall not be affected thereby and shall be valid and
enforceable to the fullest extent permitted by law. To the extent this Agreement
is in violation of applicable law, then the parties agree to negotiate in good
faith to amend the Agreement, to the extent possible consistent with its
purposes, to conform to law.

         Section 6.11. Amendment. Except as expressly provided herein, this
Agreement may only be amended by a written agreement executed by all parties
hereto.

         Section 6.12 Binding Effect; Nonassignability. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective legal representatives, successors and permitted assigns, and nothing
in this Agreement, express or implied, is intended to confer upon any other
Person any rights or remedies of any nature whatsoever under or by reason of
this Agreement. This Agreement may be enforced separately by each Company
Entity, each KSI Entity, and each KBI Entity. Except as herein specifically
provided to the contrary, a party may not assign this Agreement or any rights or
obligations hereunder (including, without


                                       13

limitation, in connection with a sale of all or substantially all of such
party's assets), without the prior written consent of each of the other parties.

         Section 6.13. Waiver of Breach. The waiver by a party hereto of a
breach or violation of any provision of this Agreement shall not operate as, or
be construed to constitute, a waiver of any subsequent breach of the same or
another provision hereof.

         Section 6.14. Authority. Each party hereto represents to the others
that (a) it has the corporate or other requisite power and authority to execute,
deliver and perform this Agreement, (b) the execution, delivery and performance
of this Agreement by it has been duly authorized by all necessary corporate or
other actions, (c) it has duly and validly executed and delivered this
Agreement, and (d) this Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equity principles.

         Section 6.15. Descriptive Headings. The headings contained in this
Agreement or in any Schedule hereto are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. Any
capitalized term used in any Schedule but not otherwise defined therein, shall
have the meaning assigned to such term in this Agreement. When a reference is
made in this Agreement to an Article or a Section, or Schedule, such reference
shall be to an Article or Section of, or a Schedule to, this Agreement unless
otherwise indicated.

         Section 6.16. Gender and Number. Whenever the context of this Agreement
requires, the gender of all words herein shall include the masculine, feminine
and neuter, and the number of all words herein shall include the singular and
plural.

         Section 6.17. Additional Assurances. Except as may be specifically
provided herein to the contrary, the provisions of this Agreement shall be
self-operative and shall not require further agreement by the parties; provided,
however, at the request of a party, another party shall execute such additional
instruments and take such additional acts as are reasonable, and as the
requesting party may reasonably deem necessary, to effectuate this Agreement.


                                       14

         Section 6.18. Counterparts. This Agreement may be executed in separate
counterparts, each of which shall be deemed an original and all of which, when
taken together, shall constitute one agreement.

         IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their duly authorized representatives.



CELERITY GROUP, INC. (formerly known as Kinetics Holdings Corporation)

By:__________________________________________________
     Name:
     Title:



KINETIC SYSTEMS, INC.



By:__________________________________________________
     Name:
     Title:



KINETICS BIOPHARM, INC.



By: __________________________________
     Name:
     Title:















                [SIGNATURE PAGE TO MANAGEMENT SERVICES AGREEMENT]




                                       15

[SERVICES, SERVICE CHARGES AND SERVICE SCHEDULES TO BE DETERMINED AND COMPLETED
                              BY THE CLOSING DATE]

EX-2.04

                                                                    Exhibit 2.04


                        CONFIDENTIAL DISCLOSURE AGREEMENT


         This Confidential Disclosure Agreement (the "AGREEMENT") is effective
as of _________, 2002 (the "EFFECTIVE DATE"), between Celerity Group, Inc., a
Delaware corporation (the "COMPANY", formerly known as Kinetics Holdings
Corporation), Kinetic Systems, Inc., a California corporation ("KSI"), and
Kinetics Biopharm, Inc., a Delaware corporation ("KBI"). The Company, KSI and
KBI are sometimes referred to herein individually as a "PARTY" or collectively
as the "PARTIES."

         WHEREAS, the Board of Directors of each of the Company, KSI and KBI
have determined that it is in the best interests of the Company and its
stockholders to separate the Company's existing businesses into three
independent businesses by distributing the capital stock in KSI and KBI to the
Company's stockholders;

         WHEREAS, as part of the foregoing, the Company, KSI and KBI have
entered into a Separation Agreement (as defined below), which provides, among
other things, for the separation of the three businesses and the execution and
delivery of certain other agreements in order to facilitate and provide for the
foregoing; and

         WHEREAS, also as part of the foregoing, the parties further desire to
enter into this Agreement to provide for the protection of their Confidential
Information (as defined below).

         NOW, THEREFORE, in consideration of the mutual promises of the parties,
and of good and valuable consideration, it is agreed by and between the parties
as follows:

                                   ARTICLE I

                                   DEFINITIONS

         For the purpose of this Agreement the following capitalized terms are
defined in this Article I.

         1.1 "ANCILLARY AGREEMENTS" has the meaning set forth in the Separation
Agreement.

         1.2 "CONFIDENTIAL INFORMATION" means any and all financial, technical,
commercial or other information of the Company, KSI or KBI, as appropriate
(whether written or oral), including, without limitation, all information,
notes, client lists and records, reports, analyses, financial statements,
compilations, studies, forms, business or management methods, marketing data,
product designs, inventions, software, processes, manufacturing methods,
manufacturing line design or procedures, engineering design tools, test hardware
or software, supply base information, fee schedules, information technology
systems and programs, projections, forecasts or trade secrets of the Company,
KSI or KBI, as applicable, in each case whether or not such Confidential
Information is disclosed or otherwise made available to one party by another
party pursuant to this Agreement, as well as information disclosed by one party
to another party in connection with the Management Services Agreement of even
date herewith. Confidential Information does not include any information that
(i) is or becomes generally available to and

known by the public (other than as a result of an unpermitted disclosure
directly or indirectly by the Receiving Party or its affiliates, advisors or
representatives); (ii) is or becomes available to the Receiving Party on a
nonconfidential basis from a source other than the Disclosing Party or its
affiliates, advisors or representatives, provided that such source is not and
was not bound by a confidentiality agreement with or other obligation of secrecy
to the Disclosing Party; or (iii) has already been developed, or is hereafter
independently acquired or developed, by the Receiving Party without violating
any confidentiality agreement with or other obligation of secrecy to the
Disclosing Party.

         1.3 "CONFIDENTIALITY PERIOD" means, (i) with respect to Confidential
Information that is not Highly Confidential Information, three (3) years after
either (A) the Closing Date with respect to Confidential Information of the
Disclosing Party that is known to or in the possession of the Receiving Party as
of the Closing Date or (B) the date of disclosure with respect to Confidential
Information that is disclosed by the Disclosing Party to the Receiving Party
after the Closing Date, and (ii) with respect to Highly Confidential
Information, in perpetuity.

         1.4 "DISCLOSING PARTY" means the party owning or disclosing the
relevant Confidential Information.

         1.5 "CLOSING DATE" has the meaning set forth in the Separation
Agreement.

         1.6 "HIGHLY CONFIDENTIAL INFORMATION" means Confidential Information
that is product designs, inventions, software, processes, manufacturing methods,
manufacturing line design or procedures, engineering design tools, test hardware
or software, and trade secrets.

         1.7 "SEPARATION AGREEMENT" means the Separation Agreement dated of even
date herewith between the parties.

         1.8 "PERSON" has the meaning set forth in the Separation Agreement.

         1.9 "RECEIVING PARTY" means the non-owning party or recipient of the
relevant Confidential Information.

         1.10 "SUBSIDIARY" means, as to any Person, any corporation, limited
liability company, association, partnership, joint venture or other business
entity of which more than 50% of the voting capital stock or other voting
ownership interests is owned or controlled directly or indirectly by such Person
or by one or more of the Subsidiaries of such Person or by a combination
thereof. The term "Subsidiary" shall, as to the Company, also include Kinetics
Japan K.K.

         1.11 "THIRD PARTY" means a Person other than (i) the Company, its
Subsidiaries and their respective employees, (ii) KSI, its Subsidiaries and
their respective employees, and (iii) KBI, its Subsidiaries and their respective
employees.

         1.12 "TRANSACTION AGREEMENTS" means the Separation Agreement and the
Ancillary Agreements.


                                       2

                                    ARTICLE II

                                 CONFIDENTIALITY

         2.1 CONFIDENTIALITY AND NON-USE OBLIGATIONS. During the Confidentiality
Period, the Receiving Party shall (i) protect the Confidential Information of
the Disclosing Party by using the same degree of care, but no less than a
reasonable degree of care, to prevent the unauthorized use, dissemination, or
publication of the Confidential Information as the Receiving Party uses to
protect its own Confidential Information of a like nature, (ii) not use such
Confidential Information in violation of any use restriction in any Transaction
Agreement, and (iii) not disclose or publish such Confidential Information to
any Third Party, except as expressly permitted under this Agreement, in the
Transaction Agreements or in any other agreements entered into between the
parties in writing, without the prior written consent of the Disclosing Party.

         2.2 COMPELLED DISCLOSURE. If the Receiving Party or any of its
respective Subsidiaries believes that it will be compelled by a court or other
governmental authority to disclose Confidential Information of the Disclosing
Party, it shall (i) give the Disclosing Party prompt and timely written notice
so that the Disclosing Party may take steps to oppose such disclosure, but in
any event the Receiving Party shall not be prohibited from complying with such
requirement and (ii) cooperate with the Disclosing Party in the Disclosing
Party's attempts to oppose such disclosure, provided that such opposition is
reasonable in light of applicable law or regulation. If the Receiving Party
complies with the above, it shall not be prohibited from complying with such
requirement to disclose, but shall cooperate with the Disclosing Party to take
all reasonable steps to make such disclosure subject to a suitable protective
order or otherwise prevent unrestricted or public disclosure.

         2.3 NO RESTRICTION ON DISCLOSING PARTY. Nothing in this Agreement shall
restrict the Disclosing Party from using, disclosing, or disseminating its own
Confidential Information in any way provided that, in so doing, it does not use,
disclose or disseminate any Confidential Information of the Receiving Party.

         2.4 NO RESTRICTION ON REASSIGNMENT. This Agreement shall not restrict
reassignment of the Receiving Party's employees.

         2.5 THIRD PARTY RESTRICTIONS. Nothing in the Agreement supersedes any
restriction imposed by Third Parties on their Confidential Information, and
there is no obligation on the Disclosing Party to conform Third Party agreements
to the terms of this Agreement.

                                  ARTICLE III
                               WARRANTY DISCLAIMER

         EACH PARTY ACKNOWLEDGES AND AGREES THAT ALL CONFIDENTIAL INFORMATION IS
PROVIDED ON AN "AS IS, WHERE IS" BASIS AND THAT NO PARTY OR ANY OF ITS
SUBSIDIARIES HAS MADE OR WILL MAKE ANY WARRANTY WHATSOEVER WITH RESPECT TO
CONFIDENTIAL INFORMATION, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT
LIMITATION, ANY


                                       3

IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE,
ENFORCEABILITY OR NON-INFRINGEMENT.

                                   ARTICLE IV
                              TERM AND TERMINATION

         4.1 TERM. This Agreement shall remain in full force and effect unless
and until terminated by the mutual written agreement of the parties.

         4.2 SURVIVAL. Articles II (with respect to Confidential Information
acquired or disclosed prior to the date of termination), III, V, and VI shall
survive any termination of this Agreement.

                                   ARTICLE V

                               DISPUTE RESOLUTION

         Resolution of any and all claims, controversies and disputes arising
from or in connection with this Agreement shall be exclusively governed by and
settled in accordance with the provisions of Article VII of the Separation
Agreement; provided, however, that any such claim, controversy or dispute
regarding the following is not required to be negotiated prior to seeking relief
from a court of competent jurisdiction: breach of any obligation of
confidentiality; infringement, misappropriation, or misuse of any intellectual
property right; or any other claim where interim relief from the court is sought
to prevent serious and irreparable injury to a party.

                                   ARTICLE VI
                            MISCELLANEOUS PROVISIONS

         6.1 LIMITATION OF LIABILITY. IN NO EVENT SHALL A PARTY OR ITS
SUBSIDIARIES BE LIABLE TO ANOTHER PARTY OR ITS SUBSIDIARIES FOR ANY SPECIAL,
CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES, LOST DATA OR LOST
PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE)
ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

         6.2 EXPORT RESTRICTIONS. The parties shall adhere to all applicable
laws, regulations and rules relating to the export of technical data, and shall
not export or reexport any technical data, any products received from Disclosing
Party, or the direct product of such technical data, to any proscribed country
listed in such applicable laws, regulations and rules unless properly
authorized.

         6.3 NO IMPLIED LICENSES. Nothing contained in this Agreement shall be
construed as conferring any rights by implication, estoppel or otherwise, under
any intellectual property right, other than the rights expressly granted in this
Agreement with respect to


                                       4

Confidential Information. The parties are not required hereunder to furnish or
disclose to the other any technical or other information.

         6.4 INFRINGEMENT SUITS. A party shall not have any obligation hereunder
to institute any action or suit against a Third Party for misappropriation of
any of such party's Confidential Information or to defend any action or suit
brought by a Third Party that alleges infringement of any intellectual property
rights by the Receiving Party's authorized use of the Disclosing Party's
Confidential Information.

         6.5 ENTIRE AGREEMENT. This Agreement, the Transaction Agreements, and
the Exhibits and Schedules referenced or attached hereto and thereto constitute
the entire agreement between the parties with respect to the subject matter
hereof and shall supersede all prior written and oral and all contemporaneous
oral agreements and understandings with respect to the subject matter hereof.

         6.6 GOVERNING LAW. This Agreement shall be construed in accordance
with, and all claims, controversies and disputes hereunder shall be governed by,
the laws of the State of California, excluding its conflict of law rules and the
United Nations Convention on Contracts for the International Sale of Goods. The
Superior Court of Santa Clara County, California and/or the United States
District Court for the Northern District of California, San Jose Division, shall
have jurisdiction and venue over all claims, controversies and disputes between
the parties that are permitted to be brought in a court of law pursuant to
Article V above.

         6.7 NOTICES. Any notice, demand, offer, request or other communication
required or permitted to be given by a party pursuant to the terms of this
Agreement shall be in writing and shall be deemed effectively given the earlier
of (i) when received, (ii) when delivered personally, (iii) one (1) Business Day
after being delivered by facsimile (with electronic receipt of appropriate
confirmation), (iv) one (1) Business Day after being deposited with a nationally
recognized overnight courier service or (v) four (4) days after being deposited
in the U.S. mail, First Class with postage prepaid, and addressed to the
attention of:

        IF TO THE COMPANY:

                  [Name]
                  [Address]
                  [Address]
                  Attention:
                  Facsimile No.:  (___) ___-____

        with a copy to:

                  [Name]
                  [Address]
                  [Address]
                  Attention:
                  Facsimile No.:  (___) ___-____



                                       5

        IF TO KSI:

                  Kinetic Systems, Inc.
                  [Address]
                  [Address]
                  Attention:
                  Facsimile No.:  (___) ___-____

        with a copy to:

                  [Name]
                  [Address]
                  [Address]
                  Attention:
                  Facsimile No.:  (___) ___-____

        IF TO KBI:

                  [Name]
                  [Address]
                  [Address]
                  Attention:
                  Facsimile No.:  (___) ___-_____

        with a copy to:

                  [Name]
                  [Address]
                  [Address]
                  Attention:
                  Facsimile No.:  (___) ___-_____

         The parties may substitute a different address or facsimile number,
from time to time, if such substitute is provided to the intended notice
recipient in writing by notice given in the manner provided in this Section 6.7.

         6.8 COUNTERPARTS. This Agreement, including other documents referred to
herein, may be executed in counterparts, each of which shall be deemed to be an
original but all of which shall constitute one and the same agreement.

         6.9 BINDING EFFECT; ASSIGNMENT. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective legal
representatives, successors and permitted assigns, and nothing in this
Agreement, express or implied, is intended to confer upon any other Person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement. This Agreement may be enforced separately by the Company and each of
its Subsidiaries, by KSI and each of its Subsidiaries, and by KBI and each of
its Subsidiaries. Except as herein specifically provided to the contrary, a
party may not assign this Agreement or any rights or obligations hereunder
(including, without limitation, in connection with a sale of all


                                       6

or substantially all of such party's assets) without the prior written consent
of each of the other parties.

         6.10 SEVERABILITY. The parties hereto have negotiated and prepared the
terms of this Agreement in good faith with the intent that each and every one of
the terms, covenants and conditions herein be binding upon and inure to the
benefit of the respective parties. Accordingly, if any one or more of the terms,
provisions, promises, covenants or conditions of this Agreement or the
application thereof to any Person or circumstance shall be adjudged to any
extent invalid, unenforceable, void or voidable for any reason whatsoever by a
court of competent jurisdiction, such provision shall be as narrowly construed
as possible, and each and all of the remaining terms, provisions, promises,
covenants and conditions of this Agreement or their application to other persons
or circumstances shall not be affected thereby and shall be valid and
enforceable to the fullest extent permitted by law. To the extent this Agreement
is in violation of applicable law, then the parties agree to negotiate in good
faith to amend the Agreement, to the extent possible consistent with its
purposes, to conform to law.

         6.11 WAIVER OF BREACH. The waiver by a party hereto of a breach or
violation of any provision of this Agreement shall not operate as, or be
construed to constitute, a waiver of any subsequent breach of the same or
another provision hereof.

         6.12 AMENDMENT AND EXECUTION. This Agreement and amendments hereto
shall be in writing and executed in multiple copies via facsimile or otherwise
on behalf of the Company, KSI and KBI by their respective duly authorized
officers and representatives. Each multiple copy shall be deemed an original,
but all multiple copies together shall constitute one and the same instrument.

         6.13 AUTHORITY. Each of the parties hereto represents to the other that
(a) it has the corporate or other requisite power and authority to execute,
deliver and perform this Agreement, (b) the execution, delivery and performance
of this Agreement by it have been duly authorized by all necessary corporate or
other actions, (c) it has duly and validly executed and delivered this
Agreement, and (d) this Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equity principles.

         6.14 DESCRIPTIVE HEADINGS. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. When a reference is made in this Agreement to
an Article or a Section, such reference shall be to an Article or Section of
this Agreement unless otherwise indicated.

         6.15 GENDER AND NUMBER. Whenever the context of this Agreement
requires, the gender of all words herein shall include the masculine, feminine
and neuter, and the number of all words herein shall include the singular and
plural.

         6.16 ADDITIONAL ASSURANCES. Except as may be specifically provided
herein to the contrary, the provisions of this Agreement shall be self-operative
and shall not require further agreement by the parties; provided, however, at
the request of a party, another party shall


                                       7

execute such additional instruments and take such additional acts as are
reasonable, and as the requesting party may reasonably deem necessary, to
effectuate this Agreement.

         6.17 FORCE MAJEURE. A party shall not be liable or deemed to be in
default for any delay or failure in performance, other than of confidentiality
and use restrictions, under this Agreement or other interruption of service
deemed to result, directly or indirectly, from acts of God, civil or military
authority, acts of public enemy, war, accidents, explosions, earthquakes,
floods, failure of transportation, strikes or other work interruptions by a
party's employees, or any other similar cause beyond the reasonable control of
a party unless such delay or failure in performance is expressly addressed
elsewhere in this Agreement.



         WHEREFORE, the parties have signed this Confidential Disclosure
Agreement effective as of the date first set forth above.

CELERITY GROUP, INC. (formerly                   KINETIC SYSTEMS, INC.
known as Kinetics Holdings Corporation)

By:                                              By:
     ---------------------------------------          --------------------------

Name:                                            Name:
       -------------------------------------          --------------------------

Title:                                           Title:
        ------------------------------------           -------------------------


KINETICS BIOPHARM, INC.


By:  ___________________________

Name:  _________________________

Title:__________________________





              [SIGNATURE PAGE TO CONFIDENTIAL DISCLOSURE AGREEMENT]


                                       8

EX-2.05

                                                                    EXHIBIT 2.05

                              TAX SHARING AGREEMENT


                                     BETWEEN


                             KINETIC SYSTEMS, INC.,

                            KINETICS BIOPHARM, INC.,

                                       AND

                              CELERITY GROUP, INC.
                (FORMERLY KNOWN AS KINETICS HOLDINGS CORPORATION)


                           ---------------------------




                              TAX SHARING AGREEMENT

        This Tax Sharing Agreement (the "AGREEMENT"), effective as of
___________, 2002 (the "EFFECTIVE DATE"), is made and entered into by and among
Celerity Group, Inc., a Delaware corporation ("CELERITY," formerly known as
Kinetics Holdings Corporation), Kinetic Systems, Inc., a California corporation
("KSI"), and Kinetics Biopharm, Inc., a Delaware corporation ("KBI"). Celerity,
KSI and KBI are sometimes referred to herein individually as a "PARTY" or
collectively as the "PARTIES." Such references to a "party" shall include a
reference to the present and future subsidiaries of the parties, as the context
of the reference may require. Capitalized terms used herein and not otherwise
defined herein shall have the meanings ascribed to such terms in that certain
Separation Agreement (the "SEPARATION AGREEMENT") between the parties hereto,
dated effective as of _________, 2002.

                                    RECITALS

        A. WHEREAS, Pursuant to the Separation Agreement and related Ancillary
Agreements, the parties desire that the following events occur:

                1. Prior to or simultaneous with the Distribution as defined
below, the current shareholders of Celerity (the "EXISTING SHAREHOLDERS") may
form HLLC, a Limited Liability Company in the State of Delaware ("HLLC"), as an
entity that would be treated as a partnership for US Federal income tax
purposes.

                2. Prior to or simultaneous with the Distribution, HLLC may form
Kinetics Biopharm, Inc. Holding Corporation, a Delaware corporation ("KBIHC"),
and Kinetic Systems, Inc. Holding Corporation, a Delaware corporation ("KSIHC"),
both with minimum capitalization.

                3. Prior to or simultaneous with the Distribution, KGI will
contribute the stock of Kinetics Modular Systems, Inc. ("KMS") to KBI as a
capital contribution.

                4. Prior to or simultaneous with the Distribution, KGI will
contribute the stock of Kinetics Thermal Systems, Inc ("KTS") to KSI as a
capital contribution.

                5. Prior to or simultaneous with the Distribution, KGI will
contribute to KSI an intercompany receivable owing from KSI to KGI as a capital
contribution.

                6. As part of the "DISTRIBUTION" KGI will distribute 100% of the
stock of KBI and 100% of the stock of KSI to Celerity, and Celerity will
immediately thereafter distribute the stock of KBI and KSI to the Existing
Shareholders on a pro rata basis all on the "DISTRIBUTION DATE" as defined in
the Separation Agreement.

                7. After or simultaneous with the Distribution, the Existing
Shareholders may contribute the stock of KBI and KSI to HLLC.



                                  Page 1 of 18


TAX SHARING AGREEMENT

                8. After or simultaneous with the Distribution, HLLC may
contribute the stock of KBI to KBIHC in exchange for stock in KBIHC or as a
capital contribution.

                9. After or simultaneous with the Distribution, HLLC may
contribute the stock of KSI to KSIHC in exchange for stock in KSIHC or as a
capital contribution.

                10. After or simultaneous with the Distribution, Celerity may
cause KGI to be liquidated into Celerity.

                11. At the time of registration or simultaneous with the
transactions described above, Celerity will issue stock for cash in an initial
public offering.

        B. WHEREAS, the parties intend that the Distribution will result in the
separation of KSI and KBI from the Affiliated Group or Combined Group of which
Celerity is the common or group parent.

        C. WHEREAS, KBI, KSI and Celerity have determined that it is necessary
and desirable to provide for allocations between and among KBI, KSI and Celerity
of the responsibilities, liabilities and benefits relating to Taxes paid or
payable by the parties determined on a consolidated, combined, unitary or other
group basis, with respect to any period beginning before the Distribution Date.

        D. WHEREAS, KBI, KSI and Celerity would like to officially designate and
authorize the Representative of the Affiliated Group and Combined Group to
handle the responsibilities for certain administrative matters, such as:

                1. the preparation and filing of Tax Returns for
Pre-Distribution Periods, Straddle Periods, and Post-Distribution Periods.

                2. the allocation and payment of Taxes shown to be due and
payable on any Pre-Distribution Period Tax Return or Straddle Period Tax Return
(as well as any estimated or advance payments required to be paid before the
filing of those Tax Returns);

                3. the allocation and payment of any additional Taxes determined
to be due and payable with respect to any Pre-Distribution Period or Straddle
Period;

                4. the allocation and disbursement of any Tax refunds received
with respect to any Pre-Distribution Period or Straddle Period;

                5. the retention, maintenance and provision of access to all
records necessary to prepare and file appropriate Pre-Distribution Period Tax
Returns or Straddle Period Tax Returns;

                6. the conduct of audits, examinations, and proceedings that
could result in a redetermination of Tax liabilities for any Pre-Distribution
Period or Straddle Period;

                7. the exclusion of Celerity (or its predecessor and/or
successors in interest) from any excess section 338(h)(10) tax liability as
defined in section 6.2(j) of that certain Stock



                                  Page 2 of 18


TAX SHARING AGREEMENT

Purchase Agreement between KGI (as successor in interest to Kinetics Acquisition
Corporation) and United States Filter Corporation ("USF") dated as of July 18,
2000 (the "USF AGREEMENT"); and

                8. the exclusion of Celerity (or its predecessor and/or
successors in interest) from any Tax liability associated with the restructuring
transactions described above.

        NOW, THEREFORE, in consideration of the mutual agreements, provisions,
and covenants contained in this Agreement (the adequacy of which is hereby
acknowledged by the parties), the parties hereby agree as follows:

                                    AGREEMENT

1. DEFINITIONS.

        As used in this Agreement the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined).

        1.1. "ADJUSTMENT" means an adjustment determined on an issue-by-issue or
transaction-by-transaction basis, as appropriate, made or proposed by a Taxing
Authority with respect to any amount reflected or required to be reflected on
any Return relating to such Tax.

        1.2. "AFFILIATED GROUP" means Celerity and all other corporations which
prior to the Distribution were required to be included in a US consolidated
Federal income Tax return with Celerity as the common parent corporation.

        1.3. "AFTER TAX BASIS" means a basis such that any payment received or
deemed to have been received by a party (the "ORIGINAL PAYMENT") shall be
supplemented by a further payment to such party so that the sum of the two
payments shall equal the Original Payment, after taking into account all Taxes
that would result from the receipt or accrual of such payments, if legally
required. All payments hereunder shall be calculated on the assumptions that the
payee is subject to tax at the highest marginal rates of Tax applicable to such
class of taxpayer.

        1.4. "CODE" shall mean the United Stated Internal Revenue Code of 1986,
as amended, and the Treasury Regulations promulgated thereunder. All section
references are to the Code unless otherwise indicated.

        1.5. "COMBINED GROUP" means Celerity and all other corporations which
prior to the Distribution were required to be included in a Return of state
income or franchise Tax filed on a combined, group or unitary basis (a "COMBINED
RETURN"), as opposed to a separate company basis.

        1.6. "ESTIMATED PAYMENT DATE" means each date occurring during any
period upon which the Affiliated Group or Combined Group is required to make a
payment of estimated Tax whether or not such a payment is due.

        1.7. "EXTENSION PAYMENT DATE" means, with respect to any period any date
upon which the Affiliated Group or the Combined Group shall be required to make
a payment of



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TAX SHARING AGREEMENT

Taxes in connection with any request by Celerity on behalf of the Affiliated
Group or Combined Group for an extension of the date upon which it would have
been required, absent such extension, to file its Tax Return.

        1.8. "FINAL DETERMINATION" means (a) a decision, judgment, decree or
other order by any court of competent jurisdiction, which has become final and
is either no longer subject to appeal or for which a determination not to appeal
has been made; (b) a closing agreement made under Section 7121 of the Code or
any comparable foreign, state, local, municipal or other Taxing statute; (c) a
final disposition by any Taxing Authority of a claim for refund; or (d) any
other written agreement relating to an Adjustment to which any Taxing Authority
is a party to the execution of which is final and prohibits such Taxing
Authority from seeking any further legal or administrative remedies with respect
to such Adjustment.

        1.9. "IRS" means the United States Internal Revenue Service.

        1.10. "POST-DISTRIBUTION PERIOD" means any period of time beginning
after the Distribution Date.

        1.11. "PRE-DISTRIBUTION PERIOD" means any period of time beginning
before and ending on or before the Distribution Date.

        1.12. "REGULATIONS" means the Regulations issued by the Secretary of the
Treasury interpreting the Code.

        1.13. "REPRESENTATIVE OF THE AFFILIATED GROUP AND COMBINED GROUP" means
KSI or any successor in interest, and the person(s) within KSI responsible for
performing the functions to be performed by the Representative of the Affiliated
Group and Combined Group shall be the highest ranking tax officer of KSI (most
likely the VP of Taxes, or Director of Tax).

        1.14. "RETURN" means any return, report, form or similar statement or
document (including, without limitation, any related or supporting information
or schedule attached thereto and any information return, claim for, amended
return and declaration of estimated Tax) that has been or is required to be
filed with any Taxing Authority or that has been or is required to be furnished
to any Taxing Authority in connection with the determination, assessment or
collection of any Taxes or the administration of any laws, regulations or
administrative requirements relating to any Taxes.

        1.15. "STRADDLE PERIOD" means any period of time beginning before but
ending after the Distribution Date. Straddle periods may exist in any situations
involving any Tax computed on a basis which does not and cannot be closed on the
Distribution Date including, but not limited to, payroll taxes, property taxes,
sales taxes, and the like.

        1.16. "TAX" (and, with correlative meanings, "TAXES" and "TAXABLE")
means, without limitation, and as determined on a jurisdiction-by-jurisdiction
basis, each foreign or US Federal, state, local or municipal income, alternative
or add-on minimum, gross receipts, sales, use, ad valorem, transfer, franchise,
profits, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property or any other tax, custom, tariff, impost, levy,
duty, governmental fee or other like assessment or charge of any kind
whatsoever, together with



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TAX SHARING AGREEMENT

any interest or penalty, addition to tax or additional amount related thereto,
imposed by any Taxing Authority.

        1.17. "TAX BENEFIT" means with respect to any Taxable period or portion
of a Taxable period, and as computed separately with respect to each Tax, the
net decrease in each such Tax resulting from all Adjustments made pursuant to a
Final Determination with respect to each such Tax.

        1.18. "TAX CONTEST" means, without limitation, any audit, examination,
claim, suit, action or other proceeding relating to Taxes in which an Adjustment
to Taxes may be proposed, collected or assessed and in respect of which an
indemnity payment, reimbursement or other payment may be sought under this
Agreement.

        1.19. "TAX DETRIMENT" means with respect to any Taxable period or
portion of a Taxable period, as computed separately with respect to each Tax,
the net increase in each such Tax resulting from all Adjustments made pursuant
to a Final Determination with respect to each such Tax.

        1.20. "TAXING AUTHORITY" means any governmental authority or any
subdivision, agency, commission or authority thereof, or any quasi-governmental
or private body having jurisdiction over the assessment, determination,
collection or other imposition of Taxes.

2. ALLOCATION OF TAX LIABILITY.

        2.1. REGULAR US FEDERAL INCOME TAX. If the US Federal income Tax
liability of the Affiliated Group for any Pre-Distribution Period or Straddle
Period during which a party or any subsidiary thereof is a member of the
Affiliated Group (an "AFFILIATED GROUP MEMBER"), is determined on a regular US
Federal income Tax basis, then the amount of US Federal income Tax liability
allocable to each Affiliated Group Member and for which each Affiliated Group
Member shall be responsible for such periods, shall be determined using the
basic Tax allocation method described in Section 1552(a)(1) of the Code (the
separate taxable income method), without taking into account the complementary
methods of allocating Tax liabilities described in Treas. Reg. Section
1.1502-33(d) or Treas. Reg. Section 1.1502-32(b)(3)(iv)(D). The Representative
of the Affiliated Group and Combined Group shall be responsible for preparing
such Tax allocations and computations, including, but not limited to, the
determination of how any Affiliated Group US Federal regular income Tax
attributes are to be apportioned among the members of the Affiliated Group.

        2.2. US FEDERAL ALTERNATIVE MINIMUM TAX. If the Affiliated Group pays US
Federal consolidated alternative minimum Tax ("AMT") for any Pre-Distribution
Period or Straddle Period during which a party or any subsidiary thereof is an
Affiliated Group Member, then the amount of the Affiliated Group's AMT allocable
to each Affiliated Group Member and for which each Affiliated Group Member shall
be responsible for such periods shall equal the excess, if any, of (A) the total
AMT of the Affiliated Group for the period, over (B) the AMT of the Affiliated
Group for the period computed by excluding that Affiliated Group Member's items
of income, gain, deduction and loss, and that party's credits. The
Representative of the Affiliated Group and Combined Group shall be responsible
for preparing such Tax allocations and



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TAX SHARING AGREEMENT

computations, including, but not limited to, the determination of how any
Affiliated Group AMT Tax attributes are to be apportioned among the members of
the Affiliated Group.

        2.3. OTHER CONSOLIDATED, COMBINED, UNITARY OR GROUP TAXES. With respect
to all Taxes other than the US consolidated Federal income Taxes and AMT
addressed in Sections 2.1 and 2.2 of this Agreement, that are determined on a
consolidated, combined, unitary or group basis for any Pre-Distribution Period
or Straddle Period during which a party or any subsidiary thereof is a member of
such a consolidated, combined, unitary or group (a "COMBINED GROUP MEMBER"), the
amount of such other Taxes allocable to each Combined Group Member and for which
each Combined Group Member shall be responsible for such periods shall be
determined by applying the principles underlying the allocation method described
in Section 1552(a)(1) of the Code, without taking into account the complementary
methods of allocating Tax liabilities described in Treas. Reg. Section
1.1502-33(d) or Treas. Reg. Section 1.1502-32(b)(3)(iv)(D). The Representative
of the Affiliated Group and Combined Group shall be responsible for preparing
such Tax allocations and computations, including, but not limited to, the
determination of how any Affiliated Group non-US Federal regular income and
non-AMT Tax attributes are to be apportioned among the members of the Affiliated
Group.

        2.4. SEPARATE COMPANY TAXES. With respect to all Taxes computed on a
separate company basis for any Pre-Distribution Period, Straddle Period or
Post-Distribution Period, each party or subsidiary thereof shall be separately
responsible for their respective separate company Taxes for such periods
(including, without limitation, the payment of such separate company Taxes and
the preparation and filing of any Tax Return related to such Taxes).

        2.5. POST-DISTRIBUTION PERIOD CONSOLIDATED, COMBINED, UNITARY OR GROUP
TAXES. Any Taxes attributable to any Post-Distribution Period (including,
without limitation, the payment of such Taxes and the preparation and filing of
any Tax Return related to such Taxes) of any party(ies) or subsidiary(ies)
thereof, determined on a consolidated, combined, unitary or group basis, shall
be the sole responsibility of each party or subsidiary thereof as members of
such consolidated, combined, unitary or group for such periods and shall be
allocated and apportioned among such group members in accordance with applicable
Tax law. In addition, any Tax attributes attributable to any Post-Distribution
Period determined on a consolidated, combined, unitary or group basis, shall be
allocated and apportioned among such group members in accordance with applicable
Tax law, or some other reasonable basis if applicable Tax law does not provide
any allocation or apportionment rules. The Representative of the Affiliated
Group and Combined Group shall be responsible for preparing such Tax allocations
and computations. This section 2.5 shall not create any obligations or
liabilities on the part of any party to this Agreement which is not a member of
such consolidated, combined, unitary or group, except to the extent otherwise
provided in this Agreement.

        2.6. ALLOCATION OF TAXES WITHIN A STRADDLE PERIOD. Taxes attributable to
any Straddle Periods as determined in this Agreement shall be allocable to each
party or a subsidiary thereof within such Straddle Periods to the portions of
such Straddle Periods before and after the Distribution Date by applying the
provisions of and / or principles underlying the allocation method described in
Treas. Reg. Section 1.1502-76(b)(2) as if each of the parties or subsidiaries
thereof had closed their books as of the end of the Distribution Date. The
Representative of the



                                  Page 6 of 18


TAX SHARING AGREEMENT

Affiliated Group and Combined Group shall be responsible for preparing such Tax
allocations and computations.

        2.7. DISPUTE RESOLUTION. The Representative of the Affiliated Group and
Combined Group shall use commercially reasonable efforts in preparing all
required Tax allocations and computations. Should a dispute arise concerning any
Tax allocations or computations, the dispute shall be resolved by hiring a third
party independent accounting firm to perform the disputed Tax allocations or
computations. The cost of hiring such third party independent accounting firm
shall be born by the party disputing the Tax allocations or computations
prepared by the Representative of the Affiliated Group and Combined Group.
Should the results of the third party independent accounting firm be
inconclusive, the disputed tax allocations shall be resolved pursuant to section
9 of this Agreement.

        2.8. ALLOCATION OF TAXES ARISING OUT OF USF AGREEMENT. Notwithstanding
the other provisions of this Section 2 and consistent with Section 7.2 of this
Agreement, Celerity and its predecessor and/or successors in interest shall not
be responsible for any excess section 338(h)(10) tax liability as defined in
section 6.2(j) of the USF Agreement. Thus, no such excess section 338(h)(10) tax
liability can be allocated under Section 2 of this Agreement to Celerity or its
predecessor and/or successors in interest. All such excess section 338(h)(10)
tax liability, if any, arising out of section 6.2(j) of the USF Agreement shall
be allocable only to KSI and/or KBI in accordance with the other rules of
Section 2 of this Agreement as if Celerity or its predecessor and/or successors
in interest did not exist, and KSI and KBI shall be jointly and severally liable
for such amounts.

        2.9. ALLOCATION OF TAXES ATTRIBUTABLE TO THE RESTRUCTURING TRANSACTIONS.
Notwithstanding the other provisions of this Section 2 and consistent with
Section 7.3 of this Agreement, Celerity and its predecessor and/or successors in
interest shall not be responsible for any Tax liabilities stemming from any
taxable gain or any taxable income recognized by Celerity or its predecessor
and/or successors in interest as a result of the restructuring transactions
described in Recital A of this Agreement. Thus, no such Tax liabilities can be
allocated under Section 2 of this Agreement to Celerity and its predecessor
and/or successors in interest. All such Tax liabilities, if any, shall be
allocable only to KSI and/or KBI in accordance with the other rules of Section 2
of this Agreement as if Celerity or its predecessor and/or successors in
interest did not exist, and KSI and KBI shall be jointly and severally liable
for such amounts.

3. PAYMENTS OF TAX; DISTRIBUTION OF TAX REFUNDS ON ORIGINAL OR AMENDED TAX
   RETURNS.

        3.1. PAYMENT OF ALLOCATED TAX AMOUNTS. Each party on behalf of and for
itself and each of its subsidiaries shall pay their combined allocable share of
any Taxes as determined in this Agreement and as reflected on any original or
amended Tax Return for any Pre-Distribution or Straddle Period filed after the
Distribution Date to the Representative of the Affiliated Group and Combined
Group filing such Tax Returns on or before the date such Tax Returns are filed
with the appropriate Taxing Authority. The Representative of the Affiliated
Group and Combined Group shall forward any such payments to the appropriate
Taxing Authority in conjunction with the filing of any such Tax Returns.



                                  Page 7 of 18


TAX SHARING AGREEMENT

                3.1.1. NOTICE; AVAILABILITY OF FUNDS. The Representative of the
Affiliated Group and Combined Group filing such original or amended Tax Returns
shall provide the other parties with as much notice as is practicable concerning
the date on which the Tax payment required under Section 3.1 hereof shall be
paid. Each paying party shall ensure that each such Tax payment required under
Section 3.1 hereof is made to the Representative of the Affiliated Group and
Combined Group in readily available same day funds such that such funds may be
combined with all other Taxes allocated by the Representative of the Affiliated
Group and Combined Group filing such Tax Returns and paid to the appropriate
Taxing Authorities on the date such Tax Returns are filed.

                3.1.2. ESTIMATED TAX CONSIDERATIONS. For these purposes,
estimated Tax payments made by a party or its subsidiaries directly to any
relevant Taxing Authority shall be taken into account in determining the
payments required to be made under Section 3.1 hereof.

        3.2. CONSOLIDATED, COMBINED, UNITARY, OR GROUP REFUNDS. If the
Affiliated Group or Combined Group receives a Tax refund as a result of an
overpayment of Taxes shown on any original or amended Tax Return filed by or for
the Affiliated Group or Combined Group with respect to any Pre-Distribution
Period or Straddle Period, then the Representative of the Affiliated Group and
Combined Group receiving any such Tax refund shall pay to the other parties that
portion of the Tax refund, if any, allocable to them or their subsidiaries. The
portion of the Tax refund allocable to the other parties or their subsidiaries
shall be equal to the excess, if any, of (i) the estimated Tax payments made by
that party or its subsidiaries to the Representative of the Affiliated Group and
Combined Group filing the relevant Tax Return, over (ii) that party's or its
subsidiaries' share of the Tax liability reported on the original or amended Tax
Return, allocated as provided in Section 2 of this Agreement.

4. MINIMUM TAX CREDITS, CARRYBACK OF TAX ATTRIBUTES.

        4.1. ALLOCATION OF MINIMUM TAX CREDITS. Any US consolidated Federal
minimum tax credit of the Affiliated Group for any Pre-Distribution Period or
Straddle Period shall be allocated to the extent possible to each Affiliated
Group Member in proportion to its allocable share of any AMT determined under
Section 2.2 of this Agreement. If it is determined that such an allocation is
not possible, or if the Treasury Department issues Regulations that prohibit or
require a different allocation, then the parties shall use commercially
reasonable efforts to comply with such other required allocation methodology and
take into account any differences in determining the amount one party may need
to pay to another party for the loss of any US consolidated Federal minimum tax
credit. The Representative of the Affiliated Group and Combined Group shall be
responsible for preparing such credit allocations and computations.

        4.2 ALLOCATION OF OTHER TAX ATTRIBUTES. All other Tax attributes of the
Affiliated Group or Combined Group for any Pre-Distribution Period or Straddle
Period shall be allocated or apportioned to the members of such groups in
accordance with the rules prescribed by the Code or other applicable Tax law for
the allocation or apportionment of such Tax attributes. If the Code or other
applicable Tax law provides no rules for allocating or apportioning any such Tax
attribute, then such Tax attribute shall be allocated and/or apportioned on a
reasonable basis determined by and in the sole discretion of the Representative
of the Affiliated Group and Combined Group.



                                  Page 8 of 18


TAX SHARING AGREEMENT

        4.3. ELECTIVE CARRYBACK OF POST-DISTRIBUTION TAX ATTRIBUTES. If, for any
Post-Distribution Period, a party recognizes a loss, credit, or similar Tax
attribute that, under applicable Tax law, may be carried back at the party's
election to a Pre-Distribution Period or a Straddle Period of the Affiliated
Group or Combined Group during which the party was a member of the Affiliated
Group or Combined Group filing consolidated, combined, unitary or group Tax
Returns, then the party shall forego the ability to carry back such loss,
credit, or similar tax attribute to such period.

        4.4. MANDATORY CARRYBACK OF POST-DISTRIBUTION TAX ATTRIBUTES. If, for
any Post-Distribution Period, a party recognizes a loss, credit, or similar Tax
attribute that, under applicable law, must be carried back to a Pre-Distribution
Period or a Straddle Period of the Affiliated Group or Combined Group during
which the party was a member of the Affiliated Group or Combined Group filing
consolidated, combined, unitary or group Tax Returns, then the Representative of
the Affiliated Group and Combined Group for such periods shall, at the party's
expense, file appropriate Tax refund claims within a reasonable period of time
after receiving notice from the party that such Tax attribute must be carried
back to such periods. The Representative of the Affiliated Group and Combined
Group for such periods shall remit to the party any Tax refunds received, less
any applicable costs, with respect to any Tax attribute so carried back upon
receipt of such Tax refund. The Representative of the Affiliated Group and
Combined Group shall be responsible for preparing such Tax allocations and
computations.

5. CONDUCT OF TAX CONTESTS; REDETERMINATION OF TAX LIABILITIES; COOPERATION.

        5.1. SEPARATE PARTY CLAIMS. Each party or its subsidiaries shall have
sole and complete authority to contest any claim by a Taxing Authority arising
from an examination of a Tax Return for any Taxable period with respect to any
Tax Return which includes only that party or its subsidiaries (a "SEPARATE PARTY
CLAIM"). The Representative of the Affiliated Group and Combined Group shall use
its commercially reasonable efforts (at the cost of the requesting party) to
assist the party in assisting with the resolution of the Separate Party Claim as
set forth in that certain Management Services Agreement ("MANAGEMENT SERVICES
AGREEMENT") between and among the parties, dated effective as of ________, 2002.

        5.2. GROUP CLAIMS. Except as otherwise provided in Section 5.1 hereof,
the Representative of the Affiliated Group and Combined Group shall have sole
and complete authority to control and resolve the contest of any claim by any
Taxing Authority arising from an examination of any Tax Return for any
Pre-Distribution or Straddle Period relating to the Affiliated Group or Combined
Group (a "GROUP CLAIM"), provided that other parties ultimately affected by the
resolution of the Group Claim shall be allowed the opportunity to provide
constructive and useful input to the Representative of the Affiliated Group and
Combined Group within the time and procedural constraints established by the
Representative of the Affiliated Group and Combined Group in the handling of any
Group Claim at the sole discretion of the Representative of the Affiliated Group
and Combined Group. No other party shall have any other right to participate in
the contest of a Group Claim. The Representative of the Affiliated Group and
Combined Group shall be entitled to incur reasonable costs in handling any Group
Claim. The other parties affected by a Group Claim shall be responsible for and
shall pay to the



                                  Page 9 of 18


TAX SHARING AGREEMENT

Representative of the Affiliated Group and Combined Group their reasonable share
of such costs as determined by the Representative of the Affiliated Group and
Combined Group.

        5.3. REDETERMINED TAX LIABILITIES

                5.3.1. SEPARATE PARTY CLAIMS. If a Final Determination of Taxes
results from a Separate Party Claim, the relevant party shall pay any resulting
increase in Tax liability and shall be entitled to receive any refunds related
to a decrease in Tax liability attributable to the Separate Party Claim.

                5.3.2 GROUP CLAIMS: TAX INCREASE. If a Final Determination of a
Group Claim results in an increase in Tax liability for the Affiliated Group or
Combined Group with respect to the Group Claim, then such Tax increase shall be
allocated to the parties in accordance with the allocation methodology provided
in Section 2 of this Agreement. The Representative of the Affiliated Group and
Combined Group shall notify each party of their share of any such Tax increase
and each party shall pay to the Representative of the Affiliated Group and
Combined Group such share on or before such Tax amount is paid to the relevant
Taxing Authority. The Representative of the Affiliated Group and Combined Group
shall be responsible for preparing such Tax allocations and computations.

                5.3.3 GROUP CLAIMS: TAX REFUND. If a Final Determination of a
Group Claim results in a decrease in Tax liability for the Affiliated Group or
Combined Group with respect to the Group Claim, then such Tax decrease shall be
allocated to the parties in accordance with the allocation methodology provided
in Section 2 of this Agreement. The Representative or the Affiliated Group and
Combined Group shall notify each party of their share of any such Tax decrease
and shall make arrangements to disburse any Tax Refunds resulting from such Tax
decrease (net of any costs) to the other parties when such Tax Refunds are
received from the relevant Taxing Authority. The Representative of the
Affiliated Group and Combined Group shall be responsible for preparing such Tax
allocations and computations.

        5.4. RETENTION OF AND ACCESS TO RECORDS; COOPERATION AND ASSISTANCE

                5.4.1. RETENTION OF AND ACCESS TO RECORDS. The Representative of
the Affiliated Group and Combined Group shall retain all Tax Returns for
Pre-Distribution and Straddle Periods, together with all related reports, work
papers, schedules or other documents or files (whether in paper or electronic
form), in accordance with the record retention policies established by the
Representative of the Affiliated Group and Combined Group for the Affiliated
Group and Combined Group, and with the requirements of any relevant Taxing
Authority. Subject to the confidentiality provisions of Section 8 hereof, the
Representative of the Affiliated Group and Combined Group shall make these
documents or files available to each party on a reasonable basis and each party
may make copies of such documents or files at their own expense. A party shall
not dispose of any of these documents or files without the written permission of
the Representative of the Affiliated Group and Combined Group.

                5.4.2. COOPERATION. Each party and their subsidiaries shall
provide any assistance reasonably requested by the Representative of the
Affiliated Group and Combined Group in conducting any Tax Contest of a Group
Claim, subject to the confidentiality provisions



                                 Page 10 of 18


TAX SHARING AGREEMENT

of Section 8 hereof. Such assistance shall include (without limitation) the
execution of any powers of attorney, the execution of any statute of limitation
extensions, the execution of other appropriate documentation, the attendance at
any administrative or judicial proceedings as requested, the performance of
necessary computations, and, subject to the confidentiality provisions of
Section 8 hereof, provision of access to or furnishing books, records, tax
returns, and supporting work papers relevant to any Group Claim.

                5.4.3. ADDITIONAL COOPERATION AND ASSISTANCE. Subject to the
confidentiality provisions of Section 8 hereof, each party shall provide each
other with such cooperation, assistance, and information as the other parties
may reasonably request with respect to the filing with any Taxing Authority of
any Tax Return, amended Tax Return, claim for Tax Refund, or other document
relating to any Pre-Distribution Period or Straddle Period. With respect to any
Tax Return for any Pre-Distribution Period or Straddle Period that includes more
than one party, such assistance shall include the timely submission by the party
to the Representative of the Affiliated Group and Combined Group of pro forma
Tax Returns for the party. A party's obligations under this Section 5.4.3 shall
include, but is not limited to, the submission of a pro forma Tax Return for the
Pre-Distribution Period that will end on the Distribution Date, and the
provision of information and assistance in dealing with any administrative
matter pertaining to the USF Agreement, if any.

6. PREPARATION OF TAX RETURNS; ESTIMATED PAYMENTS.

        6.1. FILING OF AFFILIATED GROUP AND COMBINED GROUP TAX RETURNS FOR
PRE-DISTRIBUTION PERIODS AND STRADDLE PERIODS. The Representative of the
Affiliated Group and Combined Group shall have the sole and complete authority
and responsibility to prepare and timely file (for a fee) all Tax Returns of the
Affiliated Group and Combined Group on behalf of the members of those groups for
any Pre-Distribution Periods and Straddle Periods. Any fees or costs incurred by
the Representative of the Affiliated Group and Combined Group in preparing such
Tax Returns shall be shared by the parties on a reasonable basis determined by
the Representative of the Affiliated Group and Combined Group. Such reasonable
basis may include, but is not limited to, the proportion of Taxes allocated to
each party under Section 2 hereof.

        6.2. FILING OF TAX RETURNS FOR POST-DISTRIBUTION PERIODS. The parties
shall be separately responsible for the preparation and timely filing of all Tax
Returns of their own Post-Distribution Periods. The parties may request the
assistance of the Representative of the Affiliated Group and Combined Group (for
an appropriate fee) in the preparation of such Tax Returns as established and
described in the Management Services Agreement. The Representative of the
Affiliated Group will use its commercially reasonable efforts to provide such
requested assistance.

        6.3. ESTIMATED PAYMENTS: EXTENSION PAYMENTS. Except for estimated Tax
payments which have already been made by any party for or on behalf of the
Affiliated Group or Combined Group with respect to any Pre-Distribution Period
or Straddle Period, the Representative of the Affiliated Group and Combined
Group shall be responsible for making all estimated Tax payments to any relevant
Taxing Authorities required to be paid on or before the Estimated Payment Date
in connection with any Tax Return of the Affiliated Group or



                                 Page 11 of 18


TAX SHARING AGREEMENT

Combined Group for any Pre-Distribution Period and Straddle Period. The
Representative of the Affiliated Group and Combined Group shall be responsible
for making all payments required in connection with requests for extensions of
time to file such Tax Returns to any relevant Taxing Authorities required to be
paid on or before the Extension Payment Date. The Representative of the
Affiliated Group and Combined Group shall determine each party's share of such
estimated Tax payments and Tax Return extension payments in accordance with the
provisions of and principles described in Section 2 of this Agreement, and shall
notify each party in writing of their allocable share of such estimated Tax
payments and Tax Return extension payments and when such amounts must be paid to
the Representative of the Affiliated Group and Combined Group. Each party shall
be required to pay to the Representative of the Affiliated Group and Combined
Group their share of such amounts on or before the date such payments are paid
to the relevant Taxing Authority as specified in the notice to the parties.

7. INDEMNIFICATION.

        7.1. INDEMNITY OBLIGATIONS. Each party shall indemnify each other and
hold each other harmless from and against:

                7.1.1. any Tax liability, penalty, interest, cost, or expense
arising out of the fraudulent or negligent preparation by such party of any
information, workpapers, documents, or other items used in the preparation of,
or presented in, any Tax Return, amended Tax Return, or claims for Tax Refund;
and

                7.1.2. any Tax liability, and related cost, penalties, interest,
or related expense allocated to the party under this Agreement.

        7.2. OBLIGATIONS AND RESPONSIBILITIES ASSOCIATED WITH USF AGREEMENT.
Notwithstanding any other provision in this Agreement (including without
limitation the Tax allocation provisions of Section 2 of this Agreement and the
other indemnification provisions of Section 7 of this Agreement), Celerity and
its predecessor and/or successors in interest shall have no responsibility for
and no obligations to pay and shall be jointly and severally indemnified by KSI
and KBI against any excess section 338(h)(10) tax liability (and related costs,
fees, damages or expenses) as defined in section 6.2(j) of the USF Agreement.
Accordingly, Celerity and its predecessor and/or successors in interest do not
provide any indemnity for any excess section 338(h)(10) tax liability as defined
in section 6.2(j) of the USF Agreement.

        7.3. INDEMNIFICATION FOR RESTRUCTURING TRANSACTIONS. Notwithstanding any
other provision of this Agreement (including without limitation the Tax
allocation provisions of Section 2 of this Agreement and the other
indemnification provisions of Section 7 of this Agreement), Celerity and its
predecessor and/or successors in interest shall have no responsibility for and
shall be jointly and severally indemnified by KSI and KBI against any Tax
liabilities (and related costs, fees, damages or expenses) stemming from any
taxable gain or any taxable income recognized by Celerity or its predecessor
and/or successors in interest as a result of the restructuring transactions
described in Recital A of this Agreement, pursuant to which KSI and KBI stock
will be distributed to Celerity, and thereafter distributed to the Existing
Shareholders. Accordingly, Celerity and its predecessor and/or successors in
interest do not



                                 Page 12 of 18


TAX SHARING AGREEMENT

provide any indemnity for any amounts arising out of the restructuring
transactions described in Recital A of this Agreement.

        7.4. PERFORMANCE OF INDEMNITY OBLIGATIONS. Each party's indemnity
obligations under Section 7.1 hereof shall continue for the entire applicable
statute of limitations period applicable to the Tax involved until such
obligation is satisfied by the party. Each party shall satisfy its indemnity
obligations under Section 7.1 hereof in a manner consistent with the provisions
of Article IV of the Separation Agreement.

        7.5. AFTER TAX BASIS. All such indemnification payments required under
this Agreement shall be paid on an After Tax Basis.

        7.6. RIGHT OF SET OFF. Each party (a "PAYOR") may reduce the amount of
its indemnification obligation owing to another party (a "PAYEE") to the extent
that the payor has a legitimate indemnification claim against the payee.

        7.7. INDEMNIFICATION OF REPRESENTATIVE OF THE AFFILIATED GROUP AND
COMBINED GROUP. The parties hereby indemnify and hold harmless the
Representative of the Affiliated Group and Combined Group for any amounts
determined to be solely related to the performance of its functions under and
within the scope of this Agreement.

8. CONFIDENTIALITY OF DOCUMENTS AND INFORMATION.

        8.1. GENERAL RULE. Any documents or information provided pursuant to
this Agreement in connection with a Tax Contest or filing with a Taxing
Authority shall be disclosed by the recipient solely to its employees
responsible for any Tax Contest or Tax filing or to attorneys or accountants
advising the recipient on these matters. Any wider dissemination of these
documents or this information shall be allowed only if required by law or
authorized by the party providing the documents or information.

        8.2. CONFIDENTIAL DISCLOSURE AGREEMENT. The parties acknowledge that
communications between and among them may also be governed by that certain
Confidential Disclosure Agreement entered between the parties, dated effective
as of ___________, 2002.

9. DISPUTE RESOLUTION.

        9.1. OBLIGATION TO NEGOTIATE TO RESOLVE ANY DISPUTE. Except as provided
in Section 2.7 of this Agreement, if any dispute between the parties relating to
the validity, performance, interpretation or construction of this Agreement,
then the parties shall use commercially reasonable efforts to resolve any such
Tax related dispute through informal negotiation between the parties or their
authorized representatives. If at any time a party feels that such negotiations
are not leading to a resolution of the Tax related dispute, such party may send
a notice to the other parties describing the Tax related dispute and requesting
a meeting of the senior executives from each party. Within ten (10) business
days after such notice is given, each party shall select appropriate senior
executives (e.g., director or V.P. level) of each party who shall have the
authority to resolve the matter and shall meet to attempt in good faith to
negotiate a resolution of the Tax related dispute prior to pursuing the
arbitration remedy described below. During the course of negotiations under this
Section 9.1, all reasonable requests made by one party to the



                                 Page 13 of 18


TAX SHARING AGREEMENT

others for information, including requests for copies of relevant documents,
will be honored. The specific format for such negotiations will be left to the
discretion of the designated negotiating senior executives, but may include the
preparation of agreed upon statements of fact or written statements of position
furnished to the other parties.

        9.2 BINDING ARBITRATION. In the event that any Tax related dispute
arising out of or related to this Agreement is not settled by the parties within
thirty (30) days after the first meeting of the negotiating senior executives as
described in Section 9.1 of this Agreement, the dispute shall be submitted to
binding arbitration, to be held in Santa Clara County, California, in accordance
with the Commercial Arbitration Rules of the American Arbitration Association,
before a single arbitrator selected in accordance with such Commercial
Arbitration Rules. After affording the parties a reasonable opportunity to
present written and testimonial evidence in support of their respective
positions, the arbitrator shall issue his/her decision and award, which shall be
(i) in writing, stating the reasons therefor; (ii) based solely on the terms and
conditions of this Agreement, as interpreted under the laws of the State of
California; and (iii) final and binding upon the parties. The decision and award
of the arbitrator in any arbitration proceeding under this Section 9.2 may be
enforced in any court of competent jurisdiction.

        9.3. CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise agreed in
writing, the parties will continue to provide service and honor all other
commitments under this Agreement and any related agreements during the course of
dispute resolution pursuant to the provisions of Section 9 of this Agreement
with respect to all matters not subject to such dispute, controversy or claim.

10. MISCELLANEOUS.

        10.1. LIMITATION OF LIABILITY. IN NO EVENT SHALL A PARTY OR ITS
SUBSIDIARIES BE LIABLE TO THE OTHER PARTIES OR THEIR SUBSIDIARIES FOR ANY
SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST
PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE)
ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

        10.2. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and shall
supersede all prior written and oral and all contemporaneous oral agreements and
understandings with respect to the subject matter hereof.

        10.3. GOVERNING LAW. This Agreement shall be construed in accordance
with and all Disputes hereunder shall be governed by the laws of the State of
California, excluding its conflict of law rules and the United Nations
Convention on Contracts for the International Sale of Goods. The Superior Court
of Santa Clara County and/or the United States District Court for the Northern
District of California shall have jurisdiction and venue over all Disputes
between the parties that are permitted to be brought in a court of law pursuant
to Section 9 of this Agreement.



                                 Page 14 of 18


TAX SHARING AGREEMENT

        10.4. NOTICES. Any notice, demand, offer, request or other communication
required or permitted to be given by a party pursuant to the terms of this
Agreement shall be in writing and shall be deemed effectively given the earlier
of (i) when received, (ii) when delivered personally, (iii) one (1) Business Day
after being delivered by facsimile (with receipt of appropriate confirmation),
(iv) one (1) Business Day after being deposited with a nationally recognized
overnight courier service or (v) four (4) days after being deposited in the US
mail, First Class with postage prepaid, and addressed to the attention of:

        IF TO KINETIC SYSTEMS, INC.:

          ----------------------------------

          ----------------------------------

          ----------------------------------

          ----------------------------------

          ----------------------------------

        with a copy to:

          ----------------------------------

          ----------------------------------

          ----------------------------------

          ----------------------------------

          ----------------------------------

        IF TO KINETICS BIOPHARM, INC.:

          ----------------------------------

          ----------------------------------

          ----------------------------------

          ----------------------------------

          ----------------------------------

         with a copy to:

          ----------------------------------

          ----------------------------------

          ----------------------------------

          ----------------------------------

          ----------------------------------



                                 Page 15 of 18


TAX SHARING AGREEMENT

        IF TO CELERITY GROUP, INC. (FORMERLY KNOWN AS KINETICS HOLDINGS
CORPORATION):

          ----------------------------------

          ----------------------------------

          ----------------------------------

          ----------------------------------

          ----------------------------------

        with a copy to:

          ----------------------------------

          ----------------------------------

          ----------------------------------

          ----------------------------------

          ----------------------------------

A party may substitute a different address or facsimile number, from time to
time, if such substitute is provided to the intended notice recipient in writing
by notice given in the manner provided in this Section 10.4.

        10.5. COUNTERPARTS. This Agreement may be executed in counterparts via
facsimile or otherwise, each of which shall be deemed to be an original but all
of which shall constitute one and the same agreement.

        10.6. BINDING EFFECT; ASSIGNMENT. A party may not assign or transfer
this Agreement or any of its rights or obligations hereunder (including, without
limitation, in connection with a sale of all or substantially all of such
party's assets), without the prior written consent of each of the other parties.
This Agreement shall be binding upon, and shall inure to the benefit of, the
parties hereto and their respective legal representatives, successors and
permitted assigns.

        10.7. SEVERABILITY. The parties hereto have negotiated and prepared the
terms of this Agreement in good faith with the intent that each and every one of
the terms, covenants and conditions herein be binding upon and inure to the
benefit of the respective parties. Accordingly, if any one or more of the terms,
provisions, promises, covenants or conditions of this Agreement or the
application thereof to any person or circumstance shall be adjudged to any
extent invalid, unenforceable, void or voidable for any reason whatsoever by a
court of competent jurisdiction, such provision shall be as narrowly construed
as possible, and each and all of the remaining terms, provisions, promises,
covenants and conditions of this Agreement or their application to other persons
or circumstances shall not be affected thereby and shall be valid and
enforceable to



                                 Page 16 of 18


TAX SHARING AGREEMENT

the fullest extent permitted by law. To the extent this Agreement is in
violation of applicable law, then the parties agree to negotiate in good faith
to amend the Agreement, to the extent possible consistent with its purposes, to
conform to law.

        10.8. WAIVER OF BREACH. The waiver by a party hereto of a breach or
violation of any provision of this Agreement shall not operate as, or be
construed to constitute, a waiver of any subsequent breach of the same or
another provision hereof.

        10.9. AMENDMENT AND EXECUTION. This Agreement may not be amended except
with the express written consent of each party to this Agreement. This Agreement
and amendments hereto shall be in writing and executed in multiple copies via
facsimile or otherwise on behalf of KSI, KBI, and Celerity, and by their
respective duly authorized officers and representatives. Each multiple copy
shall be deemed an original, but all multiple copies together shall constitute
one and the same instrument.

        10.10. AUTHORITY. Each of the parties hereto represents to the other
parties that (a) it has the corporate or other requisite power and authority to
execute, deliver and perform this Agreement, (b) the execution, delivery and
performance of this Agreement by it have been duly authorized by all necessary
corporate or other actions, (c) it has duly and validly executed and delivered
this Agreement, and (d) this Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equity principles.

        10.11. DESCRIPTIVE HEADINGS. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. When a reference is made in this Agreement to
a section hereof, such reference shall be to a section of this Agreement unless
otherwise indicated.

        10.12. GENDER AND NUMBER. Whenever the context of this Agreement
requires, the gender of all words herein shall include the masculine, feminine
and neuter, and the number of all words herein shall include the singular and
plural.

        10.13. ADDITIONAL ASSURANCES. Except as may be specifically provided
herein to the contrary, the provisions of this Agreement shall be self-operative
and shall not require further agreement by the parties; provided, however, at
the request of any party, the other parties shall execute such additional
instruments and take such additional acts as are reasonable, and as the
requesting party may reasonably deem necessary, to effectuate this Agreement.

        10.14. FORCE MAJEURE. A party shall not be liable or deemed to be in
default for any delay or failure in performance under this Agreement or other
interruption of service deemed to result, directly or indirectly, from acts of
God, civil or military authority, acts of public enemy, war, accidents,
explosions, earthquakes, floods, failure of transportation, strikes or other
work interruptions by a party's employees, or any other similar cause beyond the
reasonable control of a party unless such delay or failure in performance is
expressly addressed elsewhere in this Agreement.



                                 Page 17 of 18


TAX SHARING AGREEMENT

        WHEREFORE, the parties have signed this Tax Sharing Agreement effective
as of the date first set forth above.




KINETIC SYSTEMS, INC.                       KINETICS BIOPHARM, INC.

By: /s                                      By: /s
       ---------------------------                  ----------------------------

Name:                                       Name:
       ---------------------------                  ----------------------------

Title:                                      Title:
       ---------------------------                  ----------------------------

Date:                                       Date:
       ---------------------------                  ----------------------------


CELERITY GROUP, INC. (formerly known as Kinetics Holdings
Corporation)

By: /s
       ---------------------------

Name:
       ---------------------------

Title:
       ---------------------------

Date:
       ---------------------------



                                 Page 18 of 18

EX-2.06

                                                                    Exhibit 2.06


                           TRADEMARK LICENSE AGREEMENT


      THIS TRADEMARK LICENSE AGREEMENT (the "AGREEMENT") is entered into
effective as of _________, 2002 (the "EFFECTIVE DATE"), by and among Celerity
Group, Inc., a Delaware corporation ("LICENSOR," formerly known as Kinetics
Holdings Corporation), and Kinetic Systems, Inc., a California corporation and
Kinetics Biopharm, Inc., a Delaware corporation (each, a "LICENSEE", and
collectively, the "LICENSEES").

                                    RECITALS

A. Licensor uses the trademarks and owns applications and registrations as
specified in Exhibit A (the "TRADEMARKS").

B. Before the Effective Date, each Licensee was a direct or indirect wholly
owned subsidiary of Licensor, and Licensor and the Licensees were all using the
Trademarks.

C. Licensor and the Licensees are parties to a Separation Agreement dated the
same date as the Effective Date (the "SEPARATION AGREEMENT") and related
agreements, pursuant to which Licensees will no longer be subsidiaries of
Licensor and the businesses of Licensor and Licensees will be separated.

D. Licensor plans to cease using the Trademarks within one year after the
Effective Date (the "TRANSITION PERIOD"), however the Licensees plan to continue
to use the Trademarks in connection with design, manufacture and installation of
process piping and control systems for use in the manufacturing processes,
biotechnology, pharmaceutical, semi-conductor, and fiber optic industries and
related products and services (the "SERVICES").

E. The parties desire that each Licensee will have the right to continue use the
Trademarks after the Effective Date, and each Licensee will have an option to
purchase an assignment of the Trademarks, in accordance with the terms of this
Agreement.

      NOW, THEREFORE, in partial consideration for the considerations provided
by the parties pursuant to the Separation Agreement and other related agreements
referred to therein, the parties agree as follows:

      1. Grant of License. Subject to the terms and conditions of this
Agreement, Licensor grants to each Licensee a non-transferable, perpetual,
worldwide, royalty-free license to use the Trademarks in connection with the
Services. This license shall be exclusive to the Licensees except that Licensor
may continue to use the Trademarks during the Transition Period. After the
Transition Period, Licensor shall cease all use of the Trademarks and the
license shall be exclusive to the Licensees.

      2. Trademark Usage and Attribution. Each Licensee shall, in connection
with such Licensee's use of the Trademarks: (i) materially comply with
Licensor's reasonable trademark usage guidelines provided to such Licensee; (ii)
refer to Licensor as the owner of the Trademarks and use any denotation and
attribution trademark symbol and statement reasonably directed by Licensor;
(iii) ensure that the nature and quality of the Services sold and/or rendered by
such Licensee in connection with the Trademarks shall conform to industry
standards regarding the nature and quality of such Services; (iv) cooperate with
Licensor in facilitating Licensor's control of such nature and

quality of the Services; and (v) comply with all applicable laws and
regulations, and obtain all appropriate government approvals pertaining to the
sale, rendering, and advertising of the Services.

      3. Ownership. Each Licensee acknowledges the ownership of the Trademarks
by Licensor, and each Licensee shall have no rights to the Trademarks other than
the rights expressly granted by this Agreement. All use of the Trademarks by
each Licensee and goodwill associated therewith shall inure to Licensor's
benefit. Each Licensee shall not attack the validity of the Trademarks, and
applications or registrations thereof, or Licensor's ownership of the
Trademarks. Each Licensee shall assist Licensor as reasonably necessary in the
registration and enforcement of Licensor's rights in and to the Trademarks,
including recordation of this Agreement. If a Licensee becomes aware of any
infringement of a Trademark by a third party, then that Licensee shall promptly
notify Licensor.

      4. Option to Purchase. Either Licensee may, by written notice to Licensor
purchase the Trademarks, along with the goodwill of the business symbolized by
the Trademarks, and the domain name kineticsgroup.com (the "DOMAIN NAME"), from
Licensor for payment to the Licensor of one hundred United States dollars (USD
$100). The "PURCHASING LICENSEE" shall be the Licensee from which Licensor
receives the first written notice. Upon receipt of such written notice by
Licensor, the remaining Licensee's option to purchase the Trademarks and Domain
Name from Licensor is immediately extinguished. Upon receipt of written notice
and payment from the Purchasing Licensee, the provisions of Sections 1, 2, 3, 6,
and 7 of this Agreement shall terminate and:

            (a) Licensor shall assign, transfer and convey to Purchasing
Licensee all of Licensor's right, title and interest worldwide in and to the
Trademarks and the Domain Name, including, without limitation, registered and
common law trademark rights, together with the goodwill of the business
symbolized by the Trademarks, and, with respect to those Trademarks that are the
subject of intent-to-use applications filed with the United States Patent and
Trademark Office ("USPTO") pursuant to Section 1(b) of the Trademarks Act, that
portion of Licensor's business to which the Trademarks pertain, as well as all
pending applications for USPTO and state registration of the Trademarks, all
foreign applications and registrations for the Trademarks, all rights
appurtenant to the Trademarks under the International Convention for the
Protection of Industrial Property and all other international treaties to which
the United States is a member, all claims for damages by reason of past
infringement of the Trademarks, with the right to sue for and collect the same
for Purchasing Licensee's own use and benefit;

            (b) Licensor shall, at Purchasing Licensee's expense, cooperate
reasonably with Purchasing Licensee to do all affirmative acts, and to execute
all papers that are necessary and/or desirable in connection with the perfection
in Purchasing Licensee of the rights assigned under paragraph (a) of this
Section, including, without limitation, the execution of separate assignments in
connection with such property and the provisions of any international treaty to
which the United States is a member;

            (c) Purchasing Licensee shall grant to Licensor a non-transferable,
worldwide, royalty-free license to use the Trademarks during the remainder of
the Transition Period on terms, restrictions and conditions similar to license
terms, restrictions and conditions granted by Licensor to the Licensees
hereunder, if such assignment, transfer and conveyance is effected during the
Transition Period; and


                                       2

            (d) Purchasing Licensee shall grant to the other Licensee an
exclusive (subject to any license granted to Licensor pursuant to paragraph (c)
of this Section, and subject to the Purchasing Licensee's right to use the
Trademarks), non-transferable, perpetual, worldwide, royalty-free license to use
the Trademarks on terms, restrictions and conditions similar to license terms,
restrictions and conditions granted by Licensor to the Licensees hereunder.

      5.    Term.  This Agreement will commence as of the Effective Date and
will remain in force and effect perpetually thereafter, unless and until
terminated in accordance with its terms.

      6. Termination by Licensor. Licensor may terminate this Agreement as
against a Licensee immediately by giving notice to such Licensee: (i) if such
Licensee commits a material breach of this Agreement and fails to correct such
breach within thirty (30) days after receiving written notice from Licensor of
such material breach; or (ii) upon the occurrence of any one or more of the
following events: (a) if such Licensee shall be unable to pay its debts when
due, or shall make any assignment for the benefit of creditors, or shall file
any petition under the bankruptcy or insolvency laws of any jurisdiction,
country or place, or shall have or suffer a receiver or trustee to be appointed
for its business or property, or be adjudicated a bankrupt or insolvent; (b) if
any government agency or court finds that the Services provided by such Licensee
are defective in any way, matter or form; (c) if actual or potential adverse
publicity or other information about such Licensee's use of a Trademark is such
that Licensor, in its sole judgment, believes that Licensor's reputation will be
adversely affected.

      7. Termination Obligations. Upon termination of this Agreement by Licensor
as against a Licensee, such Licensee shall: (i) immediately discontinue all use
of the Trademarks and any term confusingly similar thereto; (ii) cooperate with
Licensor or its appointed agent to apply to the appropriate authorities to
cancel recording of this Agreement from all government records: (iii) destroy
all printed materials bearing the Trademarks in the possession of such Licensee,
and (iv) acknowledge that all rights in the Trademarks and the goodwill
connected therewith shall remain the property of Licensor.

      8.    General Provisions.

            (a) Assignment. A party may not assign its rights or obligations
under this Agreement (including, without limitation, in connection with a sale
of all or substantially all of such party's assets), without the express written
consent of each of the other parties. Subject to the foregoing, this Agreement
will inure to the benefit and bind the successors and permitted assigns of each
party.

            (b)   Governing Law.  This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without
regard to or application of, conflict of laws rules or principles.

            (c) Waiver. The waiver of any breach or default will not constitute
a waiver of any other right under this Agreement or any subsequent breach or
default.

            (d) Severability. If for any reason a court of competent
jurisdiction finds any provision of this Agreement to be unenforceable, that
provision of the Agreement will be enforced


                                       3

to the maximum extent permissible so as to effect the intent of the parties, and
the remainder of this Agreement will continue in full force and effect.

            (e) Notices. All notices required or permitted under this Agreement
will be in writing and delivered by confirmed facsimile transmission, by courier
or overnight delivery service, or by certified mail, and in each instance will
be deemed given upon receipt. All communications will be sent to the addresses
set forth above or to such other address as may be specified by a party to the
other parties in accordance with this Section. A party may change its address
for notices under this Agreement by giving written notice to the other parties
by the means specified in this Section.

            (f) Relationship of the Parties. The parties to this Agreement are
independent contractors and this Agreement will not establish any relationship
of partnership, joint venture, employment, franchise, or agency among the
parties. No party will have the power to bind another party or incur obligations
on the another party's behalf without such other party's prior written consent.

            (g) Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof, and
supersedes and replaces all prior or contemporaneous understandings or
agreements, written or oral, regarding such subject matter. No modification of
this Agreement shall be effective unless in writing and signed by duly
authorized representatives of each party.

            (h) Force Majeure. A party shall not be liable or deemed to be in
default for any delay or failure in performance under this Agreement or other
interruption of service deemed to result, directly or indirectly, from acts of
God, civil or military authority, acts of public enemy, war, accidents,
explosions, earthquakes, floods, failure of transportation, strikes or other
work interruptions by a party's employees, or any other similar cause beyond
the reasonable control of a party unless such delay or failure in performance
is expressly addressed elsewhere in this Agreement.

                                       4

IN WITNESS WHEREOF, the parties have executed this Agreement through their duly
authorized representatives as of the Effective Date.

CELERITY GROUP, INC. (formerly known as Kinetics Holdings Corporation)

By: ________________________________

Name:_______________________________

Title: _____________________________


KINETIC SYSTEMS, INC.

By: ________________________________

Name:_______________________________

Title: _____________________________


KINETICS BIOPHARM, INC.

By: ________________________________

Name:_______________________________

Title: _____________________________


                                       5

                                    Exhibit A
                                   Trademarks

KINETICS  - U.S. Registration No. 2158214

KINETICS - France Registration No. 657734/96

Ring Design - U.S. Registration No. 2160105

Ring Design - Mexico Registration No. 597345

Water Icon - U.S. Registration No. 2278282

Gas Icon - U.S. Registration No. 2285861

Chemical Icon - U.S. Registration No. 2281909

SAFETY BEGINS WITH ME - common law rights

                                       6

EX-2.07

                                                                    Exhibit 2.07


                           EMPLOYEE MATTERS AGREEMENT


      This EMPLOYEE MATTERS AGREEMENT is entered into effective as of
_________, 2002, between Celerity Group, Inc., a Delaware corporation (the
"COMPANY", formerly known as Kinetics Holdings Corporation), Kinetic Systems,
Inc., a California corporation ("KSI"), and Kinetics Biopharm, Inc., a
Delaware corporation ("KBI").

      WHEREAS, the Company, KSI and KBI have agreed to enter into this Agreement
to allocate between them assets, liabilities and responsibilities with respect
to certain employee compensation, benefit plans, programs and arrangements, and
certain employment matters;

      NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the parties hereto agree as follows:

                                    ARTICLE 1

                                   DEFINITIONS

      1.1 "AGREEMENT" means this Employee Matters Agreement, including all the
Schedules hereto, and all amendments made hereto from time to time.

      1.2 "BENEFITS COMMITTEE" means the Benefits Committee established,
implemented and operated pursuant to Section 2.5.

      1.3 "CLOSING DATE" has the meaning set forth in the Separation Agreement.

      1.4 "COBRA" means the continuation coverage requirements for "group health
plans" under Title X of the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended from time to time, and as codified in Code Section 4980B and
ERISA Sections 601 through 608.

      1.5 "CODE" means the Internal Revenue Code of 1986, as amended from time
to time.

      1.6 "COMPANY EMPLOYEE" means an individual who, on the Distribution Date,
is: (a) either actively employed by, or on leave of absence from, the Company or
a subsidiary of the Company: (b) a former employee of the Company or a
subsidiary of the Company and who, on the Distribution Date, is not a KSI
Employee or KBI Employee; or (c) an employee or group of employees designated as
Company Employees by the Company and KSI or KBI, as the case may be.

      1.7 "DEFERRED COMPENSATION PLAN," when immediately preceded by "Company"
means the Kinetics Group, Inc. Management Deferred Compensation Plan. When
immediately preceded by "KSI," "Deferred Compensation Plan" means the deferred
compensation plan to be established by KSI pursuant to Article 4.

      1.8 "DISTRIBUTION" has the meaning set forth in the Separation Agreement.


                                       1

      1.9   "DISTRIBUTION DATE" has the meaning set forth in the Separation
Agreement.

      1.10 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.

      1.11 "FMLA" means the Family and Medical Leave Act of 1993, as amended
from time to time.

      1.12 "FOREIGN PLAN," when immediately preceded by "Company," means a Plan
maintained by the Company for the benefit of eligible employees of the Company
and its subsidiaries outside the U.S. When immediately preceded by "KSI,"
"Foreign Plan" means a Plan to be established by KSI for the benefit of the
eligible employees of KSI and its subsidiaries outside the U.S.

      1.13 "401(K) PLAN," when immediately preceded by "Company," means the
Kinetics Group, Inc. Retirement Savings Plan. When immediately preceded by
"KSI," "401(k) Plan" means the 401(k) plan to be established by KSI pursuant to
Article 3 for the benefit of eligible employees of KSI and its subsidiaries.

      1.14 "FRINGE BENEFIT PLANS," when immediately preceded by "Company," means
the fringe benefit plans, programs and arrangements, offered from time to time
under the personnel policies and practices of the Company and sponsored and
maintained by the Company (as set forth in Article 7 and Schedule 7.1) for the
benefit of eligible employees of the Company and its subsidiaries. When
immediately preceded by "KSI," "Fringe Benefit Plans" means the fringe benefit
plans, programs and arrangements to be established by KSI pursuant to Article 7
for the benefit of eligible employees of KSI and its subsidiaries.

      1.15 "HEALTH PLANS," when immediately preceded by "Company," means the
medical, health maintenance organization ("HMO"), dental, and pre-tax premium
payment plans listed on Schedule 5.1 established and maintained by the Company
for the benefit of eligible employees of the Company and its subsidiaries. When
immediately preceded by "KSI," "Health Plans" means the medical, HMO, dental,
and pre-tax premium payment plans to be established by KSI pursuant to Article 5
for the benefit of eligible employees of KSI and its subsidiaries.

      1.16 "HEALTH AND WELFARE PLANS," when immediately preceded by "Company,"
means the Health Plans, Section 125 Plan and any similar health and welfare
plans listed on Schedule 5.1 established and maintained by the Company for the
benefit of eligible employees of the Company and its subsidiaries, and such
other welfare plans or programs as may apply to such employees as of the
Distribution Date. When immediately preceded by "KSI," "Health and Welfare
Plans" means the medical, HMO, dental, pre-tax premium payment, Section 125 and
any similar health and welfare plans to be established by KSI pursuant to
Article 5 for the benefit of eligible employees of KSI and its subsidiaries.

      1.17  "INITIAL PUBLIC OFFERING" has the meaning set forth in the
Separation Agreement.

      1.18 "INSURANCE PLANS," when immediately preceded by "Company," means the
various insurance plans maintained by the Company for the benefit of eligible
employees of the Company and its subsidiaries including accidental death and
dismemberment, business travel


                                       2

accident, long term disability, group life and workers' compensation insurance
plan as set forth in Schedule 5.2. When immediately preceded by "KSI,"
"Insurance Plans" means the KSI insurance plans to be established by KSI
pursuant to Article 5 for the benefit of eligible employees of KSI and its
subsidiaries.

      1.19 "KBI EMPLOYEE" means any individual who is: (a) either actively
employed by, or on leave of absence from, KBI or a subsidiary of KBI on or at
any time after the Distribution Date; (b) either actively employed by, or on
leave of absence from, the Company or KSI as either part of a work group or
organization, or common support function that, at any time before the
Distribution Date, moves to the employ of KBI from the employ of the Company or
KSI; (c) any other employee or group of employees designated as KBI Employees
(as of the specified date) by the Company and KBI by mutual agreement; or (d) an
alternate payee under a QDRO, alternate recipient under a QMCSO, beneficiary,
covered dependent, or qualified beneficiary (as such term is defined under
COBRA), in each case, of an employee or former employee, described in (a)
through (c) with respect to that employee's or former employee's benefit under
the applicable Plan(s). Unless specified otherwise in this Agreement, such an
alternate payee, alternate recipient, beneficiary, covered dependent, or
qualified beneficiary shall not otherwise be considered a KBI Employee with
respect to any benefits he or she accrues or has accrued under any applicable
Plan(s), unless he or she is a KBI Employee by virtue of (a) through (c).

      1.20 "KSI BUSINESS" and "KBI BUSINESS" have the meanings set forth in the
Separation Agreement.

      1.21 "KSI EMPLOYEE" means any individual who is: (a) either actively
employed by, or on leave of absence from, KSI or a subsidiary of KSI on or at
any time after the Distribution Date; (b) either actively employed by, or on
leave of absence from, the Company or KBI as either part of a work group or
organization, or common support function that, at any time before the
Distribution Date, moves to the employ of KSI from the employ of the Company or
KBI; (c) any other employee or group of employees designated as KSI Employees
(as of the specified date) by the Company and KSI by mutual agreement; or (d) an
alternate payee under a QDRO, alternate recipient under a QMCSO, beneficiary,
covered dependent, or qualified beneficiary (as such term is defined under
COBRA), in each case, of an employee or former employee, described in (a)
through (c) with respect to that employee's or former employee's benefit under
the applicable Plan(s). Unless specified otherwise in this Agreement, such an
alternate payee, alternate recipient, beneficiary, covered dependent, or
qualified beneficiary shall not otherwise be considered a KSI Employee with
respect to any benefits he or she accrues or has accrued under any applicable
Plan(s), unless he or she is a KSI Employee by virtue of (a) through (c).

      1.22 "MATERIAL FEATURE" means any feature of a Plan that could reasonably
be expected to be of material importance, in the aggregate, to the sponsoring
employer or the participants (or their dependents or beneficiaries) of that
Plan, which could include, depending on the type and purpose of the particular
Plan, the class or classes of employees eligible to participate in such Plan,
the nature, type, form, source, and level of benefits provided under such Plan,
the amount or level of contributions, if any, required to be made by
participants (or their dependents or beneficiaries) to such Plan, and the costs
and expenses incurred by the sponsoring employer or Participating Companies for
implementing and/or maintaining such Plan.


                                       3

      1.23 "PARTICIPATING COMPANY" means: (a) the Company; (b) any Person (other
than an individual) that the Company has approved for participation in, a Plan
sponsored by the Company; and (c) any Person (other than an individual) which,
by the terms of such Plan, participates in such Plan or any employees of which,
by the terms of such Plan, participate in or are covered by such Plan.

      1.24 "PERSON" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, and a governmental entity or any
department, agency or political subdivision thereof.

      1.25 "PLAN" means any plan, policy, program, payroll practice,
arrangement, contract, trust, insurance policy, or any agreement or funding
vehicle providing compensation or benefits to employees, former employees,
directors or consultants of the Company, KSI or KBI.

      1.26 "QDRO" means a domestic relations order which qualifies under Code
Section 414(p) and ERISA Section 206(d) and which creates or recognizes an
alternate payee's right to, or assigns to an alternate payee, all or a portion
of the benefits payable to a participant under the Company 401(k) Plan.

      1.27 "QMCSO" means a medical child support order which qualifies under
ERISA Section 609(a) and which creates or recognizes the existence of an
alternate recipient's right to, or assigns to an alternate recipient the right
to, receive benefits for which a participant or beneficiary is eligible under
any of the Company or KSI Health and Welfare Plans that are group health plans.

      1.28 "RABBI TRUST," when immediately preceded by "Company," means the
grantor trust established for purposes of holding assets under the Company
Deferred Compensation Plan. When immediately preceded by "KSI," "Rabbi Trust"
means the grantor trust to be established by KSI pursuant to Section 4.1(a) for
the purpose of holding assets under the KSI Deferred Compensation Plan.

      1.29 "SEPARATION AGREEMENT" means Separation Agreement dated the date
hereof between the Company, KSI and KBI.

      1.30 "STOCK PLAN" means any plan, program, or arrangement, pursuant to
which employees and other service providers hold stock options, restricted stock
(stock that is subject to transfer restrictions or to employment and/or
performance vesting conditions) or other equity incentives.

                                    ARTICLE 2

                               GENERAL PRINCIPLES

      2.1 ASSUMPTION OF KSI LIABILITIES. Except as specified otherwise in this
Agreement or as mutually agreed upon by KSI and the Company from time to time,
effective as of the Distribution Date, KSI hereby assumes and agrees to pay,
perform, fulfill and discharge, in accordance with their respective terms, all
of the following: (a) all liabilities of, or relating to,


                                       4

KSI Employees relating to, arising out of, or resulting from future, present or
former employment with the KSI Business (including liabilities relating to,
arising out of, or resulting from Company Plans and KSI Plans, other than any
liability for medical coverage for KSI Employees who terminated service prior to
the Distribution Date); (b) all liabilities relating to, arising out of, or
resulting from any other actual or alleged employment relationship with the KSI
Business; and (c) all other liabilities relating to, arising out of, or
resulting from obligations, liabilities and responsibilities expressly assumed
or retained by KSI, or a KSI Plan pursuant to this Agreement.

      2.2   KSI'S PARTICIPATION IN COMPANY PLANS.

            (a) PARTICIPATION IN COMPANY PLANS. Except as specified otherwise in
this Agreement or as the Company and KSI may mutually agree, KSI Employees
shall, until the Distribution Date, continue to participate in the Company
401(k) Plan as provided in Article 3, and in such other Company Plans as
provided in Articles 3 through 7.

            (b) COMPANY'S GENERAL OBLIGATIONS AS PLAN SPONSOR PRIOR TO THE
DISTRIBUTION DATE. To the extent that KSI is a Participating Company in any
Company Plan prior to the Distribution Date, the Company shall continue to
administer, or cause to be administered, in accordance with its terms and
applicable law, such Company Plan, and shall have the sole and absolute
discretion and authority to interpret the Company Plan, as set forth therein.
The Company shall not amend any Material Feature of any Company Plan in which
KSI is a Participating Company, except to the extent: (i) such amendment would
not materially affect any coverage or benefits solely with respect to KSI
Employees under such Plan; or (ii) such amendment is necessary or appropriate to
comply with applicable law.

            (c) KSI'S GENERAL OBLIGATION AS PARTICIPATING COMPANY. KSI shall
perform, with respect to its participation in the Company Plans prior to the
Distribution Date, the duties of a Participating Company as set forth in each
such Plan or any procedures adopted pursuant thereto, including (without
limitation): (i) assistance in the administration of claims, to the extent
requested by the claims administrator of the applicable Company Plan; (ii) full
cooperation with Company Plan auditors, benefit personnel and benefit vendors;
(iii) preservation of the confidentiality of all financial arrangements the
Company has or may have with any vendors, claims administrators, trustees,
service providers or any other entity or individual with whom the Company has
entered into an agreement relating to the Company Plans; and (iv) preservation
of the confidentiality of participant information (including, without
limitation, health information in relation to FMLA leaves) to the extent not
specified otherwise in this Agreement.

            (d) TERMINATION OF PARTICIPATING COMPANY STATUS. Except as otherwise
may be mutually agreed upon by the Company and KSI, effective as of the
Distribution Date, KSI shall automatically cease to be a Participating Company
in the corresponding Company Plans.

      2.3   ESTABLISHMENT OF KSI PLANS.


                                       5

      Except as otherwise provided herein, KSI shall adopt certain Plans, as
described in Articles 3 through 7, as of the Distribution Date or as the Company
and KSI may mutually agree. Except as specified otherwise in this Agreement,
nothing in this Agreement shall preclude KSI at any time after the Distribution
Date, from amending, merging, modifying, terminating, eliminating, reducing, or
otherwise altering in any respect any KSI Plan, any benefit under any KSI Plan
or any trust, insurance policy or funding vehicle related to any KSI Plans, or
any employment or other service arrangement with the KSI Employees or vendors
(to the extent permitted by law).

      2.4   TERMS OF PARTICIPATION BY KSI EMPLOYEES IN KSI PLANS.

            (a) NON-DUPLICATION OF BENEFITS. Except as specified otherwise in
the Agreement, as of the Distribution Date, the KSI Plans shall be, with respect
to KSI Employees, in all respects the successors in interest to, and shall not
provide benefits that duplicate benefits provided by, the corresponding Company
Plans. The Company and KSI shall agree on methods and procedures, including
amending the respective Plan documents, to prevent KSI Employees from receiving
duplicate benefits from the Company Plans and the KSI Plans.

            (b) SERVICE CREDIT. Except as specified otherwise in this Agreement,
with respect to KSI Employees, each KSI Plan shall provide that all service, all
compensation and all other benefit-affecting determinations that, as of the
Distribution Date, were recognized under the corresponding Company Plan shall,
as of the Distribution Date, receive full recognition and credit and be taken
into account under such KSI Plan to the same extent as if such items occurred
under such KSI Plan, except to the extent that duplication of benefits would
result. The service crediting provisions shall be subject to any respectively
applicable "service bridging," "break in service," "employment date," or
"eligibility date" rules under the KSI Plans and the Company Plans.

            (c) ASSUMPTION OF LIABILITIES. Except as specified otherwise in this
Agreement (including, without limitation, the exception applicable to
self-insured long-term disability and workers compensation plans), the
provisions of this Agreement for the transfer of assets relating to Company
Plans to KSI and/or the appropriate KSI Plans are based upon the understanding
of the parties that KSI and/or the appropriate KSI Plan shall assume all
liabilities of the corresponding Company Plan to or relating to KSI Employees,
as provided for herein.

      2.5 BENEFITS COMMITTEE. From the date of this Agreement through the later
of the Distribution Date or the end of the Post-Distribution Period, as
applicable, the management of the Plans shall be conducted under the supervision
of the Company's Chief Financial Officer, Company's Vice President of Human
Resources and the KSI Vice President of Human Resources (or their authorized
delegates). Issues that cannot be resolved by such Benefits Committee shall be
decided, at the request of either party, by a designated representative of the
KSI Corporate Executive Committee and a designated representative of the Company
Corporate Executive Committee.

      2.6 FOREIGN PLANS. KSI and the Company each intend that the matters,
issues or liabilities relating to, arising out of, or resulting from Foreign
Plans and non-U.S.-related employment matters be handled in a manner that is in
compliance with the requirements of


                                       6

applicable local law and, to the extent permitted by applicable local law, in a
manner consistent with comparable U.S. matters, issues or liabilities as
reflected in this Agreement. Without in any way limiting the general principle
set forth in the preceding sentence, Schedule 2.6 sets forth the manner in which
certain existing Company Foreign Plans in non-U.S. jurisdictions shall be
handled, effective as of the Distribution Date (or such other date(s)) as the
Company and KSI may mutually agree) consistent with the provisions of this
Section 2.6 or as permitted under applicable local law.

      2.7 RIGHTS AND OBLIGATIONS OF KBI AND KBI EMPLOYEES. KBI shall have the
same rights, duties, responsibilities, liabilities and obligations with respect
to the KBI Employees and KBI Business as KSI has with respect to the KSI
Employees and KSI Business under Articles 2 through 9 of this Agreement, except
that KBI shall not be required to establish any Plans or take actions related
thereto (e.g., as is required of KSI in Sections 2.3, 3.1, 4.1(a), 5.1(a),
5.1(c), 5.2(a) and 7.1(a)). Notwithstanding that new Plans shall be established
by KSI (and not KBI) upon or following the Distribution, the parties intend that
KBI Employees be entitled to the same treatment as KSI Employees with respect to
the benefits and other matters that are the subject of this Agreement and that
KBI Employees be entitled to participate in the same manner as KSI Employees in
any Company Plans or KSI Plans. KSI and KBI shall enter into such further
agreements and arrangements and take such other actions as may be necessary or
appropriate to allow such participation by KBI Employees in the KSI Plans and to
provide for the respective rights, duties, responsibilities, liabilities of KSI
and KBI in connection therewith.

                                    ARTICLE 3

                                   401(K) PLAN

      3.1 401(k) PLAN. Effective as of the Distribution Date (or such other date
as the Company and KSI may mutually agree), KSI shall establish or cause to be
established a separate plan and trust which are intended to be tax-qualified
under Code Section 401(a) and 401(k), to be exempt from taxation under Code
Section 501(a)(1), (the "KS1 401(k) Plan") to which KSI Employees may make
salary reduction contributions and KSI can make matching contributions and
discretionary profit sharing contributions. To the extent that KSI makes a
discretionary profit sharing contribution to the KSI 401(k) Plan for 2002, it
shall make such contribution with respect to compensation of plan participants
that was earned from the Company and KSI during 2002.

      3.2 TRANSFER OF ACCOUNTS FROM COMPANY 401(k) PLAN. As of a date as soon as
practicable after the Distribution Date (or such other date as the Company and
KSI may mutually agree (the "401(K) TRANSFER DATE")), the Company and KSI shall
cause to be transferred to the KSI 401(k) Plan the accounts in the Company
401(k) Plan that are attributable to KSI Employees. In addition, effective as of
the 401(k) Transfer Date (or such other date as the Company and KSI may mutually
agree), the Company shall cause any participant loans held in the Company 401(k)
Plan that are attributable to KSI Employees to be assigned to the Trustee of the
KSI 401(k) Plan to enable such KSI Employees to continue to repay such loans
through payroll deduction, and after such assignment such KSI Employees shall
repay such loans to the KSI 401(k) Plan only.


                                       7

                                    ARTICLE 4

                               NON-QUALIFIED PLANS

      4.1   DEFERRED COMPENSATION PLANS.

            (a) ESTABLISHMENT OF KSI RABBI TRUST. Effective on or before the
Distribution Date (or such other date as the Company and KSI may mutually
agree), KSI shall establish the KSI Deferred Compensation Plan and the KSI Rabbi
Trust.

            (b) TRANSFER OF LIABILITIES AND RABBI TRUST INSURANCE POLICIES. The
Company Rabbi Trust maintains policies of insurance (the "POLICIES") on the
lives of participants in the Company Deferred Compensation Plan as a means of
funding the benefit liabilities to participants thereunder. As of the
Distribution Date, the Company shall cause the Company Rabbi Trust to assign and
transfer to the KSI Rabbi Trust, and KSI shall cause the KSI Rabbi Trust to
assume, the rights and obligations of the Company Rabbi Trust under the Policies
that insure the lives of KSI Employees. Coincident with such transfer of the
Policies, KSI shall assume all responsibilities and obligations relating to,
arising out of, or resulting from such liabilities under the Company Deferred
Compensation Plan.

            (c) PARTICIPATION IN DEFERRED COMPENSATION PLANS. Effective as of
the Distribution Date (or such other date as the Company and KSI may mutually
agree), eligible KSI Employees may commence participation in the KSI Deferred
Compensation Plan. KSI Employees who are currently participating in the Company
Deferred Compensation Plans shall continue their participation in such Plans
(according to its terms) to the Distribution Date (or such other date as the
Company and KSI may mutually agree).

                                    ARTICLE 5

                            HEALTH AND WELFARE PLANS

      5.1   HEALTH PLANS.

            (a) KSI HEALTH PLANS. As of the Distribution Date (or such other
date(s) and the Company and KSI may mutually agree), KSI shall establish the KSI
Health Plans similar to the Company Health Plans listed on Schedule 5.1 and,
correspondingly, KSI shall be solely responsible for the administration of the
KSI Health Plans, including the payment of all employer-related costs in
establishing and maintaining the KSI Health Plans, and for the collection and
remittance of employee premiums, subject to Section 8.1.

            (b) MEDICAL PLANS THROUGH THE DISTRIBUTION DATE. Except as otherwise
agreed by the Company and KSI, until the Distribution Date, KSI shall be a
Participating Company in the Company Health Plans listed in Schedule 5.1. The
Company shall administer claims incurred under the Company Health Plans by KSI
Employees before the Distribution Date. Any determination made or settlements
entered into by the Company with respect to such claims shall be final and
binding. The Company shall retain financial and administrative ("run-out")
liability and all related obligations and responsibilities for all claims
incurred by KSI Employees before the Distribution Date (or such other date(s) as
the Company


                                       8

and KSI may mutually agree), including any claims that were administered by
Company as of, on, or after ________________ (or such other date(s) as the
Company and KSI may mutually agree). Except as set forth in the preceding
sentence, KSI shall reimburse the Company for any and all direct and indirect
costs and expenses associated with its participation in the Company Health Plans
prior to the Distribution Date, subject to Section 8.1.

            (c) SECTION 125 PLAN. Through the Distribution Date (or such other
date as the Company and KSI may mutually agree), KSI shall remain a
Participating Company in the Company Section 125 Plan. The existing elections
for KSI Employees participating in the Company Section 125 Plan shall remain in
effect until the Distribution Date (or such other date as Company and KSI may
mutually agree). Effective on the day after the Distribution Date (or such other
date immediately following the date that KSI's participation in the Company
Section 125 Plan terminates), KSI shall establish, or caused to be established,
the KSI Section 125 Plan and KSI shall be solely responsible for the KSI Section
125 Plan. As of the Distribution Date, the Company shall assign and transfer to
KSI the rights and obligations of the Company under the medical and dependent
care flexible spending accounts maintained on behalf of KSI Employees pursuant
to the KSI Section 125 Plan. As of the Distribution Date, the Company and KSI
shall determine, with respect to each KSI Employee as of the Distribution Date,
the net difference between the amount of flexible spending account contributions
and the amount of flexible spending account reimbursements for such KSI Employee
during the period between January 1, 2002 and the Distribution Date. If the
total contributions during such period for a KSI Employee exceed the total
reimbursement during such period for such KSI Employee, the difference for such
KSI Employee shall be characterized as a "NET CONTRIBUTION." If the total
reimbursement during such period for a KSI Employee exceeds the total
contributions during such period for such KSI Employee, the difference for such
KSI Employee shall be characterized as a "NET REIMBURSEMENT." If the sum of all
Net Contributions for all KSI Employees exceeds the sum of all Net
Reimbursements for all KSI Employees, the Company shall, as of the Distribution
Date, pay to KSI the amount of such excess. If the sum of all Net Reimbursements
for all KSI Employees exceeds the sum of all Net Contributions for all KSI
Employees, KSI shall, as of the Distribution Date, pay to the Company the amount
of such excess.

            (d) COBRA. The Company shall be responsible through the Distribution
Date (or such other date as Company and KSI may mutually agree) for compliance
with the health care continuation coverage requirements of COBRA and the Company
Health and Welfare Plans with respect to KSI Employees and qualified
beneficiaries (as such term is defined under COBRA). KSI shall be responsible
for providing the Company with all necessary employee change notices and related
information for covered dependents, spouses, qualified beneficiaries (as such
term is defined under COBRA), and alternate recipients pursuant to any QMCSO, in
accordance with applicable Company COBRA policies and procedures. Effective as
of the Distribution Date (or such other date as the Company and KSI may mutually
agree), the Company shall be solely responsible for compliance with the health
care continuation coverage requirements of COBRA and the Company Health and
Welfare Plans for Company Employees and their qualified beneficiaries (as such
term is defined under COBRA). Effective as of the Distribution Date (or such
other date as the Company and KSI may mutually agree), KSI shall be solely
responsible for compliance with the health care continuation coverage
requirements of COBRA and the KSI Health and Welfare Plans for KSI Employees and
their qualified beneficiaries (as such term is defined under COBRA); provided,
however, KSI may elect to


                                       9

retain the Company's services in such manner and for such period as the Company
and KSI may mutually agree to assist it with COBRA administration and KSI shall
reimburse the Company for its costs and expenses associated with such
administration, subject to Section 8.1.

      5.2   INSURANCE PLANS

            (a) KSI INSURANCE PLANS. Effective as of the Distribution Date, KSI
shall assume and be solely responsible for all liabilities relating to, arising
out of, or resulting from claims by KSI Employees attributable to employment
with the KSI Business whether incurred before or after the Distribution Date. As
of the Distribution Date (or such other date(s) as the Company and KSI may
mutually agree), KSI shall establish Insurance Plans to provide benefits similar
to those listed on Schedule 5.2 and, correspondingly, KSI shall be solely
responsible for the administration of the KSI Insurance Plans, including the
payment of all employer-related costs in establishing and maintaining the KSI
Insurance Plans, and for the collection and remittance of employee premiums,
subject to Section 8.1.

            (b) INSURANCE PLANS THROUGH THE DISTRIBUTION DATE. Except as
otherwise agreed by the Company and KSI, for the period ending on the
Distribution Date (or such other period as Company and KSI may mutually agree),
KSI shall be a Participating Company in the Company Insurance Plans listed in
Schedule 5.2. The Company shall administer claims incurred under the Company
Insurance Plans by KSI Employees before the Distribution Date but only to the
extent that KSI has not, before such date, established and assumed
administrative responsibility for a corresponding Insurance Plan. Any
determination made or settlements entered into by the Company with respect to
such claims shall be final and binding. The Company shall retain financial and
administrative ("run-out") liability and all related obligations and
responsibilities for all claims incurred by KSI Employees before the
Distribution Date (or such other date(s) as the Company and KSI may mutually
agree), including any claims that were administered by the Company as of, on, or
after the Distribution Date (or such other date(s) as Company and KSI may
mutually agree). Except as set forth in the preceding sentence, KSI shall
reimburse the Company for any and all direct and indirect costs and expenses
associated with its participation in the Company Insurance Plans, subject to
Section 8.1.

                                    ARTICLE 6

                               EQUITY COMPENSATION

            The treatment of options and restricted stock issued under Stock
Plans of the Company and held by Company Employees and KSI Employees as of the
Distribution Date shall be as described in Schedule 6.

                                    ARTICLE 7

                            FRINGE AND OTHER BENEFITS

      7.1   FRINGE BENEFITS:

            (a) KSI FRINGE BENEFIT PLANS. Effective as of the Distribution Date,
KSI shall assume and be solely responsible for all liabilities relating to,
arising out of, or


                                       10

resulting from KSI Employees' participation in fringe benefit plans, programs,
personnel policies and practices of Company listed on Schedule 7.1, whether such
liabilities are incurred before or after the Distribution Date. As of the
Distribution Date (or such other date(s) as the Company and KSI may mutually
agree), KSI shall establish Fringe Benefit Plans to provide benefits similar to
those listed on Schedule 7.1 and, correspondingly, KSI shall be solely
responsible for the administration of the KSI Fringe Benefit Plans, including
the payment of all employer-related costs in establishing and maintaining the
KSI Fringe Benefit Plans, subject to Section 8.1.

            (b) FRINGE BENEFIT PLANS THROUGH THE DISTRIBUTION DATE. Except as
otherwise agreed by the Company and KSI, for the period ending on the
Distribution Date (or such other period as the Company and KSI may mutually
agree), KSI shall be a Participating Company in the Company Fringe Benefit Plans
listed in Schedule 7.1. The Company shall administer benefits under the Company
Fringe Benefit Plans for KSI Employees before the Distribution Date but only to
the extent that KSI has not, before such date, established and assumed
administrative responsibility for a corresponding Fringe Benefit Plan. KSI shall
reimburse Company for any and all direct and indirect costs and expenses
associated with its participation in the Company Fringe Benefit Plans, subject
to Section 8.1.

      7.2 OTHER BENEFIT PLANS. To the extent that the Company maintains,
sponsors or provides benefits other than those specified in Schedule 7.1 to its
eligible employees, then the Company shall, to the extent permitted by law,
continue to make such benefits available to KSI Employees on substantially
similar terms and conditions as are offered to Company Employees through the
Distribution Date (or such other date upon which KSI and the Company mutually
agree). KSI shall reimburse the Company for any and all direct and indirect
costs and expenses associated with, arising out of, or resulting from the
provision of such other fringe benefits.

                                    ARTICLE 8

                            ADMINISTRATIVE PROVISIONS

      8.1   PAYMENT OF LIABILITIES, PLAN EXPENSES AND RELATED MATTERS.

            (a)   EXPENSES AND COSTS CHARGEABLE TO A TRUST. Effective as of
the Distribution Date, KSI shall pay its share of any contributions made to any
trust maintained in connection with a Company Plan while KSI is a Participating
Company in that Company Plan.

            (b) CONTRIBUTIONS TO TRUSTS. With respect to Company Plans to which
KSI Employees make contributions, the Company shall use reasonable procedures to
determine KSI assets and liabilities associated with each such Plan, taking into
account such contributions, settlements, refunds and similar payments.

            (c) ADMINISTRATIVE EXPENSES NOT CHARGEABLE TO A TRUST. Effective as
of the Distribution Date, to the extent not charged pursuant to the Management
Services Agreement entered into by the parties of even date herewith, and to the
extent not otherwise agreed to in writing by the Company and KSI, and to the
extent not chargeable to a trust established in connection with a Company Plan
(as provided in paragraph (a)), KSI shall be


                                       11

responsible, through either direct payment or reimbursement to the Company, for
its allocable share of actual third party and/or vendor costs and expenses
incurred by the Company and additional costs and expenses, subject to the
methodology reasonably agreed upon by the Company and KSI, in the administration
of (i) the Company Plans while KSI participates in such Company Plans, and (ii)
the KSI Plans, to the extent the Company procures, prepares, implements and/or
administers such KSI Plans. To the extent not otherwise determinable through
direct allocation of costs and expenses, KSI's allocable share of such costs and
expenses will be based on the number of KSI Employees at the commencement of the
period for which costs are being allocated, as a percentage of the total number
of Company Employees and KSI Employees at such time.

      8.2 SHARING OF PARTICIPANT INFORMATION. In addition to the
responsibilities and obligations of the Company and KSI specified in this
Agreement, the Company and KSI shall share, or cause to be shared, all
participant information that is necessary or appropriate for the efficient and
accurate administration of each of the Company Plans and the KSI Plans during
the respective periods applicable to such Plans (as KSI and the Company may
mutually agree). The Company and KSI and their respective authorized agents
shall, subject to applicable laws of confidentiality and data protection, be
given reasonable and timely access to, and may make copies of, all information
relating to the subjects of this Agreement in the custody of the other party or
its agents, to the extent necessary or appropriate for such administration.

      8.3 REPORTING AND DISCLOSURE COMMUNICATIONS TO PARTICIPANTS. While KSI is
a Participating Company in the Company Plans, KSI shall take, or cause to be
taken, all actions necessary or appropriate to facilitate the distribution of
all Company Plan-related communications and materials to its employees,
participants and beneficiaries, including (without limitation) summary plan
descriptions and related summaries of material modification(s), summary annual
reports, investment information, prospectuses, notices and enrollment material
for the Company Plans and KSI Plans. KSI shall reimburse the Company for the
costs and expenses relating to the copies of all such documents provided to KSI.
KSI shall assist the Company in complying with all reporting and disclosure
requirements of ERISA, including the preparation of Form Series 5500 annual
reports for the Company Plans, as applicable.

      8.4 AUDITS REGARDING VENDOR CONTRACTS. From the period beginning as of the
Distribution Date and ending on ____________________ (or such later date as the
Company and KSI may mutually agree), the Company and KSI and their duly
authorized representatives shall have the right to conduct joint audits with
respect to any vendor contracts that relate to both the Company Health and
Welfare Plans and the KSI Health and Welfare Plans. The scope of such audits
shall encompass the review of all correspondence, account records, claim forms,
cancelled drafts (unless retained by the bank), provider bills, medical records
submitted with claims, billing corrections, vendor's internal corrections of
previous errors and any other documents or instruments relating to the services
performed by the vendor under the applicable vendor contracts. The Company and
KSI shall agree on the performance standards, audit methodology, auditing policy
and quality measures, reporting requirements, and the manner in which costs and
expenses incurred in connection with such audits shall be shared.


                                       12

      8.5 EMPLOYEE IDENTIFICATION NUMBERS. Until the Distribution Date (or such
other period as the Company and KSI may mutually agree), the Company and KSI
shall not change any employee identification numbers assigned by the Company.
The Company and KSI mutually agree to establish a policy pursuant to which
employee identification numbers assigned to either employees of the Company or
KSI shall not be duplicated between the Company and KSI.

      8.6 BENEFICIARY DESIGNATIONS. Subject to Section 8.9, all beneficiary
designations made by KSI Employees for the Company Plans shall be transferred to
and be in full force and effect under the corresponding KSI Plans, in accordance
with the terms of each such applicable KSI Plan, until such beneficiary
designations are replaced or revoked by the KSI Employees who made the
beneficiary designations.

      8.7 REQUESTS FOR REGULATORY OPINIONS. The Company and KSI shall make such
applications to regulatory agencies, including the Internal Revenue Service and
Department of Labor, as may be necessary or appropriate. KSI and the Company
shall cooperate fully with one another on any issue relating to the transactions
contemplated by this Agreement for which the Company and/or KSI elects to seek a
determination letter or private letter ruling from the Internal Revenue Service
or an advisory opinion from the Department of Labor.

      8.8 FIDUCIARY MATTERS. The Company and KSI each acknowledge that actions
contemplated to be taken pursuant to this Agreement may be subject to fiduciary
duties or standards of conduct under ERISA or other applicable law, and that no
party shall be deemed to be in violation of this Agreement if such party fails
to comply with any provisions hereof based upon such party's good faith
determination that to do so would violate such a fiduciary duty or standard.

      8.9 CONSENT OF THIRD PARTIES. If any provision of this Agreement is
dependent on the consent of any third party (such as a vendor) and such consent
is withheld, the Company and KSI shall use their commercially reasonable best
efforts to implement the applicable provisions of this Agreement. If any
provision of this Agreement cannot be implemented due to the failure of such
third party to consent, the Company and KSI shall negotiate in good faith to
implement such provision in a mutually satisfactory manner.

      8.10 COMPANY INTRANET. Through the Distribution Date (or such other date
as KSI and the Company may mutually agree), the Company shall make its Company
intranet site available to KSI Employees. KSI shall reimburse the Company for
any and all costs and expenses related to making its intranet site available to
KSI Employees, subject to the Management Services Agreement. The Company and KSI
shall use their commercially reasonable best efforts to mutually agree on the
appropriate methods by which KSI shall establish its own intranet site.

                                    ARTICLE 9

                           EMPLOYMENT-RELATED MATTERS


                                       13

      9.1 TERMS OF KSI EMPLOYMENT. All basic terms and conditions of employment
for KSI Employees including, without limitation, their pay and benefits in the
aggregate, shall, to the extent legally and practicably possible, remain
substantially the same through the Distribution Date as the terms and conditions
that were in place when the KSI Employee or KSI Employee was employed by the
Company, as applicable. Notwithstanding the foregoing, KSI Employees shall be
required to execute a new agreement regarding confidential information and
proprietary developments in a form approved by KSI by the Distribution Date. In
addition, nothing in this Agreement shall be construed to change the at-will
status of the employment of any of the employees of the Company or KSI.

      9.2 HR DATA SUPPORT SYSTEMS. [The Company shall provide human resources
data support for KSI Employees through __________________ (or such other period
as the Company and KSI may mutually agree). KSI agrees to fully reimburse the
Company for any and all direct and indirect costs and expenses associated with
its use of the Company human resources data support systems, subject to Section
8.1. In the event that the Company and KSI agree to extend the time period
beyond ___________________, then the costs and expenses shall be computed in
accordance with Section 8.1. The Company and KSI each reserves the right to
discontinue KSI's access to any Company human resources data support systems
with sixty (60) days' notice (or such other period as Company and KSI may
mutually agree).]

      9.3   EMPLOYMENT OF EMPLOYEES WITH U.S. WORK VISAS.  KSI shall request
amendments to the nonimmigrant visa status of KSI Employees with U.S. work
visas authorizing them to work for the Company, to request authorization to
work for KSI.

      9.4 CONFIDENTIALITY AND PROPRIETARY INFORMATION. No provision of this
Agreement shall be deemed to release any individual for any violation of the
Company non-competition guideline or any agreement or policy pertaining to
confidential or proprietary information of the Company, or otherwise relieve any
individual of his or her obligations under such non-competition guideline,
agreement, or policy.

      9.5 PERSONNEL RECORDS. Subject to applicable laws on confidentiality and
data protection, the Company shall deliver to KSI prior to the Distribution Date
(or such other date as the Company and KSI may mutually agree), personnel
records of KSI Employees to the extent such records relate to KSI Employees'
active employment by, leave of absence from, or termination of employment with
KSI. KSI shall fully reimburse Company for any and all direct and indirect costs
and expenses associated with such delivery, subject to Section 8.1.

      9.6 MEDICAL RECORDS. Subject to applicable laws on confidentiality and
data protection, the Company shall deliver to KSI prior to the Distribution Date
(or such other date as the Company and KSI may mutually agree), medical records
of KSI Employees to the extent such records (a) relate to KSI Employees' active
employment by, leave of absence from, or termination of employment with KSI. KSI
shall fully reimburse the Company for any and all direct and indirect costs and
expenses associated with such delivery, subject to Section 8.1.

      9.7 UNEMPLOYMENT INSURANCE PROGRAM. Unless otherwise directed by KSI, the
Company shall use its commercially reasonable best efforts to cause KSI to
receive service from the Company's third party unemployment insurance
administrator through


                                       14

_____________ (or such other date as the Company and KSI may mutually agree).
KSI shall reimburse the Company for its allocable share of fees paid and related
costs and expenses by the Company to its third party unemployment insurance
administrator for services rendered during such period, pursuant to the
Management Services Agreement. KSI shall cooperate with the unemployment
insurance administrator by providing any and all necessary or appropriate
information reasonably available to KSI.

      9.8 NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES. No
provision of this Agreement shall be construed to create any right or accelerate
entitlement to any compensation or benefit whatsoever on the part of any Company
Employee, KSI Employee or other former, present or future employee of the
Company or KSI under any Company Plan or KSI Plan or otherwise. Without limiting
the generality of the foregoing: (a) neither the Distribution, nor the
termination of the Participating Company status of KSI shall cause any employee
to be deemed to have incurred a termination of employment; and (b) no transfer
of employment between the Company and KSI before the Distribution Date shall be
deemed a termination of employment for any purpose hereunder.

      9.9   EMPLOYMENT LITIGATION.

            (a) CLAIMS TO BE TRANSFERRED TO KSI AND/OR JOINTLY DEFENDED BY THE
COMPANY AND KSI. On or before the Distribution Date, the Company and KSI shall
enter into a written agreement that specifies the legal responsibility and
accompanying liability for any identified claims of KSI.

            (b) UNSCHEDULED CLAIMS. KSI shall have the sole responsibility for
all employment-related claims regarding KSI Employees that exist, or come into
existence, on or after the Distribution Date relating to, arising out of, or
resulting from their employment with KSI.

                                   ARTICLE 10

                               GENERAL PROVISIONS

      10.1 EFFECT IF DISTRIBUTION AND/OR INITIAL PUBLIC OFFERING AND/OR
DISTRIBUTION. Subject to Section 10.9, if the Initial Public Offering and/or
Distribution does not occur, then all actions and events that are, under this
Agreement, to be taken or to occur effective as of the Distribution Date and/or
Closing Date, shall not be taken or occur except to the extent specifically
agreed by the parties.

      10.2 RELATIONSHIP OF PARTIES. Nothing in this Agreement shall be deemed or
construed by the parties or any third party as creating the relationship of
principal and agent, partnership or joint venture between the parties, the
understanding and agreement being that no provision contained herein, and no act
of the parties, shall be deemed to create any relationship between the parties
other than the relationship set forth herein.

      10.3 SUBSIDIARIES. Each party shall cause to be performed and hereby
guarantees the performance of any and all of its actions and those of its
subsidiaries (as such subsidiaries exist immediately following the
Distribution).


                                       15

      10.4 GOVERNING LAW; DISPUTE RESOLUTION. To the extent not preempted by
applicable federal law, including, without limitation, ERISA, the Code and
applicable securities laws, this Agreement shall be construed in accordance with
the laws of the State of California, excluding its conflict of law rules and the
United Nations Convention on Contracts for the International Sale of Goods. The
Superior Court of Santa Clara County, California and/or the United States
District Court for the Northern District of California, San Jose Division, shall
have jurisdiction and venue over all disputes between the parties that are
permitted to be brought in a court of law pursuant to Article VII of the
Separation Agreement. The terms of Article VII of the Separation Agreement shall
govern with respect to all disputes, claims and controversies under this
Agreement.

      10.5 ASSIGNMENT. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective legal representatives,
successors and permitted assigns, and nothing in this Agreement, express or
implied, is intended to confer upon any other Person any rights or remedies of
any nature whatsoever under or by reason of this Agreement. Except as herein
specifically provided to the contrary, a party may not assign this Agreement or
any rights or obligations hereunder (including, without limitation, in
connection with a sale of all or substantially all of such party's assets),
without the prior written consent of each of the other parties hereto.

      10.6 SEVERABILITY. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof. Any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. Without prejudice to any rights or remedies otherwise
available to any party hereto, each party hereto acknowledges that damages would
be an inadequate remedy for any breach of the provisions of this Agreement and
agrees that the obligations of the parties hereunder shall be specifically
enforceable.

      10.7  TITLES AND HEADINGS.  Titles and headings to Sections herein are
inserted for convenience of reference only and are not intended to be a part
of or to affect the meaning or interpretation of this Agreement.

      10.8 AMENDMENT. This Agreement may not be altered or amended, nor may
rights hereunder be waived, except by an instrument in writing executed by the
party or parties to be charged with such amendment or waiver. No waiver of any
terms, provision or condition of or failure to exercise or delay in exercising
any rights or remedies under this Agreement, in any one or more instances shall
be deemed to be, or construed as, a further or continuing waiver of any such
term, provision, condition, right or remedy or as a waiver of any other term,
provision or condition of this Agreement.

      10.9 TERMINATION. This Agreement may be terminated and the Distribution
and/or the Initial Public Offering may be deferred, modified or abandoned at any
time prior to Distribution Date or the Closing Date, as applicable, by and in
the sole discretion of the Board of Directors of the Company without the
approval of KSI or KBI. In the event of such termination, no party hereto (or
any of its respective directors or officers) shall have any liability to any
other party pursuant to this Agreement.


                                       16

      10.10 CONFLICT. In the event of any conflict between the provisions of
this Agreement and any Plan, the provisions of this Agreement shall control.

      10.11 COUNTERPARTS. This Agreement, including the Schedules hereto and the
other documents referred to herein, may be executed in counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same agreement.

      10.12 FORCE MAJEURE. A party shall not be liable or deemed to be in
default for any delay or failure in performance under this Agreement or other
interruption of service deemed to result, directly or indirectly, from acts of
God, civil or military authority, acts of public enemy, war, accidents,
explosions, earthquakes, floods, failure of transportation, strikes or other
work interruptions by a party's employees, or any other similar cause beyond
the reasonable control of a party unless such delay or failure in performance
is expressly addressed elsewhere in this Agreement.


      IN WITNESS WHEREOF, each of the parties have caused this Employee Matters
Agreement to be executed on its behalf by its officers hereunto duly authorized
on the day and year first above written.


                                          CELERITY GROUP, INC. (formerly
                                          known as Kinetics Holdings
                                          Corporation)


                                          By: __________________________________
                                          Name:
                                          Title:


                                          KINETIC SYSTEMS, INC.


                                          BY: __________________________________
                                          Name:
                                          Title:



                                          KINETICS BIOPHARM, INC.



                                          By: __________________________________
                                          Name:
                                          Title:









                [SIGNATURE PAGE TO EMPLOYEE MATTERS AGREEMENT]


                                       17

     [SCHEDULES (OTHER THAN THE ATTACHED SCHEDULE 6) TO BE AGREED TO BY THE
                  PARTIES ON OR BEFORE THE DISTRIBUTION DATE.]


                                       18

EX-3.03

                                                                    Exhibit 3.03


                            CERTIFICATE OF AMENDMENT

                                     OF THE

                      RESTATED CERTIFICATE OF INCORPORATION

                                       OF

                          KINETICS HOLDINGS CORPORATION

                  (Originally incorporated on October 22, 1999)

         Kinetics Holdings Corporation, a Delaware corporation, does hereby
certify that the following amendment to the corporation's Restated Certificate
of Incorporation has been duly adopted in accordance with the provisions of
Section 242 of the Delaware General Corporation Law, with the approval of such
amendment by the corporation's stockholders having been given by written consent
without a meeting in accordance with Sections 228(d) and 242 of the Delaware
General Corporation Law.

         Article One of the Restated Certificate of Incorporation, relating to
the name of the corporation, is amended to read in its entirety as follows:

         The name of the corporation is Celerity Group, Inc.

         IN WITNESS WHEREOF, said corporation has caused this Certificate of
Amendment to be signed by its duly authorized officer this sixth day of June,
2002 and the foregoing facts stated herein are true and correct.


                                      KINETICS HOLDINGS CORPORATION


                                      By:  /s/ John Goodman
                                           --------------------------------
                                           John Goodman
                                           Secretary

EX-10.15

                                                                   Exhibit 10.15

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been
omitted pursuant to a request for confidential treatment and, where applicable,
has been marked with an asterisk to denote where omissions have been made. The
confidential material has been filed separately with the Commission.

                             GLOBAL SUPPLY AGREEMENT

                         APPLIED MATERIALS CONFIDENTIAL

This Global Supply Agreement dated and effective as of June 1, 2002 is by and
between Applied Materials, Inc., a Delaware corporation, having places of
business in Santa Clara, California and Austin, Texas, and Kinetics Fluid
Systems, Inc., a California corporation, having places of business in Santa
Clara, California, and Austin, Texas.

In consideration of the mutual promises and consideration provided for in this
Agreement, the parties agree as follows:

DEFINITIONS

The following capitalized terms will have the meanings given below when used in
this Agreement:

"Agreement" means this Global Supply Agreement, all its Exhibits and
Attachments, and all Specifications for Items, all as amended from time to time,
and all Applied Purchase Orders and other Authorized Demand Signals that may be
issued for the purchase of Items (including Services). When used with reference
to the purchase of a particular Item or Items, "Agreement" means those
provisions of the foregoing that apply to such Item or Items and to the
transaction for such purchase.

"Applied's Standard Terms and Conditions of Purchase" means Exhibit 1 to this
Agreement.

"Applied" means Applied Materials, Inc., and all of its domestic and
international divisions and subsidiaries.

"Applied IP" has the meaning given in the IPA.

"Applied System(s)" means capital equipment sold by Applied that incorporates a
Fluid Delivery System.

"Asset Purchase Agreement" means the Asset Purchase Agreement dated June 25,
1999 between Applied Materials, Inc. and Kinetics Fluid Systems, Inc., as
amended and supplemented from time to time.

"Attachment" means one of the documents, records or instruments identified as an
"Attachment" on the List of Exhibits and Attachments set out in this Agreement.




CONFIDENTIAL TREATMENT REQUESTED

"Authorized Demand Signal" means an order or record issued by Applied to
Supplier pursuant to Section 2.1.5.1.

"Bus Route" or "Blanket Order" means an arrangement, method or agreement for the
order and purchase of goods under which the buyer issues a standing, blanket or
open order (under which quantities may be indeterminate, forecasted, or
otherwise provided for) and then periodically specifies quantities for delivery
through summary orders, issuance of a purchase order document, or by electronic
or other notice.

"Business Day" means a day that is not a Saturday, a Sunday, or a holiday or
operating shut down day under the most current fiscal year operating calendar of
Applied in effect under this Agreement.

"Committed Delivery Date" means the date on which Supplier shall deliver a
completed Item and all required documentation to Applied, as determined under
Sections 2.1.5.2 and 2.1.5.3. As to Services for which a Purchase Order is the
"Authorized Demand Signal," the "Committed Delivery Date" means each date
established by such Purchase Order for completion of Services and delivery of
work product or other deliverables to Applied.

"Confidential Information" means all of the following: (a) "Confidential
Information," as such term is defined by the IPA, a Design SOW, a DSA or a DVA
(each as defined below), (b) Internal Applied Data, as defined below, and new
product plans of Applied that are included as Confidential Information under
Section 2.9.2 below, and (c) "Confidential Information" or "Proprietary
Information" of, or received from, Applied or Supplier, under (and as such
term(s) are defined in) any NDA now in effect or hereafter in effect (but in any
case, only for the period applicable under the IPA, NDA or other agreement, as
applicable).

"Configurable Subassemblies" means those configurable products identified by a
non-repeating part numbering system established by Applied (in which a
Subassembly part numbering follows a particular convention, i.e., XXXX-cont.). A
Configurable Subassembly may contain a number of Piece Parts, Modules or devices
(or a combination thereof) that are electrically and/or mechanically connected
and perform a specific function. An FDS is a Configurable Subassembly.

"Configuration Engineering Services" means the engineering services requested by
Applied and provided by Supplier for Applied *

"CCR Services" means the Configuration Engineering Services or CES Services
provided by Supplier pursuant to Applied's CCR.

"CCR" means Applied's request for CES Services or Configuration Engineering
Services in the revision of a Configured BOM or CES Package, which request is
issued after Supplier's acceptance of the applicable SSR or NSO order.


* Material has been omitted and filed separately with the Commission.


                                       2


CONFIDENTIAL TREATMENT REQUESTED

"Contract Price" means the price for an Item, including a Service, established
by or in accordance with Attachment 1 or, as to Services for which pricing is
not determined under Attachment 1, the price for Services established by or in
accordance with the applicable Applied Purchase Order issued under this
Agreement.

"CES Package" means all documentation, drawings, specifications and information
prepared or provided by Supplier to implement and record a CES.

"CES Services" means the engineering services provided by Supplier pursuant to
Applied's request to Supplier for a Customer Engineering Special.

"CES" or "Customer Engineering Special" means a modification to an existing
standard Fluid Delivery System configuration, wherein the modification involves
either *

"CPS" means Applied's Installed Customer Productivity Support organization,
formerly known as the Installed Base Service & Support organization, and any
successor organization (such organization being sometimes referred to as "IBSS"
or "CPS").

"Design Services," "Design SOW," "Design Services Agreement," and "DSA" have the
meanings given in the IPA.

"Development Services," "Development Services Agreement," and "DVA" have the
meanings given in the IPA.

"ECO" means an Engineering Change Order issued by Applied to change a
Specification or to make another Engineering Change under (and as defined in)
Section 4.1.1 below or approved by Applied to authorize a change in a
Specification or to make another Engineering Change under Section 4.1.1 below.

"ERS Program" means Applied's "Evaluated Receipts Settlement Program," which is
a system for payment by Applied for Items purchased hereunder, as described in
Section 2.11.1.3 below.

"Exhibit" means one of the documents, records or instruments identified as an
"Exhibit" on the list of Exhibits and Attachments set out in this Agreement.

"FDS" or "Fluid Delivery System" has the meaning given in the IPA. The term FDS
includes (unless otherwise limited by particular provisions of this Agreement)
Volume Manufacturing FDS, Pilot FDS, R&D FDS and NSO FDS.

"First Article" means a new Item, an Item with revised Specifications (including
drawings), or an Item manufactured after a change in Supplier's (or a sub-tier
supplier's) manufacturing location, manufacturing process or any other change
that, pursuant to the QRD (defined below) or the Quality Framework Document
(Attachment 15 to this Agreement), requires the change or the affected Item to
be evaluated and accepted by Applied prior to delivery to Applied or use in
manufacturing of Items under this Agreement.


* Material has been omitted and filed separately with the Commission.


                                       3


CONFIDENTIAL TREATMENT REQUESTED

"Internal Applied Data" means all non-public, proprietary information from any
source that is recorded, displayed, maintained or accessed on Applied's SPR,
SSR, NSR, CCR or any internal database, subject to the exclusions of Section
4.1, clauses (i) through (v) of the IPA.

"IP Rights" has the meaning given in the IPA.

"Item" or "Items" means FDS(s), Module(s), other Subassembly(ies), Piece Part(s)
and any other good(s) or Service(s) that (a) Supplier is to provide to Applied
under this Agreement pursuant to any Authorized Demand Signal and (b) are
identified in, or have pricing terms determined as set forth in, Attachment 1
and any amendments to Attachment 1 or are identified in and have pricing terms
set forth in an Applied Purchase Order issued as an Authorized Demand Signal
under this Agreement. Items (excluding Services) shall be deemed to constitute
"goods" as that term is defined in, and used in, the Uniform Commercial Code as
adopted in California, including amendments to such statutes. Certain exclusions
affecting "Items" are also set out in Section 1.4 below.

"Manufacturing Process" has the meaning given in the IPA.

"MFC" means mass flow controller.

"Module" means those standard or configurable parts that may be identified by a
single Applied part number, that contain multiple Piece Parts and that are sold
by Supplier to Applied on a recurring basis as separate units or as assemblies
for use in FDSs, NSOs or other fluid delivery products.

"NDA" means any and all agreements between Applied and Supplier for
confidentiality, nondisclosure or limitation on use of Confidential Information.
Such term, unless otherwise indicated in this Agreement, includes the IPA.

"New Product Transition" or "NPT" means the transition, in accordance with
criteria approved by Applied, of an FDS or Applied System from * to *, or from *
to *.

"New Product Transition Services" or "NPT Services" means the *, * and *
preparation services necessary for New Product Transition. The particular
requirements for each NPT Services project will be defined in * for NPT Services
issued pursuant to an RFP/RFQ process, and will generally include (when
appropriate to the particular project and with compensation to be negotiated)
*and *,* and * specifications, * and *,* of * and *, and * preparation.

"NSO" or "Non-System Order" means a Subassembly or other Item (excluding an FDS)
that (a) is ordered by Applied for Volume Manufacturing, Pilot Manufacturing or
R&D use and (b) either is to be installed or incorporated in a previously
manufactured Configurable Subassembly or is to be used by Applied for R&D
purposes.

"NSR" means a nonstandard request for an Item to be manufactured by Supplier,
which request will include basic process, platform, fab, and chamber information
and other information to describe the Item ordered.


* Material has been omitted and filed separately with the Commission.


                                       4


CONFIDENTIAL TREATMENT REQUESTED

"Piece Parts" means piece parts that are contained in Subassemblies or that are
provided by Supplier to Applied separately from a Subassembly.

"Pilot FDSs" means FDSs manufactured by Supplier for incorporation into Applied
Systems under Applied's Pilot Manufacturing program.

"Pilot Manufacturing" excludes R&D Manufacturing and means (i) manufacturing in
the United States of America of FDSs or Modules that have not been released for
Volume Manufacturing by completion of New Product Transition, and/or (ii)
manufacturing of FDSs or Modules in each other country which is specifically
identified from time to time in an Attachment to this Agreement as a country in
which Supplier may provide FDSs or Modules that have not been released for
Volume Manufacturing by completion of New Product Transition.

"Product Development Process" means Applied's process and management procedures
for its new product development programs employed to control design and delivery
of Applied's products.

"Purchase Order," (i) when used to describe a method of ordering Items, means
that method of ordering (sometimes also referred to as "Spot Buy") under which
Applied issues Authorized Demand Signals in accordance with Section 2.1.5.1,
including SSRs, NSRs and Purchase Orders (as defined in the following clause
(ii)), that identify or describe particular Items to be manufactured or provided
to Applied; and (ii) when used to describe an order issued by Applied for
particular Item(s), means Applied's order for particular Item(s) contained in an
Applied purchase order form, except that the provisions of this Agreement
(including Exhibit 1 to this Agreement) shall be a part of each purchase order
form issued as a Purchase Order under this Agreement and shall supersede and
replace in their entirety the terms and conditions stated on the reverse side of
the purchase order form. The Purchase Order method is distinguished from the Bus
Route method. The Purchase Order method will be utilized for the ordering of
FDSs by Applied from Supplier. When used in Section 2.2.3, "Spot Buy" refers to
Supplier's method, arrangement or agreement for the purchase of Piece Parts
under a Purchase Order method.

"QRD" means the "Quality Requirements Document for Manufactured
Assemblies--Kinetics Gas Systems," attached to this Agreement as Attachment 20,
as such document is modified from time to time.

"R&D" means the development, design and related scientific analysis (a) for new
or modified capital equipment for use or application in any Applied System; and
(b) for the prototype manufacture of such new or modified capital equipment.

"R&D Manufacturing" means the manufacturing of FDSs or Modules on a prototype or
other limited basis for use by Applied for R&D purposes.

"R&D Services" means Design Services and Development Services required for R&D
or R&D Manufacturing. R&D Services may include creation of product definitions
and functional requirements, schematics, product structure trees, electronic
valve assignments, definition of test requirements, determination and resolution
of manufacturing engineering issues, and the manufacture of one or more
prototypes. CES Services are not included in the term R&D Services.


                                       5


CONFIDENTIAL TREATMENT REQUESTED

"RFP," "RFQ," or "RFP/RFQ" means, as applicable, Applied's Request for Proposal
or Request for Quotation process, as applicable, or a combination of such
processes.

"SAT" means the Supply Account Team (or successor organization) assigned to
Supplier by Applied.

"Services" means Configuration Engineering Services, CES Services, CCR Services,
NPT Services, Design Services, Development Services, and other services
performed by Supplier for Applied pursuant to this Agreement, the IPA (to the
extent applicable), or (as to Design Services or Development Services) the
relevant DSA or DVA.

"SMT" means Applied's Subsystem Management Team (or successor organization)
assigned to Supplier by Applied.

"Source Inspection" means any inspection at Supplier's facilities required by
the quality provisions of this Agreement, including the QRD or the Quality
Framework, Attachment 15.

"Spares" means Items ordered by Applied's CPS pursuant to Section 2.1.5 below.

"Specifications" means authorized drawings, designs, specifications,
instructions relating to installation, assembly and testing, and manufacturing
and product requirements that are applicable to an Item. Specifications include
any ECOs applicable to an Item and information of the types set out above that
is included in, or referred to in, an SSR, NSR, CCR or Purchase Order issued as
to an Item.

"SPR" or "System Production Report" means, as to Volume Manufacturing FDSs,
Pilot Manufacturing FDSs, and NSO Items, Applied's schedule for anticipated
production of Applied Systems and NSOs, which is posted by Applied from time to
time and updated at least weekly for Supplier's electronic access and review,
identifying the Applied Systems and NSO transactions for which Supplier (subject
to the provisions of this Agreement) is anticipated to provide FDSs or NSOs
under this Agreement.

"Standard Services" means any or all of the following: Configuration Engineering
Services; CCR Services; CES Services; and NPT Services.

"Standard Subassemblies" means those products discretely identified by a single
Applied part number. A Standard Subassembly may contain a number of Piece Parts,
Modules or devices (or a combination thereof) that are electrically and/or
mechanically connected and performs a specific function.

"Subassemblies" means both Standard Subassemblies and Configurable
Subassemblies.

"Supplier" means Kinetics Fluid Systems, Inc., a California corporation, and (x)
all unincorporated divisions of Kinetics Fluid Systems, Inc. and (y) those
subsidiaries and affiliates of Kinetics Fluid Systems, Inc. that are approved
(through written supplement to this Agreement) by Applied as permitted to
perform supply or service obligations hereunder. Unit Instruments, Inc. shall
not be included in the term "Supplier" unless a written amendment to this
Agreement, executed by all parties, so provides. As set out in Section 1.4
below, this Agreement does not


                                       6


CONFIDENTIAL TREATMENT REQUESTED

apply to goods, products, parts or services that are the subject of agreement(s)
previously entered into with Applied by Insync Systems, Inc., even though
Supplier has succeeded to such prior agreement(s) by merger.

"Supplier Performance Plan" means a formal performance plan for Supplier in the
form of Attachment 16, as modified from time to time. Attachment 16 is the
Supplier Performance Plan in effect on the Effective Date.

"System Specification Report" or "SSR" means Applied's internally generated
report of basic process, platform, fab and chamber information and requirements
describing an order for an Applied System requiring FDS or other Item(s), or for
an NSO, from Supplier, as the same is posted by Applied to the Applied website
designated for Supplier access or as otherwise furnished to Supplier.

"UCC" means the Uniform Commercial Code, as adopted, amended and in effect in
the State of California from time to time, which is currently codified in the
California Commercial Code.

"Volume Manufacturing FDSs" means FDSs manufactured by Supplier for
incorporation into Applied Systems in Applied's Volume Manufacturing operations.

"Volume Manufacturing" or "VMO" means (i) manufacturing in the United States of
America of those FDSs or Modules that are released *, and also (ii)
manufacturing of FDSs or Modules in each other country which is specifically
identified from time to time in an Attachment to this Agreement as a country in
which Supplier may provide FDSs or Modules that have been released *.

"Will" or "shall" have the same meaning and are used to convey an affirmative
duty or obligation (i.e., a requirement).

Capitalized terms used in this Agreement and defined in other provisions will
have the meanings in this Agreement given in such other provision(s). Unless
otherwise indicated, references to Sections, provisions, paragraphs or like
terms are to such elements of this Agreement and to all subsections or subparts
of the referenced Section, provision or paragraph, and "hereof," "herein" and
like words refer to this Agreement as a whole and not to a particular provision,
also unless otherwise indicated. "Including" or "includes" does not indicate a
limitation. Capitalized terms defined in the text of this Global Supply
Agreement that are also used in its Attachments or Exhibits are used in the
Attachments and Exhibits as defined in the text of the Global Supply Agreement,
unless the context of usage indicates otherwise.

1.    SCOPE.

1.1.  Description of Agreement.

This Agreement defines the terms and requirements applicable between Applied and
Supplier with respect to the supply of Items by Supplier to Applied and to
matters related to such supply


* Material has been omitted and filed separately with the Commission.


                                       7


CONFIDENTIAL TREATMENT REQUESTED

that are covered by this Agreement; each party agrees to observe, perform under
and comply with this Agreement. Applied may, from time to time, issue Authorized
Demand Signals to Supplier for the purchase of Items. Upon acceptance (including
deemed acceptance) of each Authorized Demand Signal, and for valuable
consideration received, Supplier agrees that it shall, throughout the term of
this Agreement, sell and deliver the Item(s) covered by each such Authorized
Demand Signal under and in compliance with this Agreement. Decisions regarding
future purchases from Supplier will be based in part upon Supplier's performance
under this Agreement, and Supplier's achievement toward Applied's business
objectives.

1.2.  Addresses and Contact Persons; Notices.

      1.2.1. Contact Persons.

      The persons to receive notices generally under this Agreement and the
      procedures for notice are set out in Section 1.2.2. The following
      individual contact persons are identified for convenience of the parties
      and certain of the persons listed below are designated, in specific
      sections of this Agreement, as the person(s) to receive or initiate
      certain specific notices or actions. Each party may change any of its
      contact persons or other information in this Section 1.2.1 from time to
      time. Upon any such change, notice of the change shall be given promptly
      to the other party through the person(s) specified to receive notice under
      Section 1.2.2 below, and until such notice is given the change shall not
      be effective as to the other party.

      SUPPLIER CONTACT PERSONS: KINETICS FLUID SYSTEMS, INC.

      Senior Vice President: Joe Foster
      Phone: (408) 935-4570
      Facsimile: (408) 934-6302
      E-mail address: jfoster@kineticsgroup.com

      Vice President Operations: Brad Sander
      Phone: (512) 246-5100
      E-mail address: bsander@kineticsgroup.com

      Vice President Sales: Mark Thomas
      Phone: (408) 935-4592
      E-mail address: mthomas@kineticsgroup.com

      Senior Director of Operations - Round Rock Division: Mark Hutson
      Phone: (512) 246-5103
      E-mail address: mhutson@kineticsgroup.com

      Director of Operations - Milpitas Division: Shireen Zekanoski
      Phone: (408) 934-4603
      E-mail address: szekanoski@kineticsgroup.com


                                       8


CONFIDENTIAL TREATMENT REQUESTED

      Customer Service Manager (Austin): Geoff Chriswisser
      Phone: (512) 246-5852
      E-mail address: gchriswisser@kineticsgroup.com
      Cell phone: (512) 917-4670 Pager: (888) 789-1928

      Customer Service Manager (Milpitas): Sapana Talwalker
      Phone: (408) 935-7414
      Email address: stalwalker@kineticsgroup.com
      Cell phone: (408) 621-6605 Pager: (408) 388-0687

      Engineering Manager: John Rowland
      Phone: (512) 246-5841
      E-mail address: jrowland@kineticsgroup.com

      Quality Manager (Round Rock): Dave Thomas
      Phone: (512) 246-5775
      E-mail address: dthomas@kineticsgroup.com

      Quality Manager (Milpitas): Tina Caspar
      Phone: (408) 935-4595
      E-mail address: tcaspar@kineticsgroup.com

      Finance Manager (Milpitas): Diep Ha
      Phone: (408) 935-7470
      E-mail address: dha@kineticsgroup.com

      Finance Manager (Round Rock): Paul Senecal
      Phone: (512) 246-5104
      E-mail address: psenecal@kineticsgroup.com

      Customer Service Manager-Warranty Claims: Mark Kitchen
      Phone: (512) 246-5848
      E-mail address: mkitchen@kineticsgroup.com

      Senior Counsel - Austin: Nicol Hebert
      Phone: (512) 246-9092
      E-mail address: nhebert@kineticsgroup.com

      Milpitas Division Address:
      1463 Center Pointe Drive, Milpitas, CA 95035

      Austin/Round Rock Division Address:
      200 C. Parker Drive, Austin, Texas 78728


                                       9


CONFIDENTIAL TREATMENT REQUESTED

      APPLIED CONTACT PERSON:

      Craig Romick, Supply Account Team Lead, M/S 3300
      Applied Materials, Inc., 9700 Highway 290E, Austin Texas 78724
      Phone: 512-272-2535
      Facsimile: (512) 272-3908 Attn: Craig Romick
      E-mail: Craig_A_Romick@amat.com

      1.2.2. Notices.

      Notices required or permitted under this Agreement shall be given in
      writing, which shall include facsimile and e-mail transmission with
      receipt confirmed (either electronically or by the recipient or on behalf
      of the recipient) to the recipient, at the recipient's current business
      address, facsimile number or e-mail address, addressed to Supplier or
      Applied, as the case may be, and to the attention of the persons specified
      below, except as otherwise provided in this Agreement. If hand-delivered
      or transmitted by facsimile or e-mail, notice is effective at the time of
      receipt at the designated business address, facsimile number or e-mail
      address or on the next Business Day after receipt if receipt occurs after
      5:00 p.m. (local time of recipient) or on a non-Business Day; if sent by
      nationally recognized courier or express service (e.g., Federal Express,
      Airborne, Express Mail or equivalent service), or by mail (which shall be
      certified mail -- return receipt requested), notice is effective on the
      Business Day of receipt, or the next Business Day after receipt, if
      receipt occurs on a non-Business Day.

      The persons specified to receive notices under the Agreement as provided
      in this Section 1.2.2 are:

            FOR APPLIED,

            Craig Romick, Supply Account Team Lead, at the address given above
            in Section 1.2.1,

            with a copy to:

            Barry Quan, Vice President-Legal Affairs, Applied Materials, Inc.,
            Legal Department, 2881 Scott Blvd., Building 20, Santa Clara,
            California 95050.
            Telephone: (408) 986-7930, Facsimile: (408) 986-2836,
            E-mail: Barry_Quan@amat.com;

            FOR SUPPLIER,

            Joe Foster, Senior Vice President, 2805 Mission College Blvd., Santa
            Clara, California 95054, and whose telephone and facsimile numbers
            and e-mail address are given above in Section 1.2.1,

            with a copy to:


                                       10


CONFIDENTIAL TREATMENT REQUESTED

            (a) Brad Sander, Vice President Operations at the address given
            above in Section 1.2.1, and

            (b) John Goodman, Vice President and General Counsel, 2805 Mission
            College Blvd., Santa Clara, California 95054.
            Telephone: (408) 588-4422, Facsimile: (408) 576-0196,
            E-mail: jgoodman@kineticsgroup.com.

      Either party may specify that notices to it, and any required copies of
      same, be provided to no more than three persons, and notice shall be
      effective as to a party when it has been given as above provided to all
      persons so specified. Further, each party may, from time to time, change
      the persons(s) specified to receive notice under this Section 1.2.2.
      Notice of such a change shall be given to the person(s) specified to
      receive notice for the other party under this Section 1.2.2, and such
      change shall be effective when notice thereof is effective under the
      procedures of this Section 1.2.2.

In certain instances, notice may also be given to one or more "Guarantors" under
and for purposes of the "Performance Guaranty Agreement" (such terms being
defined below) relating to this Agreement. The persons to receive such notice(s)
are set out in such Performance Guaranty Agreement.

1.3.  Entire Agreement; Related Agreements; Modification; Prior Transactions.

      1.3.1. Certain Related Agreements.

      In addition to this Agreement, the parties and certain affiliates of
      Supplier have entered into and delivered concurrently with this Agreement
      certain other agreements related to, and constituting part of the
      consideration for, this Agreement (the "Related Agreements"). The Related
      Agreements are the following:

            (i) an Acknowledgement and Supplement agreement of even date
            herewith to the Asset Purchase Agreement;

            (ii) two Acknowledgement and Supplement agreements of even date
            herewith to the two Facilities Use Agreements between the parties
            and dated, respectively, June 28, 1999, as to Applied's facilities
            in Austin, Texas, and September 20, 1999, as to Applied's facilities
            in Santa Clara County, California, as the same have been amended
            (such Facilities Use Agreements, as amended, being called the
            "FUAs");

            (iii) An Amended and Restated Intellectual Property Agreement of
            even date herewith (such agreement, as amended from time to time,
            being called the "IPA"); and

            (iv) a Performance Guaranty Agreement of even date herewith of
            Kinetics Holdings Corporation (sometimes called "KHC") and


                                       11


CONFIDENTIAL TREATMENT REQUESTED

      The Kinetics Group, Inc. (sometimes called "KGI") (such agreement, as
      amended from time to time, being called the "Performance Guaranty
      Agreement" and such corporations being collectively called "Guarantors")
      with and for the benefit of Applied.

      1.3.2. Entire Agreement.

      This Agreement and the Related Agreements set forth the entire
      understanding and agreement of the parties as to the subject matter of
      this Agreement and of the Related Agreements. From and after the Effective
      Date (defined below) of this Agreement, this Agreement and the Related
      Agreements supersede, in accordance with their respective terms and
      subject to the other provisions below in this Section 1.3.2, all prior
      agreements, understandings, negotiations and discussions between the
      parties as to the subject matter of this Agreement and of the Related
      Agreements.

            1.3.2.1. In addition to this Agreement and the Related Agreements,
            other agreements now in effect between Applied and Supplier and
            referred to in Section 1.3.2.2, clause "third" below, relate to the
            subject matter of this Agreement and provide Applied or Supplier
            with rights in or licenses of Confidential Information or
            intellectual property of the other party, or protect or limit the
            use by either of Confidential Information or intellectual property
            of the other party (the "Separate Confidential Information
            Agreements"). The Separate Confidential Information Agreements shall
            remain in effect for the respective terms thereof and each of such
            agreements shall control as to the matters covered by such Separate
            Confidential Information Agreements, subject to Section 1.3.2.2.

            1.3.2.2. In the event (and to the extent) of conflict between or
            among any of the documents set out in this Section 1.3.2.2,
            precedence shall be given as follows (except as otherwise expressly
            agreed in writing, with reference to this Agreement or to the other
            affected agreement):

                  first, to any DVA entered into by Applied and Supplier, and
                  then to the IPA ;

                  second, to this Agreement (other than its incorporated
                  Exhibits or Attachments, unless and to the extent otherwise
                  provided expressly by this Agreement);

                  third, to any DSA, and then to any applicable Separate
                  Confidential Information Agreement (including any NDA) other
                  than the IPA, a DVA or DSA;

                  fourth, to Exhibit 1 to this Agreement, and then to all
                  Attachments and other Exhibits (if any) to this Agreement;


                                       12


CONFIDENTIAL TREATMENT REQUESTED

                  fifth, to Specifications, to other technical documents
                  incorporated in this Agreement (other than Attachments), and
                  then to Authorized Demand Signals; and

                  sixth, to any of the Related Agreements that are not
                  specifically identified above for precedence.

            1.3.2.3. From and after the Effective Date (defined below), this
            Agreement supersedes and replaces in its entirety the Amended and
            Restated Comprehensive Supplier Agreement dated as of June 28, 1999,
            as amended and extended through the Effective Date (the "CSA"), so
            that the term of the CSA expires concurrently with this Agreement
            becoming effective on its Effective Date, except as to those
            obligations, rights and liabilities arising under such CSA that have
            accrued at or prior to the Effective Date, or that hereafter accrue
            with respect to transactions between the parties that have occurred
            under and pursuant to such CSA at or prior to the Effective Date
            (including, by way of example, obligations, rights and liabilities
            relating to Items provided prior to the Effective Date of this
            Agreement), as to which the CSA shall continue in effect in
            accordance with its terms. In this regard, the parties specifically
            agree (i) that pricing for Items for which an SSR or Purchase Order
            issued under the CSA has been accepted, under the procedures
            described in Section 2.1.5.1 below, prior to the Effective Date
            shall be determined under the CSA, and (ii) that, except for such
            pricing of those Items within clause (i) above, the provisions of
            this Agreement will apply to Items that are delivered after the
            Effective Date but were ordered under the CSA prior to the Effective
            Date of this Agreement.

      1.3.3. Provisions Continuing in Effect.

      Following any termination, cancellation, or expiration of this Agreement,
      the provisions of each of Articles 2, 3, 5, 9,11, 21, 22, and 27 of
      Exhibit 1 and Sections 2.9.1.1.D, 2.9.2, 4.8, 7 and 9 of this Agreement
      will remain in full force and effect, unless specifically terminated by
      mutual written agreement between the parties, until the respective stated
      expiration of such provisions. The termination, cancellation or expiration
      of this Agreement shall not relieve a party of its obligations and
      liabilities that accrue or arise under or in connection with this
      Agreement through the time of, or in connection with, termination,
      cancellation or expiration of this Agreement (or thereafter under or in
      connection with provisions that survive as set out above), which
      obligations and liabilities and related claims, demands and causes of
      action shall continue until the expiration of the applicable period for
      the bringing of claims under controlling statutes of limitation or repose.
      The various Related Agreements and Separate Confidential Information
      Agreements (including NDAs) shall terminate or continue in effect as
      provided in such agreements.

      1.3.4. Modification.

      No amendment to or modification of this Agreement will be binding unless
      in writing and signed by a duly authorized representative of each party,
      except for amendments or


                                       13


CONFIDENTIAL TREATMENT REQUESTED

      modifications which Applied is permitted to initiate by posting or notice
      under this Section 1.3.4. The Attachments to this Agreement that are
      identified on the List of Exhibits and Attachments following the signature
      page of this Agreement as subject to modification or amendment by Applied
      upon notice (the "Implementation Attachments"), will be deemed to be the
      most current versions of such Attachments, as updated and revised from
      time to time by Applied in accordance with this Section 1.3.4.

      Unless prohibited by law or by separate modification of this Agreement, to
      initiate a modification or amendment of an Implementation Attachment,
      Applied will either (i) post updates or revisions to current versions of
      such Attachment on the Applied website which shall be designated for
      Supplier's use and made available to Supplier, or (ii) provide other
      written or electronic notice to Supplier of the revision or update, which
      notice shall be sent or given to Supplier's Senior Counsel - Austin
      identified in Section 1.2.1 above.

      If Supplier fails to object within thirty (30) calendar days after the
      date (i) on which such modification or amendment to an Implementation
      Attachment was posted on Applied's website (provided that Supplier had
      timely notice of posting of such modification or amendment through notice
      on the Applied website designated for Supplier's use) or (ii) on which
      such other notice was provided to Supplier, then such Attachment, as
      modified or amended, shall be deemed to be accepted by Supplier as the
      Attachment to this Agreement and shall be effective as the applicable
      Attachment upon the expiration of such thirty (30) day period.

      Any update or revision to an Attachment that is initiated by Applied's
      posting of the update or revision on the applicable Applied web site and
      that would have the effect of amending this Agreement (other than the
      modification or amendment of the affected Attachment) shall be effective
      only if Supplier fails to object within thirty (30) days after written,
      electronic or other actual notice of such update or revision is received
      by Supplier. Notice of such an update or revision subject to this
      provision shall be given to Supplier's Senior Counsel - Austin, as above
      identified.

1.4.  Items Covered.

All Items supplied (including Services other than Development Services) to
Applied by Supplier, even if sold pursuant to a separate Purchase Order, will be
covered by this Agreement; provided that the terms, provisions and conditions of
this Agreement (if any) applicable to Services rendered pursuant to a DVA shall
be determined in accordance with the DVA. This Agreement does not apply to
goods, parts, products or services that Unit Instruments, Inc., or any other
subsidiary or affiliate of Supplier provides to Applied. This Agreement likewise
does not apply to goods, parts, products or services provided to Applied
pursuant to the currently effective Global Supply Agreement dated as of October
27, 2000 (with execution dates of October 4, 2000 and October 19, 2000), for
weldments and other items provided to Applied by Insync Systems, Inc. (now
merged into, and a division of, Supplier), or pursuant to subsequent agreements
for such goods, parts, products or services, even though Supplier is successor
by merger to Insync Systems, Inc. Such other agreement(s) for goods, parts,
products or services shall continue in effect in accordance with their
respective terms, but shall not affect this Agreement. New Items may be added to
Attachment 1 upon mutual written agreement of Applied and Supplier from time to
time.


                                       14


CONFIDENTIAL TREATMENT REQUESTED

1.5.  Duration of Agreement.

This Agreement is effective and commences on and as of June 1, 2002 (the
"Effective Date").

This Agreement will remain in effect for a term of *, from the Effective Date
through * (the "Initial Term"), unless and to the extent earlier terminated or
cancelled in accordance with its provisions. At any time before expiration of
the Initial Term, Applied may, at Applied's option, extend the term of this
Agreement (subject to all other provisions of this Agreement) for an additional
period of up to 6 months, by notifying Supplier in writing of such extension.
The Initial Term shall include the period of such an extension.

2.    LOGISTICS, ORDERING AND OPERATIONAL FRAMEWORK.

2.1.  Operation and Management of Orders.

      2.1.1. Operating Calendar & Holidays.

      This Agreement operates on the basis of Applied's current fiscal year
      operating calendar, shown in Attachment 2, as modified from time to time.
      Recognized holidays and operating shut down days are as shown on such
      calendar. Supplier shall, unless commercially impracticable, adjust its
      operations, holidays and any shut down days as necessary to provide all
      Items (including Services) and meet its other agreements and obligations
      in accordance with this Agreement. Applied may, in accordance with Section
      1.3.4, modify its calendar as needed for its operations, which may result
      in the requirement for production support seven days a week, twenty-four
      hours a day.

      2.1.2. Monthly Volume Summaries.

      Supplier will prepare periodic summary reports showing quantities of FDSs
      and Modules projected by Applied for manufacture by Supplier (the "Monthly
      Volume Summaries"), and Supplier will retain a copy or electronic record
      of at least one (1) Monthly Volume Summary for each month during the term
      of this Agreement. Supplier will retain such copies and records for audit
      purposes for a minimum of twelve (12) months following the end of the
      month for which the respective Monthly Volume Summary was prepared. All of
      Applied's SPRs and other reports regarding Items or Applied Systems and
      the information provided by Applied in such SPRs and reports are Applied
      Confidential Information, to be used only by Supplier to meet its
      obligations to Applied under this Agreement and treated by Supplier as
      Confidential Information of Applied. The Monthly Volume Summaries are
      Confidential Information of each of Applied and Supplier to the extent of
      their respective Confidential Information included in, or used in the
      preparation of, any Monthly Volume Summary.


* Material has been omitted and filed separately with the Commission.


                                       15


CONFIDENTIAL TREATMENT REQUESTED

      2.1.3. Manufacture and Delivery.

      Supplier will manufacture, provide, sell and deliver all Items to Applied
      for which an Authorized Demand Signal has been issued and accepted or
      deemed accepted. Supplier will deliver all such Items to the locations, in
      the quantities, and at the times specified in or determined from the
      applicable Authorized Demand Signal, as accepted or deemed accepted, as
      such Authorized Demand Signal is modified pursuant to this Agreement and
      as otherwise required by a controlling provision of this Agreement.

            2.1.3.1. Delivery Mechanics.

            The specific mechanics and requirements for delivery of Items to
            Applied are set out in Attachment 3, and other delivery and
            transportation terms and requirements are set out in Section 2.10.3.
            Applied and Supplier may provide, by subsequent written agreement,
            that Supplier shall manufacture and deliver Items on a lean
            manufacturing system; if so, the requirements and specific mechanics
            to be followed for lean manufacturing shall be as shown in
            Attachment 3, subject to such modifications as may be mutually
            agreed at the time.

            2.1.3.2. Delivery Dates.

            Supplier shall deliver each Item to Applied on its Committed
            Delivery Date, as determined under Section 2.1.5.2, as the same may
            be modified pursuant to or as provided by Section 2.1.5.3 (or
            Section 2.1.4) or extended pursuant to Section 4.2.4(b). Supplier
            may make actual delivery of an Item no more than three (3) Business
            Days prior to the Committed Delivery Date; unless an earlier actual
            delivery date is permitted pursuant to Section 2.5.3. Delivery shall
            not be made after an Item is cancelled as provided in this
            Agreement, except as provided in Section 2.3.3(a). Supplier shall
            use all commercially reasonable efforts to make delivery of an Item
            on a date requested by Applied pursuant to Section 2.1.4.4. If Items
            are purchased under a Blanket Order (Bus Route) procedure, Items
            under the Blanket Order procedures shall be delivered at the date,
            time and location specified in the applicable Bus Route delivery
            requirements.

            The provisions of Section 2.1 shall control over provisions of
            Attachment 3 with regard to determination of actual and permitted
            dates of delivery.

      2.1.4. Change in Delivery Date.

            2.1.4.1. Applied may request Supplier to accelerate the manufacture,
            completion and delivery of any Item to a date other than the
            Committed Delivery Date then established under Section 2.1.5 below.
            A request for accelerated delivery shall be issued by a written or
            electronic record transmitted to Supplier to the attention of the
            Customer Service Manager or Director of Operations (including Senior
            Director of Operations) at the affected facility. A request for
            accelerated delivery may propose modification of the delivery date
            of one or more scheduled Items.


                                       16


CONFIDENTIAL TREATMENT REQUESTED

            2.1.4.2. Supplier will respond to the request for accelerated
            delivery within forty-eight (48) hours (measured during Business
            Days and under prevailing Pacific Time), after its receipt of the
            request. Supplier will include in its response the following:
            changes in price for accelerated manufacture, completion and
            delivery; impact of requested accelerated manufacture, completion
            and delivery on other Items for which an Authorized Demand Signal
            has been issued or which are listed on the most recent SPR;
            additional NSR or CCR information required; and limitations or
            requirements applicable to the response. Upon request by either
            party, Applied and Supplier will consult regarding the request for
            accelerated delivery during such forty-eight (48) hour period to
            facilitate Supplier's response and to resolve questions as to the
            request or response.

            2.1.4.3. Promptly upon receipt of Supplier's response to the request
            for accelerated delivery, Applied will review such response and
            consult with Supplier regarding any additional information needed by
            Applied or Supplier. Upon agreement of the parties pursuant to such
            request and response, Applied shall issue a revised Authorized
            Demand Signal and include in such revised Authorized Demand Signal
            the new Committed Delivery Date and all changes in price or other
            cost, established in accordance with the request and response.

            2.1.4.4. A request for a change accelerating delivery by three (3)
            Business days or less from the applicable Committed Delivery Date is
            not an accelerated delivery subject to this Section, and the
            Contract Price for the Item will not (due to the acceleration of
            delivery) be changed. Likewise, the Committed Delivery Date shall
            not be deemed to be altered, unless otherwise expressly agreed,
            pursuant to a request for accelerated delivery of three (3) Business
            days or less.

      2.1.5. Orders for Items.

      Orders for Items may be issued by Applied under the following methods of
      ordering:

            Bus Route or Blanket Order: If Bus Route Orders apply, then Applied
            will send via daily EDI transmission an Authorized Demand Signal to
            Supplier containing Applied's material requirements for Items, which
            will be organized according to part numbers and will represent
            Applied's daily purchase from Supplier. Unless otherwise agreed by
            Applied and Supplier by written amendment to this Agreement, the
            Blanket Order or Bus Route method shall not be used for the ordering
            and delivery of Items.

            Purchase Order: As needed by Applied, Applied will issue Authorized
            Demand Signals for one or more Items to Supplier under the
            procedures set out in Section 2.1.5.1. Each Authorized Demand Signal
            shall apply to the particular Item(s) specified in that signal.

      Authorized Demand Signals for orders by Applied under this Agreement may
      be issued by Applied using any of the methods provided for in Section
      2.1.5.1.

            2.1.5.1. Authorized Demand Signals.


                                       17


CONFIDENTIAL TREATMENT REQUESTED

            Each Authorized Demand Signal issued by Applied constitutes
            Applied's offer to purchase from Supplier, in accordance with and
            subject to this Agreement, the Item(s) identified in such Authorized
            Demand Signal. Supplier agrees that (subject to the refusal terms of
            this Agreement and to Section 4.11 of this Agreement) it will accept
            the Authorized Demand Signals issued by Applied and sell, provide
            and deliver, in accordance with and subject to this Agreement
            (including delivery in accordance with provisions regarding
            Committed Delivery Date), all Items for which an Authorized Demand
            Signal is accepted or deemed accepted by Supplier. Issuance of a
            Purchase Order as an Authorized Demand Signal may be made by e-mail
            transmission or by facsimile transmission, or, if such transmission
            services are not available, by mail or hand delivery, and shall be
            effective when transmitted or delivered to Supplier's Customer
            Service Manager - Austin, or Customer Service Manager - Milpitas, as
            appropriate. Issuance of an Authorized Demand Signal to Supplier
            through website posting by Applied and acceptance of such posted
            Authorized Demand Signals is effective between the parties as
            provided in other provisions below in this Section 2.1.5.1.

            A.    Issuance of Authorized Demand Signal.

                  1. VMO or Pilot FDSs, NSOs, and Modules. An Authorized Demand
                  Signal for Volume Manufacturing FDSs, Pilot Manufacturing
                  FDSs, NSOs or Modules is issued by Applied posting, at the
                  Applied website designated for Supplier's access (or, at such
                  times that website access is unavailable, by transmission by
                  e-mail or facsimile to, or other delivery to, Supplier's
                  Customer Service Manager - Austin or Milpitas, as
                  appropriate), an SSR, NSR, or equivalent spreadsheet, report
                  or record of basic FDS or other Item Specification, which
                  identifies the FDS or other Item(s) being ordered and includes
                  the Applied Project Number or Applied "Spec Id" number. If
                  Applied elects to provide an Applied Configured BOM pursuant
                  to Section 2.1.5.1.A.4.c below (Coordination as to Services),
                  Applied shall issue (or make available by electronic means)
                  the Applied Configured BOM as part of the Authorized Demand
                  Signal.

                  The SSR, NSR, or equivalent spreadsheet, report or record so
                  posted or furnished (and including an Applied Configured BOM
                  if such is provided) is an "Authorized Demand Signal."

                  Applied may also order Modules through an RFP/RFQ process and
                  issuance of a Purchase Order, as provided in Section
                  2.1.5.1.A.3 below.

                  2. R&D. An Authorized Demand Signal for Items for Applied's
                  R&D purposes is issued by Applied in either of the following
                  ways:

                        (a) for FDSs, Modules and NSOs that do not require
                        Design Services or Development Services, by issuing (or
                        furnishing) an SSR, NSR or equivalent spreadsheet,
                        report or record of basic


                                       18


CONFIDENTIAL TREATMENT REQUESTED

                        Specification to Supplier in the manner provided in
                        Paragraph A.1 above; or

                        (b) for any Item to be manufactured in connection with
                        or as a deliverable under a Design Services Agreement or
                        Development Services Agreement, by issuance to Supplier
                        of the Purchase Order that is a part of the relevant
                        Design Services Agreement, or the Purchase Order for the
                        Development Services Agreement, in each instance based
                        on Supplier's proposals or quotations received by
                        Applied through an RFP/RFQ process and as agreed by the
                        parties pursuant to the RFP/RFQ process.

                  The SSR, NSR or equivalent spreadsheet, report or record, or
                  Purchase Order, for FDS or other Items ordered for R&D
                  purposes is an "Authorized Demand Signal." Authorized Demand
                  Signals for R&D purposes shall be issued by electronic
                  transmission (including e-mail or facsimile transmission), or
                  by delivery of a written Purchase Order to Supplier to the
                  attention of Supplier's Customer Service Manager -Milpitas. If
                  an Item is to be manufactured in connection with or as a
                  deliverable in connection with Design Services or Development
                  Services, the Authorized Demand Signal must include the
                  Purchase Order for such Services and the Authorized Demand
                  Signal is not effective until that Purchase Order is accepted
                  or deemed accepted.

                  3. Spares and Certain Modules. An Authorized Demand Signal for
                  Spares or for Modules not ordered through the issuance and
                  acceptance of an SSR ("Non SSR Modules") is issued by Applied
                  when it issues a Purchase Order to Supplier, to the attention
                  of Supplier's Customer Service Manager - Warranty based on
                  Supplier's proposals or quotations received by Applied through
                  the RFP/RFQ process. A Purchase Order so issued is an
                  "Authorized Demand Signal." A Purchase Order issued as an
                  Authorized Demand Signal for Spares or Non SSR Modules, issued
                  pursuant to an RFP/RFQ process and in conformity with
                  Supplier's proposal or quotation (or as agreed by the parties
                  pursuant to such process), is deemed accepted on issuance.

                  4. Services. An Authorized Demand Signal for Services is
                  issued as follows:

                    a. Configuration Engineering Services, CES Services and CCR
                    Services.

                        (i)   For Configuration Engineering Services, by issuing
                              the SSR for the Applied System for which
                              Configuration Engineering is to be performed, or,
                              as to Configuration Engineering Services that are
                              CCR Services incident to a CCR, by issuing the
                              CCR.


                                       19


CONFIDENTIAL TREATMENT REQUESTED

                        (ii)  For CES Services, by issuing an NSR incident to an
                              SSR, and for CES Services that are CCR Services
                              incident to a CCR, by issuing the CCR.

                  Issuance of an NSR, SSR, CCR or Purchase Order as to Services
                  under this Section 2.1.5.1.A.4.a shall be made as follows:

                        with respect to VMO or Pilot FDSs, NSOs or Modules, by
                        posting electronic record of the NSR or SSR on the
                        Applied website designated by Supplier's access (or as
                        otherwise provided by Section 2.1.5.1.A as to Purchase
                        Orders, and in other circumstances as there provided
                        for), or,

                        with respect to NSRs, SSRs or Purchase Orders for Items
                        for which posting is not used, by e-mail or facsimile
                        transmission (or as otherwise provided by Section
                        2.1.5.1.A as to Purchase Orders, and in other
                        circumstances as there provided for), or

                        with respect to CCR Services, by e-mail or facsimile
                        transmission, or by hand delivery (if e-mail or
                        facsimile transmission is not available), of the CCR to
                        Supplier, to the attention of the Supplier contact
                        person to whom the initial order to which the CCR
                        relates was issued.

                    b. Other Services.

                  All other Services (including NPT Services) shall be ordered
                  through a Request for Proposal/Request for Quotation process,
                  pursuant to which the Authorized Demand Signal will be an
                  Applied Purchase Order issued in accordance with this Section
                  2.1.5.1.A.4.b. Design Services or Development Services shall
                  only be ordered through an RFP/RFQ process and by issuance of
                  an Applied Purchase Order conforming to Supplier's response to
                  the RFP/RFQ (or as is otherwise agreed by the parties pursuant
                  to the RFP/RFQ process). If Item(s) are to be manufactured in
                  connection with, or as a deliverable under, a Design Services
                  Agreement or Development Services Agreement, the Purchase
                  Order that is a part of the Design Services Agreement, or that
                  is issued for the Development Services Agreement, must also
                  include the order for such Item(s). Further, a Purchase Order
                  for Design Services or for Development Services shall also be
                  issued in accordance with the IPA (including provisions of the
                  IPA applicable to a DSA or DVA.) The IPA (and any DVA, as
                  applicable) shall control and have priority in the event of
                  conflict with this Agreement in accordance with Section
                  1.3.2.2 above.

                    c. Coordination as to Services.

                  (i) Applied may, at the time it issues the Authorized Demand
                  Signal for an Item, elect to provide to Supplier the
                  Configured BOM for the Item


                                       20


CONFIDENTIAL TREATMENT REQUESTED

                  that would otherwise be prepared by Supplier as part of its
                  Configuration Engineering Services (the "Applied Configured
                  BOM"). If Applied elects to provide an Applied Configured BOM
                  for an Item, the Authorized Demand Signal for the Item will be
                  the SSR, NSR or equivalent spreadsheet, report or record plus
                  the Applied Configured BOM issued with and included in the
                  SSR, NSR or equivalent document.

                  If Applied does not issue an Applied Configured BOM as part of
                  its Authorized Demand Signal in accordance with this Section
                  2.1.5.1.A.4.c, then Supplier shall perform those Services that
                  are ordered pursuant to the Authorized Demand Signal as
                  determined under other provisions of Section 2.1.5.1.A.4, and
                  Applied shall pay for Services so performed at the rates
                  applicable under the cost model (Attachment 1).

                  (ii) Applied shall be responsible for engineering services in
                  the preparation of an Applied Configured BOM. Supplier shall
                  not be required to perform or provide engineering review of an
                  Applied Configured BOM prior to commencing the manufacture of
                  the Item.

                  (iii) Supplier will advise Applied of defects in an Applied
                  Configured BOM that are identified by Supplier in the
                  manufacture of the Item. If an Applied Configured BOM is
                  defective:

                        (a) Supplier is excused from compliance with the
                        Committed Delivery Date applicable at the time the
                        defect in the Applied Configured BOM was identified;

                        (b) Applied will re-engineer the Applied Configured BOM
                        to correct the defect(s), or, upon mutual written
                        agreement pursuant to an RFP/RFQ process (which includes
                        e-mail and facsimile records of the agreement), Supplier
                        will re-engineer the Applied Configured BOM to correct
                        the defect(s) pursuant to the Purchase Order issued
                        through the RFP/RFQ process;

                        (c) Changes in Piece Parts for an Item that result from
                        re-engineering of an Applied Configured BOM pursuant to
                        this Section 2.1.5.1.A.4.c. (excluding changes involving
                        digital line-side configurable MFCs) shall be treated as
                        *s in accordance with Section 2.8 of this Agreement if
                        occurring within the period covered by Section 2.8.3.1;

                        (d) Applied and Supplier shall negotiate in good faith
                        to determine an adjusted Committed Delivery Date; and

                        (e) Appropriate written modifications of the Committed
                        Delivery Date shall be made upon mutual agreement.


* Material has been omitted and filed separately with the Commission.


                                       21


CONFIDENTIAL TREATMENT REQUESTED

                  (iv) Supplier shall review the documentation and information
                  provided as part of each Authorized Demand Signal and shall
                  coordinate its Services so that Supplier provides or performs
                  those Services necessary or appropriate under the Authorized
                  Demand Signal and its related documentation or information.

                  (v) The parties may, by mutual written agreement, amend the
                  scope of or charges for Services for repeat build Items.

                    d. Quotation of CES Charges.

                  (i) Applied may require that Supplier provide "Quoted CES
                  Charges" (as such term is defined below) as to one or more
                  product line(s), type(s) or model(s) of Applied Systems. The
                  Applied SAT Team Lead for Supplier shall notify Supplier's
                  Engineering Manager that Quoted CES Charges are required, and
                  such notice shall specify the Applied product line(s), type(s)
                  or model(s) of Applied Systems for which Quoted CES Hours are
                  required, the date on which Supplier shall commence providing
                  such quotes, and the person at Applied to whom the Quoted CES
                  Charges shall be sent. Quotations setting out Quoted CES
                  Charges shall be provided by Supplier by e-mail or facsimile
                  transmission to the person so identified.

                  (ii) "Quoted CES Charges" means the charges for CES Services
                  that Supplier is to perform pursuant to an Authorized Demand
                  Signal for CES Services under Section 2.1.5.1.A.4.a that are
                  in excess of 20 hours as to a Volume Manufacturing FDS or 40
                  hours as to a Pilot Manufacturing FDS, or such higher
                  reportable charges threshold as may be specified in the notice
                  requiring Supplier to provide quotations. Supplier may charge,
                  in addition to Quoted CES Charges, for two (2) hours of
                  engineering services for the release of a Configured BOM
                  through Applied's ECO procedures applicable to an Item when
                  Supplier performs Configuration Engineering Services or CCR
                  Services as to the Configured BOM, without having to include
                  such charges for release of the Configured BOM in its quote.

                  (iii) If Quoted CES Charges are required with respect to a
                  Volume Manufacturing FDS or Pilot Manufacturing FDS for which
                  the Authorized Demand Signal (for the FDS and related CES
                  Services) is the NSR incident to the primary SSR (a
                  "Conditional ADS") Supplier shall accept or refuse the
                  Conditional ADS within the time period otherwise applicable to
                  that Authorized Demand Signal. The obligations of Supplier and
                  Applied with respect to a Conditional ADS upon its acceptance
                  under other provisions of Section 2.1.5.1 are, however,
                  subject to subsequent agreement on Quoted CES Charges, as
                  provided in this Section 2.1.5.1.A.4.d. Within two (2)
                  Business Days after the date of acceptance of a Conditional
                  ADS, Supplier shall provide its quotation of hours and amounts
                  to be charged for Quoted CES Services to Applied. Until


                                       22


CONFIDENTIAL TREATMENT REQUESTED

                  Applied accepts (or is deemed to have accepted) the time and
                  amount for Quoted CES Services shown on the quotation of
                  Quoted CES Charges, the affected Conditional ADS shall be
                  subject to Applied's acceptance of the quote for Quoted CES
                  Services and until such acceptance the Conditional ADS shall
                  not be binding as to Applied; Supplier, however, shall not
                  revoke its acceptance of the Conditional ADS or withdraw its
                  quote of Quoted CES Charges.

                  (iv) Applied may reject or accept a quotation of Quoted CES
                  Services by e-mail, facsimile or other record or writing (but
                  not by telephone or voice-mail) at any time prior to the time
                  acceptance is deemed to occur by the following sentence. If a
                  quote for Quoted CES Services is not rejected by Applied
                  within two (2) Business Days after the quote is issued to
                  Applied, then the quote for Quoted CES Services shall be
                  deemed accepted by Applied. Upon Applied's acceptance of the
                  quotation of Quoted CES Charges, the related Conditional ADS
                  Demand Signal becomes binding on and agreed to by both
                  Supplier and Applied at such time. The Committed Delivery Date
                  shall be determined based on such date of acceptance of the
                  quotation of Quoted CES Services. Applied's notice of
                  rejection of Quoted CES Services shall be issued to Supplier's
                  Engineering Manager. If Applied rejects a quote for Quoted CES
                  Services, then Supplier and Applied shall promptly negotiate
                  as to the scope, time and costs for Quoted CES Services. If
                  the parties agree on the scope, time and costs for Quoted CES
                  Services after a quote is rejected, then Supplier shall issue
                  a revised quote for Quoted CES Services and upon Applied's
                  issuance of an acceptance of such revised quote, the related
                  Authorized Demand Signal shall be binding on and is agreed to
                  by both Supplier, and the Committed Delivery Date shall be
                  determined based on the date of acceptance of the revised
                  quote by Applied.

                  (v) Except in those instances in which a quotation of Quoted
                  CES Charges applies and has been accepted, CCR Services are
                  not subject to the procedures for quotation and acceptance in
                  this Section 2.1.5.1.A.4.d. If, after a quote of Quoted CES
                  Charges has been accepted, Applied changes the relevant SSR or
                  NSR and such change affects CES Services previously quoted and
                  accepted, then (a) Supplier shall promptly requote its Quoted
                  CES Charges to include additional CES Services (or CCR
                  Services) resulting from the changes in SSR or NSR, (b)
                  Applied shall promptly accept or reject the Quoted CES
                  Charges, as so requoted, (c) requoted Quoted CES Charges
                  accepted by Applied shall become part of the Contract Price of
                  the Item(s) affected; and (d) the parties shall negotiate in
                  good faith to determine an adjusted Committed Delivery Date
                  (if any) due to changes in the SSR or NSR that adversely
                  affect Supplier's ability to meet the otherwise applicable
                  Committed Delivery Date.


                                       23


CONFIDENTIAL TREATMENT REQUESTED

                  (vi) A charge for up to two (2) hours for engineering services
                  for release of a Configured BOM through Applied's ECO
                  procedures applicable to the Item may be made in addition to
                  Quoted CES Services.

            B. Acceptance and Refusal. Each Authorized Demand Signal issued by
            Applied in compliance with Section 2.1.5.1.A and not timely refused
            by Supplier as provided by this Section 2.1.5.1.B is agreed to have
            been accepted and is effective between Applied and Supplier upon the
            expiration of the period specified for Supplier's refusal.

                  1. VMO or Pilot FDSs, NSOs and Modules. Supplier may refuse an
                  Authorized Demand Signal issued by Applied for purchases
                  within the scope of Paragraph A.1. (a) for error by Applied in
                  the SSR, CCR, or NSR (or equivalent document), (b) as
                  exceeding Supplier's capacity or flexibility requirements
                  determined under Section 2.5 (except as to CCRs), or (c) for
                  failure to provide a required NSR or to provide an Applied
                  Configured BOM that should have been part of the Authorized
                  Demand Signal under Section 2.1.5.1.A.4.c, but not for other
                  reasons. Supplier shall effect a refusal to accept an SSR,
                  CCR, or NSR (or equivalent document) by posting its refusal on
                  Supplier's Master Production Schedule document as maintained
                  on an Applied server, or (if server access is unavailable) by
                  e-mail or facsimile transmission to the Applied purchasing
                  representative for the Applied organization issuing the SSR,
                  CCR, or NSR. Refusal shall be made within ninety-six (96)
                  hours (measured during Business Days and under prevailing
                  Pacific Time) after Applied's issuance of the Authorized
                  Demand Signal for orders in this category.

                  2. R&D. Supplier may refuse an Authorized Demand Signal issued
                  by Applied initiated by the SSR process for R&D purchases
                  within the scope of Paragraph A.2 for (a) error by Applied in
                  the SSR or NSR (or equivalent document), (b) incomplete design
                  or unresolved manufacturing issues, (c) as exceeding
                  Supplier's capacity or flexibility requirements under Section
                  2.5 below, or (d) failure to provide a required NSR, but not
                  otherwise. Supplier shall effect a refusal to accept an R&D
                  SSR order (or equivalent) by posting its refusal on Supplier's
                  Master Production Schedule document as maintained on an
                  Applied server, or (if server access is unavailable) by e-mail
                  or facsimile transmission to the purchasing representative for
                  the Applied organization issuing the Authorized Demand Signal.
                  Refusal shall be made within five (5) Business Days after
                  posting of the R&D SSR. A Purchase Order issued as an
                  Authorized Demand Signal for an R&D purchase pursuant to an
                  RFQ/RFP process and in conformity with the proposal or
                  quotation received from Supplier and the requirements of
                  Section 2.1.5.1.A.2 where applicable (or as agreed by the
                  parties pursuant to such RFP/RFQ process) is deemed accepted
                  upon its issuance.


                                       24


CONFIDENTIAL TREATMENT REQUESTED

                  3. Services. With respect to those Standard Services that are
                  required for or are incident to the manufacture of an Item or
                  Items for which the Authorized Demand Signal is an SSR or NSR
                  (or equivalent spreadsheet or record), the corresponding
                  Authorized Demand Signal for Standard Services is accepted or
                  deemed accepted upon and by the acceptance or deemed
                  acceptance of the SSR or NSR. An Authorized Demand Signal for
                  CCR Services is deemed accepted upon and by acceptance or
                  deemed acceptance of the CCR under Section 2.1.5.1.B.1. A
                  Purchase Order constituting an Authorized Demand Signal for
                  other Services, issued in accordance with Section 2.1.5.1.A.4,
                  is deemed accepted upon issuance, whether for Services
                  required for or incident to manufacture of an Item or Items,
                  or otherwise.

                  4. Assurance to Supplier. In addition to the matters set out
                  above in this Section 2.1.5.1.B as grounds for refusal of an
                  Authorized Demand Signal, Supplier may also refuse an
                  Authorized Demand Signal in the circumstances allowed by
                  Section 2609 of the UCC.

            2.1.5.2. Committed Delivery Dates.

                  A. Except as provided for in Paragraph B, C or D below in this
                  Section 2.1.5.2, the Committed Delivery Date for Volume, Pilot
                  and R&D Items shall be determined in accordance with
                  applicable cycle times in effect at the time the Authorized
                  Demand Signal is accepted or deemed accepted under the
                  following schedule:

                        Volume: From the date of acceptance or deemed acceptance
                        of Authorized Demand Signal *.

                        Pilot: From the date of acceptance or deemed acceptance
                        of Authorized Demand Signal *.

                        R&D: From the date of acceptance or deemed acceptance of
                        Authorized Demand Signal when issued by SSR, *; and, for
                        R&D Items for which a Purchase Order is issued, * from
                        the date of issuance of the Purchase Order, unless
                        another date is specified in the Purchase Order.

                  B. The Committed Delivery Date for NSO Items shall be * from
                  the date of acceptance or deemed acceptance of the Authorized
                  Demand Signal; the Committed Delivery Date for Modules shall
                  be * from the date of acceptance or deemed acceptance of the
                  Authorized Demand Signal.


* Material has been omitted and filed separately with the Commission.


                                       25


CONFIDENTIAL TREATMENT REQUESTED

                  C. Services for Items ordered through an SSR, NSR, CCR or
                  equivalent process shall be provided and completed as required
                  to achieve the applicable Committed Delivery Date for the
                  Items. Services for which the Authorized Demand Signal is a
                  Purchase Order (or DSA or DVA, if applicable) shall be
                  provided in accordance with the applicable Purchase Order (or
                  DSA or DVA, if applicable) and its Committed Delivery Date or
                  other delivery or completion requirements of such Purchase
                  Order (or DSA or DVA, if applicable).

                  D. For any Items not otherwise governed by the preceding terms
                  for which the initial Authorized Demand Signal is an Applied
                  Purchase Order, the Committed Delivery Date shall be the
                  delivery date set out in such Purchase Order.

                  E. By mutual written agreement, the parties may amend the
                  cycle times provided in this Section 2.1.5.2 with respect to
                  one or more Item(s). The parties will consult together,
                  identify and, upon mutual written agreement, implement
                  reductions in cycle time for repeat build Item(s).

         2.1.5.3 Modification of Committed Delivery Dates.

            A. For Items for which the Committed Delivery Date is established
            pursuant to Section 2.1.5.2.A or B, the Committed Delivery Date may
            be changed only with Supplier's approval; provided that any
            Committed Delivery Date may be changed, without Supplier's approval,
            as provided in Section 2.3.2. The delivery date for an Item as
            modified as provided in Section 2.3.2 shall become the "Committed
            Delivery Date" for such Item.

            B. For Items for which the Committed Delivery Date is established by
            a Purchase Order issued under Sections 2.1.5.1 and 2.1.5.2, the
            Committed Delivery Date shall be modified only through issuance of a
            revised Purchase Order, or pursuant to Section 2.3.2.

            C. The Committed Delivery Date for an Item may also be modified
            pursuant to Section 2.1.4 or Section 2.1.5.1.A.4.c. or d.

      2.1.6. Electronic Commerce.

      For transactions conducted by electronic means (other than facsimile,
      internet or e-mail transmission), Supplier is required to communicate with
      Applied using the then current EDI ANSI standards and encouraged to use
      either GEIS, EDICT or other approved software. Facsimile, internet and
      e-mail transmissions shall be made using commercially available systems
      compatible with Applied's e-mail, internet and facsimile applications.

      The parties agree that they shall conduct transactions hereunder by
      various electronic means and will rely upon electronic means to issue
      Authorized Demand Signals, to enter into purchase and sale transactions,
      and to exchange delivery and order information under this Agreement. To
      the extent electronic means are not accessible or become otherwise


                                       26


CONFIDENTIAL TREATMENT REQUESTED

      unavailable due to technical difficulties or due to the effect of any law
      or regulation governing electronic transactions (collectively
      "Unavailability"), the parties agree: (1) that any transactions entered
      into, and any delivery or order information received, by electronic means
      prior to the Unavailability date will remain valid, and Supplier and
      Applied shall honor their respective obligations; and (2) that they will
      continue to conduct their transactions, to the extent of the
      Unavailability, by other than electronic means, such as written form or
      fax as contemplated in Section 2.1.5 of this Agreement. This Agreement
      shall not require all transactions to be conducted by electronic means. If
      required by applicable law, a separate agreement concerning electronic
      transactions between Applied and Supplier will set out other terms that
      will control as to certain aspects of electronic transactions.

      2.1.7. Pro Forma.

            2.1.7.1. Estimated Pro Forma.

            No later than three (3) Business Days prior to Supplier's shipment
            of each Item to Applied for which the Contract Price is determined
            under Attachment 1, Supplier shall transmit its preliminary "pro
            forma invoice" (a "Pro Forma") for such Item. The preliminary Pro
            Forma shall identify the Item(s) covered, shall calculate the
            Contract Price by applying the appropriate elements of the cost
            model set out in Attachment 1, and shall specify separately any
            charges (stated separately as to each applicable category) for *s,
            Reconfigure Items, Relabel Items, Restock Items (as such terms are
            defined below), and any other charges included as applicable to the
            Item(s) but not provided for in Attachment 1. The preliminary Pro
            Forma shall be delivered by e-mail (or upon request by Applied, by
            fax or hand delivery) to the finance representative of the Applied
            organization issuing the Authorized Demand Signal, and to such other
            persons as Applied may reasonably request. The preliminary Pro Forma
            shall identify charges for Standard Services by category.

            2.1.7.2. Final Pro Forma.

            At the time of Supplier's shipment of each Item to Applied for which
            the Contract Price is determined under Attachment 1, Supplier shall
            transmit to Applied its final Pro Forma for such Item. The final Pro
            Forma shall contain all information, costs and charges applicable to
            the Item, including all elements described in Section 2.1.7.1, and
            shall be delivered in the manner and to the persons specified in
            Section 2.1.7.1. The final Pro Forma shall further identify
            separately for each category of Standard Services the charges for
            that category of Service and the portions of such charges
            attributable to Configuration Engineering Services, CES Services,
            and engineering for the release of the Bill of Materials for the
            Item through Applied's ECO procedures, as applicable.


* Material has been omitted and filed separately with the Commission.


                                       27


CONFIDENTIAL TREATMENT REQUESTED

2.2.  Definition of Terms for Certain Provisions Affecting Prices or Charges.

      2.2.1 The definitions set out in this Section shall apply in determining
      charges, credits and payments under Sections 2.8 (*), 2.14 (Provisions for
      Reconfiguration or Restocking), 3.1.4 (Further Agreements as to Pricing)
      through 3.1.6 (Adjustment for *), and 4.11 (Wind Down Provisions).

      Each of these sections will provide further definitions or procedures that
      will control the particular matters to which it applies.

      2.2.2 For the purposes of Section 2.2 and the sections identified in
      Section 2.2.1, Piece Parts (including MFCs) installed on or removed from
      an Item are classified in one of the following categories:

            i)    NonReusable Materials

            ii)   NonConsumable Materials

            iii)  NonConsumable MFCs

            iv)   Consumable Materials

            v)    Consumable MFCs

            vi)   Floor Stock Scrap.

      2.2.3 The following provisions and definitions apply generally for the
      purposes of Section 2.2 and the Sections indicated above:

            (a) "NonReusable Materials" means those Piece Parts, excluding Floor
            Stock Scrap, used in the manufacture of an Item that are (i) missing
            or damaged at the time of inspection prior to disassembly and
            teardown (as Reconfigure or Restock Items only), (ii) damaged in the
            course of disassembly and teardown when using commercially
            reasonable practices, or (iii) obsolete and no longer meet current
            revision levels of applicable specifications.

            (b) "Floor Stock Scrap" means those Piece Parts removed from an Item
            in the course of disassembly and teardown that have a unit cost of
            $10.00 or less.

            (c) "Consumable Materials" are all recoverable Piece Parts for an
            Item other than NonReusable Materials, NonConsumable Materials,
            NonConsumable MFCs and Floor Stock Scrap.

            (d) "NonConsumable Materials" consists of Bus Route NonConsumable
            Materials, and Spot Buy NonConsumable Materials.


* Material has been omitted and filed separately with the Commission.


                                       28


CONFIDENTIAL TREATMENT REQUESTED

            (e) "Bus Route NonConsumable Materials" are those * Piece Parts for
            an Item that * on a Bus Route basis and have been used in, or
            delivered to Supplier for, the manufacture of the Item at the
            Relevant Date that are * (x) Supplier's * for such Piece Parts over
            the * following the Relevant Date *.

            (f) "Spot Buy NonConsumable Materials" are those * Piece Parts for
            an Item that * on a Spot Buy basis and have been used in, or
            delivered to Supplier for (or for which Supplier has issued its
            non-cancelable purchase order), the manufacture of the Item at the
            Relevant Date, that are * (x) Supplier's * for such Piece Parts over
            the * following the Relevant Date, *.

            (g) "NonConsumable MFCs" are those MFCs (excluding all *
            configurable MFCs) that have been used in, or delivered to Supplier
            for (or for which Supplier has issued its non-cancelable purchase
            order), the manufacture of the Item at the Relevant Date, and that
            are in excess of Supplier's then applicable * (calculated separately
            for Spot Buy and Bus Route MFCs using the methodology for Spot Buy
            NonConsumable Materials and for Bus Route NonConsumable Materials)
            for such MFCs current at the Relevant Date. NonConsumable MFCs shall
            be handled only under provisions for NonConsumable MFCs, and not
            through charges for NonConsumable Materials.

            (h) Supplier's "Current Average Cost of Materials" shall be the
            average cost to Supplier calculated with respect to quantities * and
            taking into account the * of the affected Piece Part under the
            method employed by Supplier on the Effective Date and in accordance
            with generally accepted accounting principles in effect in the
            United States of America and consistently applied. The "Current
            Average Cost of Materials" as so determined is subject to adjustment
            under Sections 3.1.5 and 3.1.6 of this Agreement.

            (i) Supplier's "Standard Cost of Materials" is the materials cost
            charged by Supplier to Applied for Piece Parts incorporated in Items
            sold to Applied and conforming to the schedule or database of
            materials costs then in effect and maintained by Supplier on its
            Oracle (or other enterprise accounting system) database. The
            "Standard Cost of Materials" as so determined is subject to
            adjustment under Sections 3.1.5 and 3.1.6 of this Agreement.

            (j) "MRP Demand" means the demand for an affected Piece Part under
            the manufacturing requirements planning standards employed in the
            industry.

            (k) "Relevant Date" means the following:

                  1) For * charges (Section 2.8.3), the date on which the * is
                  requested by Applied.


* Material has been omitted and filed separately with the Commission.


                                       29


CONFIDENTIAL TREATMENT REQUESTED

                  2) For Restock Items and Reconfigure Items (Section 2.14), the
                  date on which the Item is classified by Applied as a Restock
                  Item or Reconfigure Item.

            (l) Each Piece Part shall be included in only one category of
            charge.

            (m) Supplier shall return to Applied's Asset Recovery Management
            organization, or destroy if so instructed by Applied, all Piece
            Parts for which a cancellation charge is made, except for Floor
            Stock Scrap and NonConsumable MFCs (to be retained by Supplier).

2.3.  Cancellation of Items.

      2.3.1. Items Subject to Cancellation.

      Applied may cancel Items in accordance with this Section 2.3 at any time
      by written or electronic notice (but not telephone or verbal notice) to
      Supplier's Customer Service Manager (Austin or Milpitas, as applicable) as
      designated in Section 1.2, between (a) the date on which Applied's
      Authorized Demand Signal has been accepted or deemed accepted and (b) the
      Committed Delivery Date. Applied may withdraw order(s) for Item(s) set out
      in Authorized Demand Signal(s) issued, but not accepted or deemed
      accepted, at any time prior to acceptance or deemed acceptance.

      2.3.2. Deferral.

      Without cancellation of an Item, Applied may defer the delivery date of
      any Item(s) for a period of up to * following the initially applicable
      Committed Delivery Date *. To defer delivery, Applied shall give notice of
      deferral, to the Supplier contact person and in the manner provided under
      Section 2.3.1, no later than * before the Committed Delivery Date in
      effect at the time of deferral; provided that the cumulative period of
      deferral as to each Item shall not exceed * from the initially applicable
      Committed Delivery Date.

      In exercising its rights of deferral under this Section 2.3.2, Applied
      will consult with Supplier with respect to the date that will become the
      new Committed Delivery Date resulting from deferral so that, to the extent
      consistent with Applied's requirements for manufacturing and shipment of
      Applied Systems, such new Committed Delivery Date is not unreasonably
      burdensome to Supplier, taking into account the available manufacturing
      capacity and flexibility capabilities of Supplier through the new
      Committed Delivery Date. Applied shall, however, be entitled to set the
      new Committed Delivery Date as required for its timely manufacturing and
      shipment of Applied Systems.


* Material has been omitted and filed separately with the Commission.


                                       30


CONFIDENTIAL TREATMENT REQUESTED

      2.3.3. Cancellation.

      If Applied cancels an Item (including as a cancellation any Item as to
      which Applied does not initiate delivery of an Item within the * period
      provided by Section 2.3.2 following a deferral), the costs, expenses and
      charges arising from such cancellation (including failure to initiate
      delivery) shall be governed by the following terms:

            (a) If cancellation occurs less than * calendar days before the
            Committed Delivery Date, then Applied shall purchase the Item at its
            *, the Item shall be delivered to Applied only if requested by
            Applied, and the Item may be classified by Applied as a * Item under
            Section 2.14 below. Applied shall have no obligation to Supplier
            arising from cancellation except those under this Section 2.3.3(a).

            (b) All costs, expenses and charges for cancellation of Items, other
            than cancellations to which Section 2.3.3(a) applies, are accounted
            for and included in the * and shall be the sole responsibility of
            Supplier. Applied shall have no obligation to Supplier arising from
            cancellations to which Section 2.3.3(a) does not apply.

      2.3.4. Applicability; Payment.

            (a) If an Item that has been deferred under Section 2.3.2 is
            subsequently cancelled, Section 2.3.3(a) applies if either (a) the
            cancellation occurs * before the Committed Delivery Date as then
            applicable following deferral, or (b) the Item was initially
            deferred * prior to the original Committed Delivery Date.

            (b) The Pro Forma for an Item purchased pursuant to Section 2.3.3(a)
            shall be issued by Supplier to Applied within * after the date on
            which cancellation becomes effective, and such purchase amount shall
            be payable (and subject to prompt payment discount) under the terms
            of Section 2.11.

      2.3.5. Other Rights.

      Applied's rights of cancellation are in addition to, and shall be
      independent of its rights under, and the limitations of, Section 2.14 of
      this Agreement, except as to Items that become classified under Section
      2.14 pursuant to Section 2.3.3(a).

      2.3.6. Services.

      If Services for which a Purchase Order was issued are cancelled, and such
      cancelled Services are not CES Services, Configuration Engineering
      Services or CCR Services performed on a cancelled Item, Supplier shall
      charge for its Services actually performed through the date of
      cancellation, at rates and in accordance with the applicable Purchase
      Order.


* Material has been omitted and filed separately with the Commission.


                                       31


CONFIDENTIAL TREATMENT REQUESTED

2.4.  Response Time, Turnaround and Implementation Time.

This Section establishes the methods by which Applied will communicate its
Production Issues to Supplier and the time periods for Supplier to respond and
implement solutions.

      2.4.1. Production Issues.

      A "Production Issue" is an interruption or stoppage of any of Applied's
      manufacturing operations in the United States of America (as, or
      equivalent to, a "line down" situation) that results from a failure of an
      Item to conform to warranty, from other defect in or damage to an Item
      delivered by Supplier, a failure or interruption in the timely delivery of
      Items by Supplier on Committed Delivery Dates, or from other failure in
      Supplier's performance under this Agreement. Applied shall notify Supplier
      of a Production Issue by telephone, cell-phone or pager to the following
      persons:

            Supplier's Customer Service Manager at Austin or Milpitas, as
            appropriate, using the contact information set out in Section 1.2.1.

      Supplier shall contact the Applied originator of a notice of Production
      Issue within * of the issuance by Applied of the notice of a Production
      Issue. This notice and response procedure is not subject to Section 1.2.2.

      2.4.2. Turnaround and Implementation Time.

      Supplier will, in the case of a Production Issue, repair, replace and
      correct Item(s), deliver (or restore delivery of) Items, and otherwise
      resolve and correct such Production Issue in accordance with the following
      requirements:

            (a) Supplier shall commence its repair, replacement, correction or
            solution of a Production Issue within one (1) hour after its
            response to Applied and shall complete the repair, replacement,
            correction or solution within the time period necessary to meet
            Applied's production requirements, not to exceed * after its
            response to Applied, unless a longer time is required for completion
            in accordance with best practices in the industry.

            (b) Supplier shall provide timely status reports to Applied
            regarding the repair, replacement, correction or solution to assist
            Applied in managing its manufacturing operations affected by the
            Production Issue.

2.5.  Capacity Planning and Flexibility Requirements.

      2.5.1 Capacity Planning.

            (a) Supplier will use commercially reasonable efforts to plan its
      manufacturing capacity, including materials, staff, engineering support,
      facilities, and other production factors in order to:


* Material has been omitted and filed separately with the Commission.


                                       32


CONFIDENTIAL TREATMENT REQUESTED

            have capacity adequate for projected quantities and projected
            delivery dates shown in Applied's SPR, as released to Supplier and
            as revised from time to time (and at least weekly);

            have additional capacity available to supply Items ordered through
            Purchase Orders as Authorized Demand Signals but not previously
            shown on the SPR provided to Supplier; and

            to implement adjustments in operations and manufacturing to comply
            with the flexibility requirements applicable under Section 2.5.2.

            (b) As part of its capacity planning, Supplier shall review with
      Applied's Supplier Performance Management organization and any Applied
      organization subsequently performing its functions (the "SPM") on a
      monthly basis (as part of its monthly performance review) Supplier's
      manufacturing capacity and Supplier's capability to increase such capacity
      when and as changes occur in Applied's manufacturing volumes and
      requirements. Supplier shall advise Applied at such monthly meetings of
      Supplier's manufacturing capacity as planned by Supplier under Section
      2.5.1 (a) and, in consultation with the Applied SPM, determine appropriate
      changes in manufacturing capacity for periods covered in the monthly
      performance review (collectively, the "Capacity Projections") The Capacity
      Projections shall be made a part of the Supplier Performance Plan
      (Attachment 16) and shall provide capacity at least equal to the rolling *
      forecast of the then-current SPR for Items anticipated to be provided by
      Supplier.

      2.5.2 Flexibility.

            In addition to manufacturing capacity planning under Section 2.5.1,
      Supplier shall also use commercially reasonable efforts to plan for and to
      implement manufacturing flexibility capabilities in addition to Supplier's
      manufacturing capacity. Supplier shall review such plans and capabilities
      with Applied's SPM at least monthly (as part of the monthly performance
      review activity) and, in consultation with the Applied SPM, establish
      manufacturing flexibility levels applicable to Supplier as part of the
      Supplier Performance Plan (Attachment 16) consistent with known or
      anticipated changes in Applied's manufacturing volumes, delivery dates and
      product requirements. Supplier's manufacturing flexibility levels shall at
      least allow for manufacturing volumes and output to * over Supplier's
      basic manufacturing capacity established and reported to Applied, from
      time to time, in accordance with Section 2.5.1 within a given * period.


* Material has been omitted and filed separately with the Commission.


                                       33


CONFIDENTIAL TREATMENT REQUESTED

      2.5.3. Acceptance; Delivery.

            (a) Supplier shall not refuse to accept, on the basis of the
      quantity of Items involved, Authorized Demand Signals under Section
      2.1.5.1 that are within current manufacturing capacities, production
      volumes, and operating levels or are within Capacity Projections or
      flexibility levels included in the Supplier Performance Plan. Supplier
      shall also advise Applied (upon request) regarding additional volumes of
      Items that are within increases in such capacities, volumes and levels,
      beyond the Capacity Projections and flexibility levels under the Supplier
      Performance Plan, that Supplier can achieve through use of commercially
      reasonable efforts.

            (b) If week to week variations in the quantities of Items
      deliverable under Authorized Demand Signals, together with changes in
      Committed Delivery Dates through deferral of Items pursuant to Section
      2.3.3 cause the volumes of Items that are to be delivered in a weekly
      period to exceed Supplier's delivery volumes provided for by the Supplier
      Performance Plan and if Supplier is not able to complete and make delivery
      of the quantities solely due to such variations (and exclusive of any
      delivery volume limitations or other problems resulting from Supplier's
      failure or inability to achieve capacity and flexibility levels
      established for the affected periods under the Supplier Performance Plan),
      then Applied will allow Supplier to deliver Items that are affected by the
      excessive increase for that period up to a maximum of two (2) weeks in
      advance of the applicable Committed Delivery Dates. Such early delivery
      allowance shall be in effect only to the extent and for the period
      commercially necessary to enable Supplier to comply with the Committed
      Delivery Date(s) of Items exceeding its capacity and flexibility levels,
      and in no event later than the time revised capacity or flexibility
      requirements can be established on a commercially reasonable basis.

      This Section 2.5 does not alter the provisions of this Agreement in
      Section 2.3 (Cancellation of Items), Section 2.14 (Provisions for
      Reconfiguration or Restocking), or Section 2.8 (*).

2.6.  On-Site Support Requirements.

Supplier may be asked by Applied to provide appropriate or necessary personnel
required to support on-site operations at Applied's facilities. On-site
representatives will comply with all Applied facilities requirements. Applied,
at its sole discretion, may require Supplier to execute an On-site
Representative Agreement, in the form set forth in Attachment 18, and may
require the On-site Representative to execute an NDA joinder in the form
required by the On-Site Representative Agreement, prior to issuing a building
badge to Supplier's representative(s) or permitting access to Confidential
Information. Supplier agrees to notify Applied immediately of any changes in its
staffing assignments involving those individuals with access to Applied's
facilities or IS&T systems, applications or databases.


* Material has been omitted and filed separately with the Commission.


                                       34


CONFIDENTIAL TREATMENT REQUESTED

In the event that Supplier's personnel will provide such support at the premises
of a customer of Applied, Supplier agrees to comply with the requirements and
restrictions imposed by such customer for access to its premises (in addition to
the terms of any On-site Representative Agreement executed by Supplier).

2.7.  [Omitted]

2.8.  *.

      2.8.1. Modifications and *s.

      In addition to its rights of cancellation under Section 2.3 and of
      relabeling, reconfiguration and restocking under Section 2.14, Applied
      shall have the right to modify the SSR or Specifications for Items after
      the issuance and acceptance of any Authorized Demand Signal and prior to
      the actual delivery of the Item. Changes initiated by Applied as to an
      Item through changes to an SSR or Specifications (including those
      initiated by Applied as ECOs) * covered by this Section 2.8 are * or "*s."

      2.8.2. Scope of *s.

      An * includes only changes initiated by Applied * the * of an Authorized
      Demand Signal and excludes changes resulting from other requests for CES
      Services, CCR Services or Configuration Engineering Services, and design
      or engineering changes attributable to Supplier. Changes that involve *
      are not *s.

      2.8.3. Charges for *s.

      Applied shall * for *s ("*") determined under the following terms:

            1.    If the * is requested * prior to the then applicable Committed
                  Delivery Date, the * Charges shall be the *: Supplier's
                  Standard Cost of Materials for Bus Route NonConsumable
                  Materials, Supplier's Standard Cost of Materials for Spot Buy
                  NonConsumable Materials, 70% of Supplier's Standard Cost of
                  Materials for NonConsumable MFCs, and Supplier's Standard Cost
                  of Materials for NonReusable Materials, applied to Piece Parts
                  removed from the affected Item as a result of the *. * for
                  materials resulting from an * shall be shown as a separate
                  line item materials charge in Supplier's Pro Forma for the
                  affected Item and become a part of the Contract Price for an
                  Item.

            2.    If the * is requested * or more prior to the then applicable
                  Committed Delivery Date, no * Charges shall apply.


* Material has been omitted and filed separately with the Commission.


                                       35


CONFIDENTIAL TREATMENT REQUESTED

            3.    Supplier shall also charge for, as a rate per hour charge in
                  accordance with the terms of Attachment 1, but subject to the
                  terms of Section 2.1.5.1.A.4.d as to "Quoted CES Charges" and
                  Section 2.1.5.1.A.4.c as to "Coordination of Services," the
                  actual CES, CCR and Configuration Engineering Services
                  resulting from an *, as part of the Contract Price for the
                  affected Item.

      Supplier shall maintain a record of the Piece Parts removed from an Item
      or classified as NonConsumable or NonReusable as a result of *s, and
      Supplier shall identify all NonConsumable and NonReusable Materials
      (excluding Floor Stock Scrap) by preparation of a Bill of Materials for
      NonConsumable and NonReusable Materials (the "NRM BOM"), classified by the
      affected Applied System or affected Purchase Order, which NRM BOM will be
      invoiced on the Pro Forma for the Item and will be retained by Supplier
      for a period of one (1) year from the invoice date for the *. All removed
      Piece Parts, excluding NonConsumable MFCs, for which an * is made to
      Applied shall be delivered to Applied's Asset Recovery Management Unit.

2.9.  Information.

      2.9.1. Applied Internal Databases.

      Supplier may be given electronic access to Internal Applied Data, and such
      access may, at Applied's sole discretion, be subject to certain further
      limitations and requirements on Supplier, including Supplier-provided
      employee control lists, audit rights and the requirement that Supplier's
      employees execute a joinder in the IPA as to confidentiality with Applied.
      This access, if granted, and all Internal Applied Data accessed shall be
      used solely by Supplier and only to directly facilitate Supplier's
      production and delivery of Items to support Applied's requirements.
      Supplier's access to, and utilization of, all Internal Applied Data is
      subject to the confidentiality provisions and obligations of the IPA with
      respect to Confidential Information and the terms of this Agreement and
      any applicable NDA between the parties. Applied may terminate Supplier's
      access to Internal Applied Data at any time at the discretion of Applied.

      If Applied terminates Supplier's access to Internal Applied Data under
      this Section, whether with or without cause, then Applied and Supplier
      shall promptly consult to develop alternative ways of providing Supplier
      with access to Internal Applied Data for the purpose of Supplier's
      performance under this Agreement.


* Material has been omitted and filed separately with the Commission.


                                       36


CONFIDENTIAL TREATMENT REQUESTED

            2.9.1.1. Applied IS&T Services.

                  A. Applied and Supplier have agreed on the services and scope
                  of services * for voice and data telecommunication and * to
                  Applied *, all for Supplier's use in the performance of its
                  obligations under this Agreement and the Related Agreements,
                  as more fully set out in the "EPSP Global Help Desk Service
                  Level Agreement" attached to this Agreement as Attachment 21
                  (the "IS&T Services" and the "IS&T Agreement"), as such is
                  modified by the provisions of this Section 2.9.1.1 regarding
                  costs and rates of charge. The IPA and the Tooling Loan
                  Agreement (Attachment 19) also set out rights and obligations
                  of Applied and Supplier with respect to the services, * and
                  telecommunications and access services provided under the IS&T
                  Agreement. Applied and Supplier each shall perform, provide,
                  pay for and observe such IS&T Agreement, as herein modified,
                  as part of this Agreement from and after the Effective Date
                  hereof for the term of this Agreement, as the same may be
                  amended from time to time.

                  B. All charges and costs payable by Supplier pursuant to the
                  "Custom IS Services Service Level Agreement" as in effect
                  between Applied and Supplier pursuant to the FUAs prior to the
                  Effective Date through the Effective Date have been resolved
                  by the parties through, and are payable by Supplier to the
                  extent provided for by, separate agreements. From and after
                  the Effective Date, Applied will * not be * charges and costs
                  for IS&T Services * of the IS&T Agreement for initial set-up
                  activities or for additional services requested by Supplier.

                  C. Except as provided below, failure by Applied to furnish the
                  IS&T Services to any extent, or any cessation thereof, shall
                  not render Applied liable in any respect for damages to either
                  person or property, and such failure or cessation shall not
                  relieve Supplier from performing as provided in this
                  Agreement, except to the extent that such failure to perform
                  on the part of Supplier is excused under Article 23(b) of
                  Exhibit 1. If IS&T Services are not restored by the fifteenth
                  (15th) Business Day after cessation or failure by Applied to
                  furnish such Services, Supplier may terminate the IS&T
                  Agreement with respect to the particular IS&T Services
                  affected. To the extent so terminated, neither Supplier nor
                  Applied shall have any further rights or obligations under the
                  IS&T Agreement from and after the date of termination except
                  for any rights or obligations that expressly survive
                  termination of the IS&T Agreement. Termination by Supplier
                  under this paragraph shall not relieve Supplier of its
                  obligations for performance under this Agreement, but such
                  performance shall be excused to the extent provided by Article
                  23(b) of Exhibit 1, or the time for performance shall be
                  equitably adjusted.


* Material has been omitted and filed separately with the Commission.


                                       37


CONFIDENTIAL TREATMENT REQUESTED

                  D. Access to IS&T Services. The IS&T Services are those
                  services to be provided by Applied, as specified in the IS&T
                  Agreement.

                        D.1. Access Restriction. Access to Applied's network and
                        the Confidential Information contained thereon is
                        granted to Supplier solely to facilitate the performance
                        of Supplier's obligations under this Agreement and the
                        IPA, is limited to the specific information,
                        applications, systems, time periods and personnel
                        approved by Supplier and Applied and is subject to the
                        obligations regarding confidentiality of Article 4 of
                        the IPA. Access is subject to and Supplier agrees to be
                        governed by business control and information protection
                        policies, standards, and guidelines of Applied. Use of
                        any other Applied information, applications, systems or
                        in other time periods or by other personnel is expressly
                        prohibited. This prohibition applies even when
                        information or an application or system that Supplier is
                        authorized to access serves as a gateway to other
                        information, application(s) or system outside the scope
                        of Supplier's authorization. Without limiting the
                        foregoing, Supplier shall be responsible for the
                        implementation and execution of security measures as to
                        its operations and personnel designed to comply with the
                        above obligations and to insure that access granted
                        hereunder will not impair the integrity and availability
                        of Applied's information, applications and systems.

                        D.2. Provision of Information. Supplier agrees to take
                        commercially reasonable actions to provide to Applied
                        all employee and other information that is reasonably
                        necessary for Applied to approve or disapprove, as the
                        case may be, access and use by any Supplier employees,
                        consultants, agents or representatives to the Applied
                        network. Furthermore, Supplier agrees to advise Applied,
                        as soon as reasonably possible, of any changes in the
                        status or identities of those employees, consultants,
                        agents, or representatives to whom Applied has granted
                        access and use.

                        D.3. Audit Rights. Supplier acknowledges that Applied
                        has a vested interest in assuring that Supplier complies
                        with its obligations of confidentiality. Accordingly,
                        Supplier agrees that Applied may take all steps that
                        Applied, in its sole discretion, believes are useful in
                        limiting and controlling Supplier's access to the
                        Applied network and the Applied Confidential Information
                        presented or accessed thereby, including the provision
                        of passwords, the utilization of security checks, and
                        the issuance of user identifications that restrict
                        Supplier's access, provided that such discretion shall
                        be reasonably exercised. Supplier also agrees that
                        Applied, upon prior notice to Supplier's Senior Director
                        of


                                       38


CONFIDENTIAL TREATMENT REQUESTED

                        Operations - Round Rock, or Director of Operations -
                        Milpitas, as appropriate, and at reasonable times, may
                        audit Supplier's access to the Applied network and use
                        of Applied Confidential Information, including
                        inspection or audit of Supplier's facilities, inventory,
                        records, documentation and personnel, with respect to
                        compliance with the requirements of this Section 2.9.1.
                        Applied, in its sole discretion, will decide the
                        frequency and extent of such audits, provided that such
                        discretion shall be reasonably exercised. Applied agrees
                        to cooperate with Supplier to limit the burden to
                        Supplier of any such audits and to implement steps to
                        protect the Applied Confidential Information.

                        D.4. Segregation of Applied Confidential Information.
                        Supplier agrees: to segregate the Applied Confidential
                        Information that it receives; to take all other
                        reasonable steps to keep Applied Confidential
                        Information separate from Supplier information or
                        information of others to which Supplier has access; and
                        to assure that the Applied Confidential Information is
                        readily locatable and identifiable.

                        D.5. Effect of Failure to Comply. Supplier agrees that
                        its failure to comply in any material respect with any
                        duty or obligation pursuant to this Section 2.9.1.1.D
                        constitutes a breach of its confidentiality obligations
                        under the IPA and that Applied may initiate termination
                        pursuant to Section 5.2.3 of the IPA.

                        D.6. Need to Know. The parties will cooperate to limit
                        the number of Supplier's employees accessing and
                        utilizing the Applications and Databases (as such are
                        defined in the IPA) to only those employees reasonably
                        necessary for Supplier to perform its duties and
                        obligations under this Agreement and the Related
                        Agreements. The parties agree, however, that Applied
                        retains final approval concerning access to and
                        utilization of any such Applications and Databases.
                        Supplier agrees to have all current employees with
                        access to Applied Confidential Information execute an
                        Employee Joinder (in the form attached to the IPA)
                        within two (2) weeks after the execution and delivery of
                        this Agreement, and to forward a copy of each signed
                        Joinder to Applied, by transmission to Applied
                        Materials, Inc., Attn: Law Department, 9700 Highway
                        290E, M/S 3100, Austin, Texas 78724. Thereafter,
                        Supplier agrees to provide to Applied, as soon as
                        reasonably possible and to its Law Department at the
                        above address, a copy of an executed Joinder for each
                        employee receiving Applied Confidential Information. In
                        this regard, for those Supplier employees requiring
                        access to the Applied computer network, Supplier will
                        forward the original executed Joinders concurrently with
                        the respective request for access to the Applied


                                       39


CONFIDENTIAL TREATMENT REQUESTED

                        Law Department at the above address. For those Supplier
                        employees receiving Applied Confidential Information,
                        but for whom access to the Applied computer network is
                        not required, Supplier will forward copies of executed
                        Joinders to the Applied Law Department, at the above
                        address. The liability of Supplier and any of its
                        employees involved for any violation of the provisions
                        of this Agreement or of the IPA regarding Applied's
                        Confidential Information, shall be joint and several. If
                        an employee violates any of the provisions of this
                        Agreement or the IPA regarding Applied's Confidential
                        Information after the time his or her employment with
                        Supplier has terminated and if Supplier, as part of its
                        exit interviews and procedures, specifically advised
                        such former employee of the continuing nature of his or
                        her obligation regarding such Confidential Information,
                        then Supplier shall not have such joint and several
                        liability to Applied for such subsequent violation by
                        such former employee by reason of the previous
                        employment relationship.

      2.9.2. Applied New Product Plans.

      Supplier will, on occasion and at Applied's discretion, be invited to
      forums in which Applied's new product plans are shared. Any Applied new
      product plans provided to Supplier are Confidential Information of Applied
      and are subject to the confidentiality provisions of Article 4 of the IPA
      and of this Agreement, and any applicable NDA executed in connection with
      the forum(s) at which such plans are shared.

      2.9.3. Compliance with Securities Laws.

      Supplier agrees that the Internal Applied Data and Applied new product
      plans contain Confidential Information of or disclosed by Applied to
      Supplier and to those of its employees, contractors, representatives, and
      agents receiving such Confidential Information or new product plans solely
      for performance of Supplier's obligations to Applied, and that possession
      of Confidential Information which is material, non-public information
      concerning companies with publicly-traded securities prohibits Supplier
      and its employees, contractors, representatives and agents with direct or
      indirect access to such Confidential Information from (1) buying or
      selling such companies' publicly traded securities (stock, options, etc.)
      ("insider trading") until after such Confidential Information has been
      disclosed to the public and absorbed by the market (at least two business
      days), and (2) passing the Confidential Information on to anyone who may
      buy or sell such companies' securities ("tipping"). Supplier shall comply
      with (and shall direct its employees, contractors, representatives and
      agents to comply with) all federal and state securities laws prohibiting
      insider trading and tipping, and shall immediately notify Applied if
      Supplier violates any such laws or if Supplier becomes aware of any such
      violation by any of its employees, contractors, agents or representatives.
      Supplier also agrees to execute additional NDAs or other agreements as may
      be required to comply with applicable securities laws. Applied has
      established a corporate policy prohibiting insider trading and tipping by
      all members of its workforce as to its securities


                                       40


CONFIDENTIAL TREATMENT REQUESTED

      and as to securities of companies other than Applied. Applied will
      maintain a policy against such insider trading and tipping in effect
      throughout the term of this Agreement.

2.10. Packaging and Transportation.

      2.10.1. Packaging and Shipment.

      Supplier will have all Items packaged "ready for use" in accordance with
      Applied's packaging Specification (Attachment 6a). Supplier will mark and
      identify every Item in compliance with Applied's part marking
      identification Specifications and requirements (Attachment 6b). In
      addition, Applied may require specific fit-for-use packaging for certain
      Items and/or deliveries.

      2.10.2. Bar Coding.

      All shipments of Items shall be bar coded to Applied's Specifications in
      Attachment 5.

      2.10.3. Transportation Requirements.

            2.10.3.1. F.O.B Destination.

            Supplier shall ship all Items "F.O.B. Destination," provided that
            allocation of risk of loss and terms for passage of title otherwise
            applicable as to Items shipped by Supplier may be varied by the
            provisions of this Agreement. Applied will specify the applicable
            destination point, which may be an Applied Facility or another
            location. Supplier shall ship all Items in accordance with Applied's
            Corporate Routing Guide (Attachment 7), including use of approved
            carriers. Supplier shall ship all Items to accomplish delivery of
            all Items at the applicable destination point, on time.

            2.10.3.2. Freight and Delivery Costs.

            Except for Items shipped by Supplier on Supplier owned trucks
            pursuant to prior written approval by Applied and except as provided
            below for Items shipped with freight prepaid with prior approval,
            all freight and delivery costs for Items shall be specified as
            "Freight Collect" on bills of lading or shipping receipts, to be
            paid directly by Applied. With prior written approval by Applied,
            Supplier may prepay freight and delivery costs (to be shown as
            "Freight Paid and Charged Back" on the bills of lading or shipping
            receipts) and invoice Applied for the actual amounts of such costs.
            Applied will not pay freight and delivery costs in excess of the
            costs determined under the Corporate Routing Guide for applicable
            delivery methods. Applied will not pay any freight and delivery
            costs if Supplier uses a carrier that is not approved under
            Applied's Corporate Routing Guide. Any variance in these
            requirements must be approved by Applied in advance, in writing.


                                       41


CONFIDENTIAL TREATMENT REQUESTED

            2.10.3.3. Risk of Loss; Title.

            For all Items shipped Freight Collect or "Freight Prepaid and
            Charged Back" in accordance with 2.10.3.2 and by a carrier approved
            by Applied, Applied shall bear all risk of loss as to such Items
            while in transit. For those Items that, with Applied's prior written
            approval, are shipped using Supplier owned trucks, Supplier shall
            bear all risk of loss as to all such Items while in transit and
            continuing until Applied or its designee has acknowledged receipt of
            the Items at the specified destination point. Acknowledgment of
            receipt occurs when Applied enters the receipt of the Items in
            Applied's data and accounting system. Applied shall be responsible,
            however, for any loss as to an Item occasioned by the gross
            negligence of its employees, acting within the scope of their
            employment, regardless of whether there has been acknowledgement of
            receipt or passing of title as to such Item.

2.11. Payment.

      2.11.1. Invoices; Certain Acceptance Terms.

      (a) Invoices (other than for Services invoiced under Section 2.11.1(c)
      below) shall contain the following information: Purchase Order number,
      Item number, description, sizes, quantities, unit prices, and extended
      totals in addition to tax amounts and any other information requested. Pro
      Formas shall comply with Section 2.1.7. Applied's payment of an invoice or
      other account, or payment made under an ERS Program, does not in itself
      represent unconditional acceptance of Items or preclude revocation of
      acceptance.

      (b) If Services are included in an invoice described in Section 2.11.1(a),
      Supplier shall provide on the invoice the charges for each category of
      Service, and the portions of such charges attributable to Configuration
      Engineering Services, CES Services, engineering for Design Services or
      Development Services, and engineering for the release of the Bill of
      Materials for the Item through Applied's ECO procedures, as applicable.

      (c) When Supplier has completed Services which are not related to an Item
      for which Supplier is to issue a Pro Forma or an invoice and has delivered
      any work product or other deliverables related to the Services, Supplier
      shall issue an invoice or other notice of completion of Services and
      delivery (a "Completion Notice") to Applied, to the attention of the
      purchasing representative of the Applied organization issuing the relevant
      Authorized Demand Signal, which may have been a Purchase Order that is
      part of a DSA or that was issued for a DVA. A Completion Notice shall
      include: the Applied Purchase Order number, the date(s) of completion and
      delivery, a description of the Services performed and work product or
      other deliverables delivered, and the Applied representative to whom
      delivery was made. A Completion Notice may be issued by Supplier in
      invoice form or as an e-mail or letter, and may be delivered by mail,
      facsimile, or e-mail transmission.


                                       42


CONFIDENTIAL TREATMENT REQUESTED

      (d) (i) Applied may reject any Item (including Services handled under
      Section 2.11.1(d)(ii)) until receipt of that Item has been acknowledged by
      entry of the receipt in Applied's data and accounting system (a "Receipt
      Entry"). Applied's Receipt Entry is deemed to be acceptance of the Item(s)
      identified in the Receipt Entry, in accordance with and subject to the
      terms of this Agreement. Supplier agrees that Applied may revoke its
      acceptance as to any Item or Items deemed accepted through Receipt Entry
      that do not conform to the warranty terms applicable to the Item(s) and
      are not timely corrected, repaired or replaced by Supplier in compliance
      with Section 7.2.2, as the value of such Item(s) to Applied is
      substantially impaired. Revocation of acceptance as to such Item(s) shall
      be made within a reasonable time after Applied discovers the defect or
      nonconformity and is not effective until Applied notifies Supplier of
      revocation.

            (ii) Services performed or provided by Supplier pursuant to a
      Purchase Order, DSA or DVA will be handled under the preceding Receipt
      Entry procedures by issuance of an Applied "in-house packing slip."
      Acceptance of such Services by Applied for purposes of payment shall not
      occur until all of the following have occurred: (i) an Applied Purchase
      Order, DSA or DVA, as applicable, has been issued for such Services; (ii)
      the Services have been completed and all work product deliverables have
      been delivered to Applied in accordance with the Purchase Order, DSA or
      DVA; (iii) Supplier has delivered its Completion Notice for the Services
      to Applied in accordance with the applicable Purchase Order, DSA or DVA;
      and (iv) Applied has issued its "in-house packing slip" to initiate
      payment of the amounts charged under the Completion Notice, whether by
      check, electronic funds transfer or otherwise.

            (iii) Acceptance of Items or of Services, as described above, is
      acceptance for purposes of payment and shall not impair any remedy or
      right of Applied, or warranty or other obligation of Supplier, under this
      Agreement or applicable law other than that of rejection of Item(s) deemed
      accepted that are governed by the UCC and rights equivalent to rejection
      as to Services governed by laws other than the UCC. All payments made by
      Applied will be subject to adjustment for errors, shortages or
      nonconformity with warranty provisions, and to revocation of acceptance
      where applicable.

            2.11.1.1. Delivery of Invoices.

            All invoices must be sent directly to Applied's Accounts Payable
            Department in Austin:

            Accounts Payable
            Applied Materials
            9700 US Highway 290 East M/S 4200
            Austin, TX  78724-1199

            2.11.1.2. Method of Payment.

            Applied is authorized by Supplier to make payments under this
            Agreement by either check or electronic funds transfer. Supplier
            will provide Applied with the


                                       43


CONFIDENTIAL TREATMENT REQUESTED

            required bank routing coordinates and other information that may be
            required by Applied to establish electronic funds transfer
            capability.

            2.11.1.3. ERS Program.

            If Supplier participates in Applied's ERS Program, Supplier will
            provide Pro Formas pursuant to Section 2.1.7, but otherwise will not
            provide invoices to Applied for sales of Items to which that program
            applies. Supplier will be responsible for the verification of all
            prices and quantities prior to shipment and will enter that
            information on the Pro Forma for each Item. All applicable sales and
            use tax will be remitted to Supplier with payment by Applied. ERS
            payments will be subject to adjustment for errors, shortages,
            non-conformities or defects, as well as prompt payment discounts.

            2.11.1.4. Packing Slips.

            Supplier must include a valid packing slip number or package ID on
            each package or shipment.

      2.11.2. *.

      Payment terms will be *:

            a. if payment is made from Supplier's invoice, then from the later
            of (i) Applied's receipt of Supplier's invoice, in form and
            substance acceptable to Applied, for the Item(s), or (ii) delivery
            of, and Applied's entry of receipt for, the Item(s) in Applied's
            data and accounting system.

            b. if payment is made under the ERS Program, then from the date of
            Applied's entry of its receipt of the Item(s) in Applied's data and
            accounting system.

      If payment is made within * after the applicable date under clause (a) or
      (b) *.

      2.11.3. Offsets, Debits.

      Applied may at any time set off any amount owed by Applied to Supplier
      against any amount owed by Supplier (whether in Supplier's name or in the
      name of Insync Systems, Incorporated) to Applied.

      Applied anticipates implementing, in the Third Quarter of its 2002 fiscal
      year, a procedure under which Applied will issue to Supplier notices of
      scheduled debits or offsets approximately * in advance of the execution of
      such debit or offset. Applied will advise Supplier if Applied will not be
      able to implement such procedure in the anticipated period with use of
      commercially reasonable efforts, and the parties will negotiate in good
      faith to determine if alternative notice procedures can be established by
      the parties.


* Material has been omitted and filed separately with the Commission.


                                       44


CONFIDENTIAL TREATMENT REQUESTED

      Notices of debits or offsets under such a procedure, if implemented, shall
      be given to Supplier's Finance Manager.

      2.11.4. Effect of Payment.

      Time and method of payment shall not alter the time at which title to
      Items passes to Applied, nor shall payment, in itself, preclude Applied
      from the exercise of remedies under this Agreement or as permitted by law,
      in each instance in accordance with this Agreement.

      2.11.5. Reconciliation of Payment Discrepancies.

      Attachment 22 to this Agreement sets out agreements of Applied and
      Supplier as to any claims of Supplier with respect to "Payment
      Discrepancies," as such term is defined in Attachment 22.

      To the extent permitted by Attachment 22, Applied may initiate
      amendment(s) of such Attachment 22 by posting of an amendment on the
      Applied website to which Supplier has access in accordance with Section
      1.3.4, and each amendment so initiated becomes effective if Supplier does
      not object to the amendment within thirty (30) days of such posting.
      Amendments that the terms of Attachment 22 exclude from such website
      modification procedure shall be made in accordance with the provisions of
      such attachment.

2.12. Disaster Recovery Plan.

Supplier shall develop and provide to Applied, upon request, reasonable
information describing or evidence of a disaster recovery plan that includes
emergency back up capacity, and appropriate record protection and recovery.
Applied shall have the right to verify Supplier's internal processes for
compliance with this provision.

2.13. Performance Constraints.

      2.13.1. Constraints.

      Supplier shall use commercially reasonable efforts to anticipate material
      constraints affecting its ability to perform its obligations under this
      Agreement. If Supplier believes that any such constraints are reasonably
      likely to materially and adversely affect its performance under this
      Agreement, Supplier will inform Applied's Subsystems Management Team and
      Supply Chain Management organizations (through the contact persons
      designated for Supplier by those organizations) thereof and of action
      plans to resolve them. Typical constraints might include, but are not
      limited to:

            a.    Consumption over forecast
            b.    Consumption under forecast
            c.    Quality problems
            d.    Capacity/production problems
            e.    Sub-tier supplier supply-chain management problems


                                       45


CONFIDENTIAL TREATMENT REQUESTED

2.14. Provisions for Reconfiguration or Restocking.

      2.14.1. "Affected Items."

      This Section 2.14 applies to those FDS, NSO, Module and Spares Items which
      have been delivered to Applied by Supplier pursuant to an Authorized
      Demand Signal issued under Section 2.1.5, which conform to applicable
      requirements (including Specifications) of this Agreement, and which,
      subsequent to delivery to Applied (and prior to shipment by Applied to its
      customer), Applied identifies for relabeling, reconfiguration, or return
      and restock based on Applied's current manufacturing requirements
      ("Affected Items"). As to Items that Applied identifies as Affected Items,
      Applied shall use its commercially reasonable efforts to locate Applied
      customers that will purchase Affected Items, so that such will be treated
      as Relabel or Reconfigure Items, rather than as Restock Items.

      2.14.2. Categories.

      Applied shall notify Supplier of those Items that are identified as
      Affected Items by Applied from time to time. Applied's notice to Supplier
      of the Affected Items so classified shall be given by fax or e-mail notice
      to Supplier's Customer Service Manager in Austin or Milpitas, as
      appropriate. Applied will classify Affected Items in the following
      categories:

            a.    Relabel Items

            b.    Reconfigure Items

            c.    Restock Items

      2.14.3. "Relabel Items."

      An Affected Item which Applied determines is appropriate for relabeling
      and/or minor reworking (for which no re-testing is required) at Applied's
      facility, to meet the requirements of an Applied customer, is a "Relabel
      Item."

            2.14.3.A. Applied shall issue new or revised configuration, labeling
            and related Specifications and completion requirements (the "Revised
            SSR") to Supplier for each Relabel Item at the time when Applied has
            determined the particular manufacturing requirements of Applied and
            its customer. Within ninety-six (96) hours (measured during Business
            Days and under prevailing Pacific Time) following receipt of the
            Revised SSR, Supplier will determine if the Revised SSR requires any
            CES Services or Configuration Engineering Services, beyond
            Configuration Engineering Services required solely to relabel, and
            if the completion requirements are feasible. Unless (i) Supplier
            specifically refuses (under the standards applicable to refusal of
            an initial SSR) the new or Revised SSR for the Relabel Item within
            forty-eight (48) hours (measured during Business Days and under
            prevailing Pacific Time) following the time Supplier has made the
            determinations under the preceding sentence, or (ii) Supplier
            determines, with


                                       46


CONFIDENTIAL TREATMENT REQUESTED

            Applied's concurrence, that CES Services or Configuration
            Engineering Services, beyond Configuration Engineering Services
            solely to relabel, are required by the Revised SSR, Supplier shall
            rework and relabel each Relabel Item at the Applied manufacturing
            facility where that Item is held. Such reworking and relabeling
            shall be performed by Supplier in compliance with all requirements
            of the Agreement applicable to such Item, including Applied's new or
            Revised SSR issued under this Section 2.14.3; as reworked and
            relabeled, the Relabel Item shall be deemed a new Item for warranty,
            performance and other provisions of this Agreement.

            2.14.3.B. The total charge from Supplier to Applied for each Relabel
            Item shall be *.

            2.14.3.C. Upon notice to Supplier, to be sent to the attention of
            Supplier's Customer Service Manager - Austin or - Milpitas, as
            appropriate, Applied may change the classification of a Relabel Item
            to another category, whether or not work under the applicable SSR
            has been initiated or completed. Pricing for a Relabel Item that is
            changed to a Restock Item after the work has been performed by
            Supplier for the relabeling shall be calculated as if such had
            originally been a *.

      2.14.4. "Reconfigure Items."

      An Affected Item (i) which Applied determines (after consultation with
      Supplier as to the scope of work involved) is appropriate for reworking,
      reconfiguration (including related CES or Configuration Engineering
      Services) and testing at Supplier's facilities to meet the requirements of
      Applied or its customer(s), and (ii) for which Applied has issued a new or
      Revised SSR from which a new Committed Delivery Date is determined, is a
      "Reconfigure Item." Unless Supplier specifically refuses the applicable
      new or Revised SSR within ninety-six (96) hours (measured during Business
      Days and under prevailing Pacific Time) after its issuance by Applied
      (under the standards applicable to refusal of an initial SSR) the SSR
      shall be deemed accepted by Supplier and the Committed Delivery Date shall
      (unless otherwise mutually agreed) be determined by the standard cycle
      time for the Item based on the date of acceptance or deemed acceptance.

            2.14.4.A. Upon Supplier's acceptance or deemed acceptance of a
            Revised SSR, Applied will ship Reconfigure Items to Supplier, at
            Applied's cost and risk of loss until delivery to Supplier's
            receiving dock. Supplier shall have risk of loss and shall hold all
            Reconfigure Items as bailee for Applied from the time the Item is
            delivered to Supplier's receiving dock. Supplier shall maintain in
            force insurance covering Reconfigure Items against risks and in
            amounts that are appropriate to protect the interests of Applied in
            such goods. Applied shall include, as part of its shipment to
            Supplier, any safety notice required for the Affected Item, to
            include a notice that the Affected Item has not been exposed to
            toxic or corrosive gases or chemicals and that no decontamination is
            required.


* Material has been omitted and filed separately with the Commission.


                                       47


CONFIDENTIAL TREATMENT REQUESTED

            2.14.4.B. Applied shall issue a new SSR or a Revised SSR for each
            Reconfigure Item when Applied has determined the particular
            manufacturing requirements of Applied and its customer and prior to
            shipment of the Reconfigure Item to Supplier. Supplier will perform
            applicable CES Services, Configuration Engineering Services and CCR
            Services and reconfigure, rework, test, and relabel each Reconfigure
            Item at Supplier's facility. Such CES Services, Configuration
            Engineering Services and CCR Services, reconfiguration, reworking,
            testing, and relabeling shall be performed by Supplier in compliance
            with all requirements and Specifications of the Agreement applicable
            to such Item, including Applied's new SSR or Revised SSR issued
            under this Section 2.14.4, and as reconfigured, reworked, tested and
            relabeled, the Reconfigure Item shall be deemed a new Item for
            warranty, performance and other provisions of this Agreement.

            2.14.4.C. The total charge from Supplier to Applied for each
            Reconfigure Item shall be equal to the sum of:

                  *

            2.14.4.D. Upon notice to Supplier, whether or not the
            reconfiguration has been initiated or completed, which notice shall
            be given by e-mail or fax transmission to the attention of
            Supplier's Customer Service Manager - Austin or - Milpitas, as
            appropriate, Applied may direct that Supplier cease work on a
            Reconfigure Item or may change the classification of a Reconfigure
            Item. Applied shall specify in its notice under this Section
            2.14.4.D whether the Item as to which work is to cease shall then
            become a new Reconfigure Item, a Relabel Item, or a Restock Item;
            alternatively, Applied may direct that it be delivered as an
            incomplete Reconfigure Item. The date of the notice of conversion
            shall be deemed the date of receipt by Supplier of the Item as a
            Restock, Relabel, or new Reconfigure Item. If the Item is changed
            from a Reconfigure Item to a Restock Item, Section 2.14.5 shall
            apply after that date.

            2.14.4.E. Each completed Reconfigure Item shall be shipped to
            Applied by Supplier in accordance with the terms of the Agreement
            and on the Committed Delivery Date. Supplier shall provide its Pro
            Forma for the Reconfigure Item in accordance with Section 2.1.7 and
            payment shall be handled under the applicable payment procedures for
            new Items. Applied shall review the Pro Forma under the applicable
            pricing model, shall advise Supplier of any dispute as to the Pro
            Forma amount, and then issue its Purchase Order in accordance with
            the pricing model, the above terms as to Reconfigure Items, and the
            Pro Forma (as revised, if necessary).


* Material has been omitted and filed separately with the Commission.


                                       48


CONFIDENTIAL TREATMENT REQUESTED

            2.14.4.F. All NonReusable and NonConsumable Materials removed by
            Supplier from a Reconfigure Item (other than NonConsumable MFCs,
            missing parts and Floor Stock Scrap) shall be returned to Applied in
            accordance with Applied's Asset Recovery Management process.

            2.14.4.G. If Applied directs Supplier to cease work on a Reconfigure
            Item under Section 2.14.4.D above without delivery of same to
            Applied, such Item shall be treated as a Restock Item under Section
            2.14.5 as of the date of the direction to cease work. Supplier
            shall, however, charge Applied for the following amounts, which
            shall be determined in addition to the amounts payable with respect
            to the Restock Item:

                  *

      2.14.5. "Restock Items."

      Affected Items returned by Applied for disassembly and restocking by
      Supplier as set out in Sections 2.14.5 and 2.14.6 are "Restock Items."
      Applied will ship Restock Items to Supplier, at Applied's cost and risk of
      loss until delivery to Supplier's receiving dock. Supplier shall have risk
      of loss from the time the Restock Item is delivered to its receiving dock.
      Supplier shall acquire all Restock Items (including all materials and
      Piece Parts other than NonConsumable Materials or NonReusable Materials
      and Floor Stock Scrap) from Applied. Supplier shall deliver to Applied any
      applicable tax exemption certificates and shall pay any applicable tax.
      Supplier shall return all NonReusable Materials and NonConsumable
      Materials to Applied in accordance with Applied's Asset Recovery
      Management process (or destroy, as instructed by Applied). Applied shall
      include, as part of its shipment to Supplier, any safety notice required
      for the Affected Item, to include a notice that the Affected Item has not
      been exposed to toxic or corrosive gases or chemicals and that no
      decontamination is required.

      2.14.6. Restocking Process and Charges.

            2.14.6.A. Within ten (10) days after completion of disassembly of
            each Restock Item by Supplier, Supplier shall (i) immediately record
            and notify Applied under Section 2.14.6.C below of, all
            NonConsumable and NonReusable Materials (as defined in Section
            2.2.3) and deliver a detailed listing of all Piece Parts; (ii)
            restock, or (as to NonConsumable and NonReusable Materials) return,
            all Piece Parts, and (iii) deliver to Applied the
            Reconfiguration/Tear-Down Reconciliation Form ("Reconciliation
            Form") for each Restock Item. The Reconciliation Form shall specify
            the amount for which Supplier shall acquire the Consumable Materials
            and NonConsumable MFCs from the Restock Item, which amount payable
            by Supplier is equal to the total of *.

            Supplier must identify on the Reconciliation Form prices for all
            NonReusable Materials and NonConsumable Materials (excluding Floor
            Stock Scrap) for each Restock Item being handled under this Section,
            which prices shall be *.


* Material has been omitted and filed separately with the Commission.


                                       49


CONFIDENTIAL TREATMENT REQUESTED

            2.14.6.B. Supplier shall deliver the Reconciliation Form to Applied
            as required by Section 2.14.6.A. Applied shall audit such form for
            compliance with the terms of this Section 2.14 and for any
            NonReusable Materials or NonConsumable Materials with costs in
            excess of $250.00. The Reconciliation Form shall not be released for
            processing and payment until Applied has approved same under
            Sections 2.14.6.B and C.

            2.14.6.C. Supplier shall return all NonConsumable and NonReusable
            Materials to Applied (other than missing parts or materials and
            NonConsumable MFCs) at Applied's Asset Recovery Management location,
            or destroy such NonConsumable and NonReusable Materials if so
            directed by Applied, in writing.

      2.14.7. Provisions as to Restocked or Removed Parts.

      A. Supplier shall identify and return to Applied (for Asset Recovery
      Management by Applied) all NonReusable Materials removed from any Affected
      Item and shall scrap or destroy all Floor Stock Scrap. Supplier accepts
      all Restock Items and all Piece Parts and materials removed or obtained
      from any other Affected Item (not identified by it, and returned, as
      NonReusable Materials or scrapped as Floor Stock Scrap) (collectively,
      "Goods") "AS IS."

      B. EXCEPT FOR THE WARRANTY IN PARAGRAPH D BELOW, APPLIED MAKES NO WARRANTY
      OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE GOODS OR ANY PART
      THEREOF. APPLIED HEREBY DISCLAIMS WITH RESPECT TO THE GOODS ALL IMPLIED
      WARRANTIES, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS
      FOR A PARTICULAR PURPOSE AND WARRANTIES OF TITLE AND OF NONINFRINGEMENT.

      C. WITH RESPECT TO SUCH GOODS AND EXCEPT AS TO MATTERS COVERED BY THE
      WARRANTY OF PARAGRAPH D BELOW, IN NO EVENT SHALL APPLIED BE LIABLE FOR ANY
      DAMAGES THAT ARE EXCLUDED DAMAGES UNDER ARTICLE 17 OF EXHIBIT 1 TO THIS
      AGREEMENT FOR ANY REASON, WHETHER OR NOT APPLIED OR SUPPLIER HAS BEEN
      ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND APPLIED EXCLUDES AND
      SUPPLIER WAIVES ANY LIABILITY OF APPLIED FOR ANY SUCH DAMAGES.

      D. Applied WARRANTS to Supplier: (a) that none of the Goods returned as
      Reconfigure Items or Restock Items shall have been exposed to toxic or
      corrosive gases or chemicals; (b) that as to any Items returned to
      Supplier as a result of a warranty claim of Applied under this Agreement
      or pursuant to Section 5.2.1, Applied will have decontaminated and
      prepared for safe handling under all applicable safety and environmental
      laws and regulations any such Items delivered to Supplier that have been
      exposed to toxic or corrosive gases or chemicals while in Applied's
      possession; (c) that all applicable safety and environmental notices and
      labels shall be affixed to or provided with the delivery of any such Goods
      or Items; and (d) that none of such Goods have been delivered to any
      person other than Applied or Supplier following Applied's receipt of


                                       50


CONFIDENTIAL TREATMENT REQUESTED

      same. The limitations of Paragraph C above do not apply to the warranties
      set out in this Section 2.14.7.D.

      2.14.8. Processing and Payments.

      Supplier shall calculate the amount payable by it for Restock Items in
      accordance with the provisions of this Section 2.14, and shall authorize
      Applied to charge Supplier for the Restock Item by issuing the
      Reconciliation Form and related NRM BOM. Applied shall review the
      Reconciliation Form and NRM BOM and shall charge and collect from Supplier
      the calculated amount payable to Applied for the Restock Item by debit
      memo or other offset against amounts otherwise payable by Applied to
      Supplier. If Applied believes that additional amounts are properly payable
      by Supplier in excess of the calculated amount, it shall promptly advise
      Supplier of such claim and the parties shall review the determination of
      the amount payable by Supplier for the affected Restock Item. If the
      parties do not agree on the proper charge to be made within 30 days after
      the dispute arises, the parties shall proceed under the Business Review
      Process as defined in Section 7 below to attempt resolution of the
      dispute. Applied shall not effect a debit or other offset (in excess of
      the amount initially calculated by Supplier) until the parties have failed
      to reach agreement and have failed to reach a resolution within the time
      allowed for the Business Review Process.

3.    PRICING FRAMEWORK

3.1.  Contract Prices.

      3.1.1. Pricing and Cost Model of Attachment 1.

      Attachment 1 contains the contract terms agreed upon with respect to the
      following: (i) the pricing and cost model, which set out the elements and
      calculations by which Contract Prices are determined on an ongoing basis;
      * indicated periods during the term of the Agreement. Any modifications to
      Attachment 1 must be made in accordance with Section 1.3.4 of this
      Agreement. Supplier shall price and sell, and Applied shall purchase, all
      Items in accordance with this Agreement, including Attachment 1. Supplier
      will provide R&D Items at non-discriminatory prices that take into
      consideration the total value of Applied's business with Supplier.

      Applied and Supplier have established pricing for certain Services on a
      rate-per-hour basis as part of Attachment 1 or in other provisions of this
      Agreement. Unless otherwise agreed at the time, pricing for Services
      provided by Supplier pursuant to Purchase Order(s) will be determined at
      applicable rates set out in Attachment 1.

      The Contract Prices of additional and/or revised Items will be based upon
      applicable elements of the pricing or cost model set forth in Attachment
      1.


* Material has been omitted and filed separately with the Commission.


                                       51


CONFIDENTIAL TREATMENT REQUESTED

      Attachment 1 is sometimes referred to as the "cost model" or "pricing
      model" for the Agreement.

      3.1.2. Application of Prices.

      On the Effective Date and in accordance with Section 1.3.2.3, the pricing
      for Items shall be determined pursuant to this Agreement, including
      Attachment 1; provided that pricing under this Agreement shall not apply
      to FDSs or other Items for which an SSR or Purchase Order has been
      accepted (based on the procedures of Section 2.1.5.1 hereof) prior to the
      Effective Date.

      Specific circumstances may result in a review of Agreement terms,
      including Contract Prices. These circumstances include, but are not
      limited to:

            a.    Volume increases or decreases resulting in an increase or
                  decrease in the value of the Agreement of over 20%;
            b.    Addition or deletion of Items to the Agreement increasing or
                  decreasing the value of the Agreement over 20%;
            c.    Cost increases or reductions exceeding those committed in
                  Supplier's Performance Plan; and
            d.    Reductions or increases in market prices for equivalent
                  materials and services.

      Any amendment or change in terms shall be made in accordance with Section
      1.3.4 of this Agreement. Nothing contained in this Section 3.1 shall
      require either party to amend or change any term of this Agreement.

      3.1.3. Pricing Model.

      The parties have anticipated that changes will occur in the design,
      Specifications, Piece Parts, and other elements of Items to be provided
      pursuant to this Agreement and have negotiated the pricing model shown in
      Attachment 1 to accommodate such changes and to apply to Items that are
      affected by such change. The pricing model is agreed to apply
      appropriately to Items as changed in the future. However, if unanticipated
      changes not within the contemplation of the parties have a material and
      adverse impact on the operation of the pricing model, and alternative
      pricing is not agreed to by the parties at the time, then the Item(s)
      affected shall be removed from this Agreement. Such removal shall not be
      classified as a partial termination.

      3.1.4. Further Agreements as to Pricing.

      (a) Upon request made by Applied through the SAT Team Lead for Supplier
      and delivered to Supplier's Vice President - Sales, Applied and Supplier
      will review pricing models proposed by Applied from time to time,
      including by way of example, option based pricing models. The parties may,
      by mutual written amendment to this Agreement, implement one or more
      alternative pricing models with respect to those Item(s) identified in or
      made subject to such alternative pricing model(s) by such amendment. The
      Items or Piece Parts subject to an alternative pricing model shall not be
      subject to Section 3.1.5 or


                                       52


CONFIDENTIAL TREATMENT REQUESTED

      Section 3.1.6 unless the parties expressly so provide in the amendment
      implementing the relevant alternative pricing model.

      (b) (i) The prices of Piece Parts sold to Applied, whether incorporated in
      FDSs or otherwise sold to Applied, shall be as follows:

            A. Non-Unit MFCs (defined below in Section 3.1.4(b)(ii) shall be *;

            B. All other Piece Parts *; and

            C. Adjustments to the foregoing prices shall be made in accordance
            with Section 3.1.5 and 3.1.6.

            (ii) *

      (c) Upon request of Applied or Supplier, the parties shall confer and
      establish milestones and criteria applicable for the transition of Item(s)
      from R&D Manufacturing to Pilot Manufacturing, and from Pilot
      Manufacturing to Volume Manufacturing and further shall develop, based on
      milestones and criteria established, checklists and procedures appropriate
      to the transition of the affected Item(s). An illustrative form of NPT
      checklist is attached to this Agreement as Attachment 23.

      3.1.5. * Terms.

      (a) The "Commodity Classifications" are * "Weldments," and "Unit MFC."
      Guidelines for determining the Commodity Classification applicable to a
      particular Commodity for each periodic reclassification are set out in
      Section 3.1.5.1(d). The * are the periods, denominated periods 1 through 5
      and stated as monthly periods from June 1, 2002 and ending on the last
      date of the indicated month, in the table set out in Section 3.1.5 (d).

      (b) Prior to each * and in accordance with Sections 3.1.5 and 3.1.6,
      Supplier will prepare a preliminary table of Commodity Classifications for
      all Commodities. Supplier and Applied shall review and consult on, and
      agree to, the actual classification of Commodities for * for purposes of
      the * Matrix for the *. Each actual classification of Commodities agreed
      upon by the parties shall be attached to this Agreement as part of
      Attachment 24.

      (c) Two weeks prior to each * and in accordance with the table classifying
      Commodities as agreed upon by the parties and with Sections 3.1.5 and
      3.1.6, Supplier shall prepare a * under Section 3.1.5.1 (e) that specifies
      * for each Piece Part that is to be incorporated in any FDS forecasted to
      be built during that * and is included in the Commodity Classification to
      which * in the next * ("Forecasted Piece Part"). The Applied Forecast to
      be used in preparing a * Matrix shall be the most recent Applied Forecast
      reflected in Supplier's MRP system as of the date which is * prior to the
      beginning of the applicable * (the "* Forecast"). Supplier shall then
      implement such


* Material has been omitted and filed separately with the Commission.


                                       53


CONFIDENTIAL TREATMENT REQUESTED

      pricing for each Forecasted Piece Part used in an Item ordered during the
      * or that is sold to Applied under this Agreement as a separately
      purchased Item (excluding in this latter case Unit MFCs). In addition,
      Supplier shall also * in accordance with Section 3.1.6 for all Piece Parts
      for which * apply as a result of *.

      (d) The * and * for each Commodity Classification are as follows:



      -----------------------------------------------------------------------------------------------------------
                  *                    * FOR *            * FOR *             *% FOR *                *
                                     COMMODITIES        COMMODITIES                                % FOR *
      -----------------------------------------------------------------------------------------------------------
                                                                                    
                 #1/*                     *                  *                   *                    *
      -----------------------------------------------------------------------------------------------------------
                 #2/*                     *                  *                   *                    *
      -----------------------------------------------------------------------------------------------------------
                 #3/*                     *                  *                   *                    *
      -----------------------------------------------------------------------------------------------------------
                 #4/*                     *                  *                   *                    *
      -----------------------------------------------------------------------------------------------------------
                 #5/*                     *                  *                   *                    *
      -----------------------------------------------------------------------------------------------------------


            3.1.5.1 Calculation of New *.

      (a) Initial Classifications. Attachment 24 to this Agreement is the
      initial table of Commodity Classifications and *, agreed upon by the
      parties as of the Effective Date and applicable for * No. 1, classifying
      all Piece Parts into *:*.

      (b) Periodic Reclassifications. Not later than * prior to the beginning of
      each * after the first period, Supplier shall deliver to Applied (to the
      attention of the Supplier's SAT Team Lead at Applied) Supplier's proposed
      classification table of all * for the next *. Applied and Supplier shall
      promptly review and negotiate in good faith to establish the
      classification table for *, utilizing the classification guidelines set
      out in Section 3.1.5.1(d) below. If the parties fail to agree upon the
      classification table to be used within ten (10) Business Days after
      Supplier's delivery of the proposed classification table, either party may
      initiate the Business Review Process of Section 7.2.5 with respect to such
      failure as a "Dispute."

      (c) Special Provisions. Special provisions related to prices applicable to
      Piece Parts affected by * (as such term is defined in Section 3.1.6) will
      be governed by Section 3.1.6, and those provisions shall control over the
      * provisions of Section 3.1.5 to the extent of any conflict.

      (d) Commodity Classification Guidelines. In preparing the Commodity
      Classification table for each *, Supplier and Applied shall utilize the
      guidelines of this Section 3.1.5(d), subject to the exclusions applicable
      under Section 3.1.5.2.


* Material has been omitted and filed separately with the Commission.


                                       54


CONFIDENTIAL TREATMENT REQUESTED

            A. Guidelines for * Commodities Classification.

            * Commodities will include all Commodities that are identified by
            the parties under any of the following descriptions:

                  (i) Sheet metal, cables, harnesses, and hardware and such
                  other Commodities as are set out as * on the initial table of
                  Commodity Classifications in Attachment 24.

                  (ii) All Commodities for which Supplier has had authority to
                  select the supplier or source of such Commodity, whether as a
                  no-preference choice or because neither Applied nor its
                  customers have required a specific source or supplier provided
                  that the Piece Parts meet Applied design requirements and, if
                  applicable, the provider is a qualified supplier, in at least
                  * of the FDSs which Applied has ordered from Supplier in the 9
                  month period preceding the start of the applicable *. Examples
                  of Commodities that will be evaluated under this guideline are
                  valves, transducers, filters and similar Commodities.

            B. Guidelines for * Commodity Classification.

            * Commodities are Commodities that are not now or hereafter
            classified as *, and include, by way of example, *.

            C. Status Change.

            Once a Commodity is classified as *, that Commodity (to include, as
            to a commodity group, all Piece Parts in such group) remains
            classified as * during the remainder of the Agreement and shall not
            be reclassified in a periodic reclassification process.

            D. MFCs.

            MFCs are not treated as *. Unit MFCs shall have pricing adjustments
            made in accordance with the table set out in Section 3.1.5(d).

            E. Weldments.

            Weldment Commodities will include all weldments that are
            incorporated in an FDS ordered by Applied under this Agreement.
            After the first *, Supplier may treat the Weldment Commodities and
            the * Commodities as one Commodity Classification for purposes of
            calculation of the Total Gross Dollars, the * and new Piece Part
            pricing applicable pursuant to Sections 3.1.5.1(e) (4), (5) and (6)
            of this Agreement.


* Material has been omitted and filed separately with the Commission.


                                       55


CONFIDENTIAL TREATMENT REQUESTED

      (e) *. Each * Matrix for a * shall reflect:

            (1) The Commodity Classification of each Forecasted Piece Part.

            (2) The pricing then in effect for each Forecasted Piece Part within
            the Commodity Classification to which the reduction will apply.
            After the initial price reduction is made with respect to a
            particular Forecasted Piece Part, whether as a result of the * or
            application of a Negotiated Price under Section 3.1.6. below,
            references in this Agreement (including these * terms) to applicable
            Piece Part prices will mean such prices as then adjusted under
            Sections 3.1.5 and 3.1.6.

            (3) The forecasted demand for each Forecasted Piece Part during the
            applicable * based on the * Forecast.

            (4) The total gross dollars forecasted for the entire list of
            Forecasted Piece Parts in the Commodity Classification based on the
            * Forecast, to which a percentage reduction applies during the
            applicable * ("Total Gross Dollars"). Total Gross Dollars equals the
            sum of the then current Forecasted Piece Part pricing (i.e., the
            prices actually charged to Applied by Supplier immediately prior to
            the start of the applicable *) multiplied by the respective
            forecasted demand in the * Forecast.

            (5) The * dollar amount * which is the product of the * multiplied
            by the Total Gross Dollars.

            (6) The new Piece Part pricing which represents Kinetics' allocation
            of the * across the list of Forecasted Piece Parts. Supplier shall
            use commercially reasonable methods in its allocation of the * and
            its selection of new Piece Part pricing. However, the difference
            between the Total Gross Dollars and the sum of the new Piece Part
            pricing multiplied by the respective forecasted demand in the
            applicable * Forecast must equal the * Percentage for the applicable
            *.

            3.1.5.2 Exclusion; Particular Terms.

      (a) A particular Piece Part shall not be classified or included in the *
      (either as a Forecasted Part utilized in calculating the * or as a Piece
      Part to which a price reduction shall apply pursuant to a Pricing
      Reduction Matrix) until the first * that occurs six (6) months after the
      time when the Piece Part is first assigned a part number.

      (b) A particular Piece Part that is a non-recurring purchase resulting
      from a CES requirement shall not be included as a Forecasted Piece Part
      and Supplier shall provide a list of such excluded Piece Parts with the
      affected *.


* Material has been omitted and filed separately with the Commission.


                                       56


CONFIDENTIAL TREATMENT REQUESTED

      (c) Prices of Unit MFCs under a * apply only to purchases of Unit MFC's
      that are incorporated in an FDS ordered by Applied under this Agreement.

      (d) Prices of * are not subject to the * terms of this Section 3.1.5.

      3.1.6. Adjustment for *.

      (a) Applied may *

      (b) The parties shall meet at least once per quarter to coordinate their
      respective efforts related to existing commitments from, or ongoing
      negotiations with, * This notice will be given to Supplier's Vice
      President Sales.

      (c) The *:

            (1) If the * for that Piece Part, the price charged to Applied *.

            (2) If the Negotiated Price for a Piece Part is below Supplier's
            Current Average Cost for such part, * under this Section 3.1.6.

            (3) *

3.2.  Volume.

Applied does not commit to buy a specific volume, quantity, or percentage of any
Piece Part or Item from Supplier, and Applied may buy the same or similar Piece
Part or Item from multiple sources.

3.3. Export.

Applied may require, from time to time, Supplier to ship Items to locations
outside of the United States of America. Supplier will prepare the export
paperwork and be the exporter of record. Supplier must utilize Applied's
preferred carriers for the export of the Items. Applied will pay the freight
charges based on Applied's rates with its preferred carriers. Applied will be
responsible for importing the goods into the destination country.

3.4. Currency.

All prices shall be quoted by Supplier in U. S. dollars; prices for foreign
manufactured Items will not be adjusted to reflect changes in the exchange rate.
Supplier is encouraged to obtain any necessary currency exchange protection
which it deems appropriate.


* Material has been omitted and filed separately with the Commission.


                                       57


CONFIDENTIAL TREATMENT REQUESTED

4.    TECHNICAL FRAMEWORK.

4.1.  Engineering Change Orders.

      4.1.1. ECO Procedures.

      (a) Applied may change its Specifications at any time and generate a
      proposed ECO with respect to such change. An Applied Supplier Engineer may
      review with Supplier the Applied proposed ECOs that affect any Item(s).

      (b) Supplier shall utilize one of the following procedures to initiate or
      request any engineering change to an Item or a change affecting
      Specifications (an "Engineering Change"):

            i) Supplier may prepare and submit for approval a proposed ECO for
            an Engineering Change if such action is authorized under Supplier's
            Manufacturing Engineering Authority ("MEA"), as defined in Applied's
            documentation of its ECO procedures and standards in effect from
            time to time and provided to Supplier (a "Supplier ECO"); or

            ii) Supplier may request an ECO to authorize an Engineering Change
            through a Request for Engineering Action ("REA") if such request is
            authorized under Supplier's MEA (a "Supplier Request"); or

            iii) Supplier may initiate the development of an Engineering Change
            by submitting a Supplier Problem Sheet (Attachment 13) (an "SPS") to
            the SPS Administrator designated for Supplier.

      (c) Changes to which an SPS or the ECO process applies shall not be
      implemented by Supplier (and Supplier shall not ship any Items with any
      Engineering Change) until written permission to proceed is given by
      Applied as required by its applicable SPS and ECO procedures. Applied will
      provide, in writing (to the attention of Supplier's Engineering Manager)
      or by release on Applied's current ECO database, notice of approved ECOs
      (Attachment 12), indicating the effective dates of all changes. Unless
      otherwise notified, Applied's receiving inspection will inspect to the
      latest revision in effect at the time of receipt of Items.

      (d) If Applied has not responded to an SPS, REA or proposed ECO within the
      time period indicated in this Paragraph (d), Supplier may request review
      of the SPS, REA or proposed ECO by the SMT Supplier Engineer for Supplier.
      Applied is not obligated to approve any SPS, REA or proposed ECO. The
      response time for purposes of this Paragraph (d) is eighteen (18) days
      after initial submission of a proposed ECO or REA or after initial
      submission of an SPS.

      (e) Each Supplier ECO and Supplier Request shall be handled in accordance
      with applicable MEA procedures and shall not modify or eliminate any
      requirement of the Quality Framework Document (Attachment 15) or the QRD
      (Attachment 20) for review


                                       58


CONFIDENTIAL TREATMENT REQUESTED

      and approval by Applied prior to implementation. Each Engineering Change
      initiated as a Supplier Request or Supplier ECO shall, prior to
      implementation by Supplier:

      (i) have been released by Supplier to Applied's assigned organizations for
      REA or ECO review and approval under the REA and ECO workflow and approval
      routing requirements of Applied in effect at the time;

      (ii) have been properly completed and documented under Applied's REA and
      ECO workflow and preparation requirements, including

            (a) the document control process,

            (b) applicable safety checklists, and

            (c) other safety engineering or information requirements, as in
            effect at the time; and

      (iii) have been approved, in writing (to include electronic authorization)
      as required by Applied's ECO, REA or other applicable approval procedures.

4.2.  Tooling.

      4.2.1. General Tooling Provisions.

      (a) Except as otherwise set forth in Section 4.2 or as otherwise agreed by
      the parties in a separate writing, special dies, tools, patterns, test
      fixtures, and like equipment (collectively, "Tooling") used in the
      manufacture of Items shall be furnished by and at the expense of Supplier
      and shall be owned by Supplier. As to those items of Tooling covered in
      Sections 4.2.2 and 4.2.3 (the "Test Fixture Hardware" and "Test Fixture
      Software," such latter term being defined in Section 4.2.3(c)), the terms
      of Sections 4.2.2 and 4.2.3 shall apply and not the terms of this Section
      4.2.1.

      (b) Supplier agrees that Applied may, at Applied's option, purchase from
      Supplier Tooling to which this Section 4.2.1 applies that is unique to the
      Items or is unique to the manufacture of Items, *. Pursuant to such
      option, Applied may purchase from time to time (but subject to the
      limitations and requirements of Section 4.2.4(c)) items of such Tooling at
      the fair market value of such Tooling, as determined at the time of the
      exercise by Applied of this option. As part of such purchase and without
      additional consideration, Supplier shall assign to Applied, or if such
      assignment is not possible, license on a royalty-free, non-terminable
      basis, all IP Rights associated with such Tooling, including software (if
      any) associated with such Tooling *. In this regard, Supplier will obtain
      from its employees, consultants, agents and representatives, as necessary,
      all assignments necessary for assignment of IP Rights to Applied.


* Material has been omitted and filed separately with the Commission.


                                       59


CONFIDENTIAL TREATMENT REQUESTED

      (c) Prior to acquisition of an item of Tooling that is unique to the Items
      or is unique to the manufacture of Items, Supplier will provide a separate
      line item quote for any such item of Tooling (excluding, however, Tooling
      subject to provisions of Sections 4.2.2 or 4.2.3) that Supplier will
      acquire for use in the manufacture of Items after the Effective Date. If
      Applied accepts such quote under such procedures, Applied will pay the
      cost of such Tooling separately, title to the Tooling shall be held by
      Applied, and the parties shall execute and deliver a Tooling Loan
      Agreement (or a supplement or schedule to an existing Tooling Loan
      Agreement) as to such Tooling. Supplier will establish appropriate
      accountability and tracking of any Tooling owned by Applied.

      (d) Supplier shall not at any time use Tooling owned by Applied ("Applied
      Tooling") for the production of goods for persons other than Applied or in
      any manner other than in performance of Supplier's obligations under this
      Agreement, without Applied's written approval. Applied and Supplier shall
      execute a tooling loan agreement of even date with this Agreement in the
      form of Attachment 19 (the "Tooling Loan Agreement") for any Applied
      Tooling in Supplier's possession, or a supplement or schedule to include
      such Applied Tooling under an existing Tooling Loan Agreement.

      4.2.2. Current FDS Test Fixtures.

      (a) The FDS test fixtures (including, for purposes of this Section 4.2, *)
      identified on Schedule 4.2.2(a) to this Agreement (the "Purchased FDS Test
      Fixtures") were purchased by Supplier from Applied. Each Purchased FDS
      Test Fixture (i) shall be located only at premises approved, in writing
      and in advance, by Applied (subject to the provision below as to changes
      of location among facilities of Supplier), and (ii) shall be used by
      Supplier solely to perform its obligations under this Agreement for
      manufacturing Applied FDSs to be sold to Applied pursuant to this
      Agreement. Further, Supplier grants and extends to all Purchased FDS Test
      Fixtures a security interest in favor of Applied to secure performance by
      Supplier of its obligations in respect of repurchase of the Purchased FDS
      Test Fixtures by Applied pursuant to Section 4.2.2(b) below.

      Supplier may, upon at least ten (10) calendar days prior notice to Applied
      given to Applied's Supply Account Team Lead as specified under Section
      1.2.2 above, relocate any of the Purchased FDS Test Fixtures from their
      current locations to any manufacturing facility of Supplier in Milpitas,
      California, Austin, Texas or Round Rock, Texas.

      (b) Supplier grants to Applied the right, exercisable from time to time by
      Applied, at its option, whether or not default has occurred under this
      Agreement but subject to the requirements of Section 4.2.4(c) below, to
      purchase from Supplier any or all of the Purchased FDS Test Fixtures(s)
      and all then existing hardware modifications and improvements to such
      fixture(s). The purchase price for such Purchased FDS Test Fixture(s)
      shall be equal to the following percentages of the purchase price
      initially paid by Supplier to Applied for such Purchased FDS Test Fixtures
      and modifications and improvements: *. Upon payment of such purchase price
      Supplier shall convey to


* Material has been omitted and filed separately with the Commission.


                                       60


CONFIDENTIAL TREATMENT REQUESTED

      Applied, and Applied shall be the owner of, such test fixture(s) and all
      IP rights in or to such test fixture(s) (*). Supplier agrees to assign to
      Applied as part of such purchase and without additional consideration, and
      to obtain from its employees, consultants, agents and representatives, as
      necessary, all assignments of, all IP Rights it or they may have relating
      to the Purchased FDS Test Fixture(s) (*).

      (c) The FDS test fixtures identified on * to this Agreement are owned by
      Applied (the "Applied Test Fixtures") *.

      (d) The FDS test fixtures identified on * are owned by Supplier (the
      "Supplier Test Fixtures"). *. Improvements, additions and alterations to
      the Supplier Test Fixtures (excluding Improved Software, as defined below)
      shall be procured, purchased, funded and owned by Supplier.

      4.2.3. Future FDS Test Fixtures.

      (a) Capacity FDS Hardware.

      Supplier shall regularly consult with Applied's SPM regarding such new FDS
      test fixture hardware and any modifications to existing FDS test fixture
      hardware (excluding modifications to the *) that Supplier will need within
      the following six (6) month period either (i) to meet manufacturing
      capacity and flexibility requirements under the Supplier Performance Plan
      then in effect, (ii) to achieve production levels established pursuant to
      its capacity planning under Section 2.5.1, or (iii) to achieve increases
      in manufacturing capacity and flexibility, production volumes or operating
      levels to accommodate changes in quantities of Items under Section 2.5.2
      (the "Capacity FDS Hardware"), and to develop operational requirements for
      the Capacity FDS Hardware and a schedule for the acquisition and
      installation of such hardware, together with any related software. Applied
      shall provide or purchase all items of Capacity FDS Hardware that are, in
      its commercially reasonable judgment, necessary and appropriate for the
      purposes set out above in this Section 4.2.3(a). All Capacity FDS Hardware
      purchased or provided by Applied shall be owned by Applied and shall be
      subject to the Tooling Loan Agreement and this Agreement and upon request
      by Applied shall be identified by a supplement to * as Applied Test
      Fixtures. Whether or not default has occurred under this Agreement but
      subject to the requirements and limitations of Section 4.2.4(c) below,
      Applied shall have the right to remove or otherwise take possession of
      such Capacity FDS Hardware.


* Material has been omitted and filed separately with the Commission.


                                       61


CONFIDENTIAL TREATMENT REQUESTED

      (b) Product Change Hardware and Improved Software.

      Supplier shall regularly consult with the Applied SAT Lead regarding (i)
      any new or modified hardware for test fixtures that will be used to
      manufacture or test any FDS, Module, or other Item for Applied, which new
      or modified hardware will be needed as a result of new Applied products,
      modifications of existing Applied products, or new or modified testing
      requirements or Specifications for Applied products that Supplier may be
      selected to manufacture or supply Items for (the "Product Change
      Hardware") and (ii) any new or modified software for test fixtures that
      will be used to manufacture or test any FDS, Module or other Item for
      Applied, which new or modified software will be needed as a result of new
      Applied products, modifications of existing Applied products, or new or
      modified testing requirements or Specifications for Applied products that
      Supplier may be selected to manufacture or supply Items for, or changes in
      Supplier's manufacturing capacities, equipment or volumes (the "Improved
      Software"). Applied (including its SAT Lead and the Tooling and Test
      Organization) shall regularly consult with Supplier as to new Applied FDS
      products and modifications of existing Applied FDS products that Supplier
      may be selected to manufacture and as to changes in Applied's FDS test
      requirements. Supplier will use commercially reasonable efforts to
      identify and advise the SAT Lead of Product Change Hardware and Improved
      Software, the need for which is known to Supplier, that will result from
      such new or modified products, testing, manufacturing requirements, or
      Specifications.

      Applied shall have the option to provide or purchase all items of Product
      Change Hardware and Improved Software that, in its commercially reasonable
      judgment, are necessary and appropriate for the manufacture and testing of
      FDSs, Modules or other Items for Applied, but shall not be required to
      provide or purchase Product Change Hardware or Improved Software. Supplier
      will not acquire or install Improved Software not purchased or provided by
      Applied. All Product Change Hardware and Improved Software purchased or
      provided by Applied shall be owned by Applied and, in the case of Product
      Change Hardware and Improved Software, be subject to the Tooling Loan
      Agreement and this Agreement and upon request by Applied shall be
      identified by a supplement to * as Applied Test Fixtures. Whether or not
      default has occurred under this Agreement, but subject to the requirements
      of Section 4.2.4(c) below, Applied shall have the right to remove or
      otherwise take possession of such Product Change Hardware.

      (c) Right to Remove or Copy Software.

      Applied owns, has provided to Supplier and has paid the cost of the
      software currently used in the testing operation of all test fixtures
      listed on Schedules 4.2.2(a)-(d) (the "Current TF Software"). (The Current
      TF Software, the software for Capacity FDS Hardware and the Improved
      Software are the "Test Fixture Software.") Any Test Fixture Software in
      Supplier's possession may be copied by Applied at any time or times, upon
      reasonable notice to Supplier, to the attention of Supplier's Engineering
      Manager. Test Fixture Software in Supplier's possession may also be
      removed by Applied at any time or times; provided that as to removal of
      Test Fixture Software, Applied shall give the notice


* Material has been omitted and filed separately with the Commission.


                                       62


CONFIDENTIAL TREATMENT REQUESTED

      and comply with the other requirements of Section 4.2.4(c) below. Applied
      shall have the right to hold all source code and original documentation of
      Test Fixture Software. Applied shall have the obligation to maintain the
      Test Fixture Software, and Supplier shall cooperate with Applied in such
      maintenance.

      4.2.4. General Application.

      (a) Supplier shall not at any time use Test Fixture Hardware or the Test
      Fixture Software (other than the Supplier Test Fixtures and hardware or
      software that, in each instance (i) are not provided or purchased by
      Applied under Sections 4.2.3(a)-(c) or (ii) do not constitute Applied IP)
      for the production of goods for persons other than Applied or in any
      manner other than in performance of Supplier's obligations under this
      Agreements without Applied's written approval. Any such Test Fixture
      Hardware in Supplier's possession shall be subject to this Agreement, the
      IPA, and also the Tooling Loan Agreement; the Test Fixture Software shall
      be subject to this Agreement, the Tooling Loan Agreement, and also the
      IPA.

      (b) If Applied fails to provide or delays providing (after notice by
      Supplier, given to Applied's SMT Operations Manager, that the failure or
      delay will affect Committed Delivery Dates), items of Capacity FDS
      Hardware, Product Change Hardware or Improved Software that are required
      for the manufacture and testing of new FDSs, Modules or other Items for
      Applied Systems, modifications of existing Applied Systems, or new or
      modified testing requirements or Specifications for Applied Systems that
      Supplier is selected to manufacture or to supply Items for, or changes in
      Supplier's manufacturing capacities, equipment or volumes, after the
      Effective Date, then, to the extent of delays in testing and delivery that
      result directly from such failure of Applied after notice under this
      Section 4.2.4(b), the Committed Delivery Date of the Items(s) so delayed
      shall be extended for a period equal to the period of Applied's failure or
      delay in providing such hardware or software.

      (c) Applied may exercise any of its options or rights to purchase,
      repossess, or remove any Tooling or Test Fixture Hardware and Test Fixture
      Software, to the extent provided for in this Section 4.2, at any time,
      without the occurrence or continuance of a default by Supplier, but only
      in connection with a termination or cancellation of this Agreement, in
      whole or in part. If exercised in connection with a partial termination or
      cancellation, the right of Applied shall extend only to such items of
      Tooling, Test Fixtures and Test Fixture Software that are reasonably
      required for or in connection with the manufacture and testing of those
      Items (including Applied System product lines) as to which the termination
      or cancellation relates. Applied shall give Supplier prior notice under
      Section 1.2.2 of Applied's intent to purchase, repossess or remove any
      Tooling, Test Fixtures or Test Fixture Software or other items which it
      owns or may acquire hereunder, which shall be given at a time reasonably
      in advance of acquisition or relocation to allow Supplier to complete
      production of Items affected by the cancellation or termination and for
      which an Authorized Demand Signal has been issued, provided that notice
      given at least eight (8) weeks (or a period equal to such lesser product
      cycle time as may be applicable to the affected Items at the time) prior
      to the repossession, removal or purchase shall be deemed reasonable.


                                       63


CONFIDENTIAL TREATMENT REQUESTED

4.3.  Design Changes and Resolution.

(a) Supplier will not make changes to the Specifications, form, fit, function or
manufacturing process of Item(s), without having first complied with the
applicable requirements of Sections 4.1, 4.3, 4.4, and 4.5 of this Agreement.

(b) Supplier shall not subcontract any Design Service or Development Service
except as permitted by and in compliance with the IPA and shall not utilize in
any Services any consultant, contractor, or employee for whom an executed
joinder in the confidentiality provisions of the IPA has not been delivered to
Applied. Supplier shall implement changes affecting Items and resulting from
Design Services or Development Services only upon obtaining prior written
approval required under applicable ECO, Applied Product Definition Form, and
other procedures from Applied's Supplier Engineer designated for Supplier and,
as applicable, as required by the DSA or DVA.

4.4.  Process Changes and Resolution.

Supplier shall be responsible for its compliance and compliance by its sub-tier
suppliers, subcontractors, providers and special process suppliers with
manufacturing requirements, Specifications and provisions of the QRD and Quality
Framework and shall inform Applied of any special process or other sub-tier
supplier, provider or subcontractor changes to Items, including any changes in
the manufacturing process of Supplier or of a sub-tier supplier, special process
supplier, subcontractor or provider, even when Specifications are being met
(excluding changes in physical layout of Supplier's manufacturing plant or in
Supplier's manufacturing line design). Supplier must receive approval in writing
from Applied with respect to the implementation of each such change. As required
by the QRD, Supplier must use special process suppliers from the list set forth
in Attachment 14.

4.5.  QRD and Special Process Requirements.

      4.5.1 Critical and Source Specific Materials.

      The manufacture, processes, Specifications, manufacturing processes and
      requirements of and for, and the providers of, Piece Parts, Modules,
      assemblies or Subassemblies designated as "Critical" or "Source Specific"
      pursuant to the QRD, and any Subassemblies transitioned to a sub-tier
      supplier or subcontractor (the "Critical and Source Specific Materials")
      shall comply with Applied's QRD, Quality Framework, and Special Process
      Supplier requirements in or pursuant to Attachments 14, 15 and 20 to this
      Agreement and documents or procedures referred to therein, all as revised
      from time to time. Supplier shall not make or authorize any change in any
      of the foregoing without prior written approval by Applied pursuant to the
      Quality Framework, QRD and Special Process Supplier requirements and
      related documents and procedures.

      4.5.2 Supplier's Subcontractors.

      Supplier will ensure that all sub-tier suppliers, providers and
      subcontractors of Supplier who have access (directly or indirectly) to
      Applied's Specifications or Internal Applied Data or other Confidential
      Information sign and are governed by a confidentiality


                                       64


CONFIDENTIAL TREATMENT REQUESTED

      agreement with Supplier that is similar in form and substance to the
      confidentiality provisions of the IPA applicable to Supplier, and Sections
      2.9.1 and 2.9.2 of this Agreement. Approval by Applied of a sub-tier
      supplier, provider, or subcontractor selected by Supplier shall not alter
      Supplier's obligations to Applied.

      4.5.3. Costs of Supplier Change.

      The party initiating a change in a subcontractor, provider or sub-tier
      supplier to Supplier for Source Specific Parts shall bear the costs of
      qualifying the new sub-tier supplier, provider or subcontractor for the
      affected Piece Part, material or other element.

      4.5.4. Waivers.

      In addition to the provisions of Section 9.4 of this Agreement, if Applied
      waives any drawing, Specification or other requirement for one or more of
      the Items, it will not constitute a waiver as to remaining Items to be
      delivered, unless stated by Applied in writing.

4.6.  First Articles and Source Inspections.

First Article and Source Inspections shall be conducted in compliance with the
QRD and Quality Framework and the documents and procedures referred to therein.

4.7.  Applied's Right to Subcontract.

Applied may at its discretion elect to contract with a manufacturer, integrator
or outsource provider of Subassemblies (a "Subassembler"), which Subassemblies
will incorporate or include Item(s) Applied may purchase under this Agreement.
Applied will advise Supplier of the new Subassembler and of the Items affected.
Supplier understands that the selection and sourcing of any Items to be
incorporated or included in Subassemblies to be provided by the Subassembler
will be made by the Subassembler, and that, pursuant to Article 17 of Exhibit 1,
Applied may assign this Agreement, in whole or in part, in connection with its
contract with the Subassembler.

4.8.  Product Support

      4.8.1. Global Technical Support and Product Support.

      (a) Technical Support. Supplier shall provide a telephone support system
      for global technical assistance to Applied, seven days a week, 24 hours a
      day, at no additional charge. Supplier shall include as part of its
      technical support hot pager contact for access at times outside Supplier's
      normal operating periods. Supplier is expected to use commercially
      reasonable efforts to provide a resolution to Applied's requests for
      technical assistance.

      (b) Product Support. In addition to support, repair and replacement
      services covered by other provisions of this Agreement and in addition to
      the above technical support, Supplier will, upon request by Applied,
      provide support globally to Applied (and at the direction of Applied, to
      Applied's customers) for all Items that Supplier provides to


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CONFIDENTIAL TREATMENT REQUESTED

      Applied, to include repair, replacement or correction of Items. Supplier
      agrees to have an established and, at Applied's request, deployable global
      product support service capability. Supplier may utilize one or more
      affiliates of Supplier, Supplier distributor(s) or other qualified
      entities designated by Supplier and acceptable to Applied to meet this
      requirement. If support services provided by Supplier are not covered as
      warranty obligations to be provided pursuant to Section 7 of this
      Agreement, Supplier will be compensated for the services so provided as
      agreed by the parties on a case by case basis or under standard pricing as
      agreed. Except as required for those requests, if any, for global support
      covered by Section 2.4, when Applied has not been able to resolve a
      defect, failure or problem affecting an Item through the above technical
      support process, Kinetics shall respond to each request for global support
      from Applied and propose a plan for the correction, solution, repair or
      replacement within forty-eight (48) hours (as to requests initiated by
      Applied's Customer Engineer), and as to all other requests from Applied,
      within a period that is prompt under commercially reasonable standards
      considering the nature and urgency of the request.

      4.8.2. Product Support Period.

      Supplier agrees to maintain the capability to provide Items and to provide
      the same types and level of global product service and technical support
      to Applied described in Section 4.8.1 above, for all of the Items, for a
      minimum of ten years from the date of the last shipment of an Item to
      Applied under this Agreement to Applied for its manufacturing operations
      (the "Post Term Support"), in addition to meeting Supplier's warranty
      obligations. Upon Applied's request, Supplier shall provide Post Term
      Support on a time and materials basis, at rates and cost determined as set
      out in Section 4.8.1 above.

      4.8.3. Product Post Term Support Options.

      (a) If Supplier desires to modify or reduce its Post Term Support
      obligation, Supplier agrees, as a condition of such a reduction or
      modification, that Supplier shall have prepared a transition and support
      plan for Post Term Support and shall have obtained Applied's approval, not
      to be unreasonably withheld, of such plan. As part of such plan, Supplier
      shall have negotiated (and obtained such approval from Applied of) a
      contract for Post Term Support (including capability to provide Items and
      the provision of global product support and technical support) to be
      provided by a financially responsible entity with established capability
      and expertise and a license to such third party of IP Rights to meet the
      requirements for Post Term Support, to the extent Supplier desires to
      reduce or modify its obligations for Post Term Support.

      (b) If, after the use of commercially reasonable efforts, Supplier has not
      located a third party to provide Items as required for modification or
      reduction of Post Term Support obligations of Supplier or to negotiate a
      contract for the provision of Items under Post Term Support as described
      in Section 4.8.3(a), then Supplier shall provide in good faith all
      assistance reasonably required by Applied for Applied to provide or obtain
      the Items for which Supplier has Post Term Support obligations and, for
      such purpose, Applied shall have and may exercise the license in respect
      of cover pursuant to Section 3.13 of the IPA. If Supplier fails in any
      respect (other than as to arrangements for the provision of Items) to
      provide Post Term Support, or to have obtained approval of a


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CONFIDENTIAL TREATMENT REQUESTED

      transition and support plan under Section 4.8.3(a), then Supplier shall
      provide in good faith all assistance reasonably required by Applied for
      Applied to provide or obtain the affected Post Term Support and, for such
      purpose, Applied shall have and may exercise the license in respect of
      cover pursuant to Section 3.13 of the IPA.

4.9.  Periodic Business Review.

Applied and Supplier shall periodically review their activities and agreements
through a formal business review process. As part of such business review
process during any Wind Down Period, the parties shall determine if Supplier
holds any documentation of a Future Modification (as defined in the IPA) in
which Applied holds any rights as owner or licensee pursuant to the IPA or any
DSA or DVA, which documentation Supplier is required to deliver to Applied
pursuant to the IPA, but which documentation has not been delivered to Applied
(the "Deliverable Documentation"). Supplier shall promptly deliver to Applied,
upon identification of same, upon subsequent request by Applied, any Deliverable
Documentation.

4.10. [Omitted].

4.11. Wind Down Provisions.

(a) The "Wind Down Period" is the period preceding expiration or termination of
this Agreement that is applicable under the following provisions:

      (i) With respect to the expiration of this Agreement, a period of up to *
      that is designated by Applied as the Wind Down Period, which period shall
      commence on the date specified in a notice by Applied (given under Section
      1.2.2) that a Wind Down Period shall apply in connection with the
      expiration of this Agreement. If the otherwise applicable term of this
      Agreement would expire prior to the end of such designated Wind Down
      Period, Applied shall extend the term of this Agreement to the last day of
      the Wind Down Period by an extension pursuant to Section 1.5, so that the
      term of the Agreement shall automatically be extended to and expire upon
      the last day of the designated Wind Down Period.

      (ii) If Applied terminates this Agreement pursuant to Article 25 of
      Exhibit 1 to this Agreement or Article 26 of Exhibit 1 to this Agreement,
      the Wind Down Period shall be a period of up to * that is designated by
      Applied in its notice (given under Section 1.2.2) exercising such right of
      termination, which period commences on the date the notice of termination
      is issued and ends on the date termination is effective, which effective
      date of termination shall be set out in the notice of termination and
      shall comply with the requirements of this Section 4.11 and of Article 25
      or 26 (as applicable) of Exhibit 1. If Supplier * the Wind Down Period
      shall be a period of at least * that is designated by Supplier in its
      notice *, which period commences on the date the notice * is issued and
      ends on the date * is effective, which effective date * shall be set out
      in the notice * and shall comply with the requirements of this Section
      4.11 and of *.


* Material has been omitted and filed separately with the Commission.


                                       67


CONFIDENTIAL TREATMENT REQUESTED

If termination is in part and not in whole, the Wind Down Period shall apply
with respect to that portion of the Agreement affected by the termination.
During the Wind Down Period, Supplier shall continue to supply all Items for
which an Authorized Demand Signal is issued and accepted or deemed accepted
under this Agreement. The parties shall use commercially reasonable efforts and
cooperate so that Items for which Authorized Demand Signals are issued and
accepted during or prior to commencement of the Wind Down Period will have
Committed Delivery Dates on or before the end of the Wind Down Period. Supplier
and Applied each shall perform its agreements and obligations regarding the Wind
Down Period under the IPA and this Agreement. The Wind Down Period continues
from the date it commences until the date termination or expiration is
effective.

(b) The provisions of Section 4.8 shall apply during, and continue in effect
after, the Wind Down Period, without limitation of other survival provisions of
this Agreement.

(c) No later than the conclusion of the Wind Down Period (and, when applicable
for a partial termination, then as to the portion affected):

      (i) Supplier shall convey its title, if any, to, and shall deliver to
      Applied, *. In the event of Termination for Default or an expiration of
      the term of this Agreement, Applied shall have the option, but not an
      obligation, to purchase from Supplier the Remaining Consumable Materials.
      *. Prices for partially completed Items shall be determined by applying
      the cost model (Attachment 1) to actual materials consumed or installed in
      the partially completed Item, and by a charge for actual Services
      performed and actual manufacturing labor (at the rate for work in
      Supplier's facility). The price payable by Applied for Remaining
      Consumable Materials shall be determined under Section 4.11(d) below.
      Supplier shall not charge for documentation of or relating to, Applied IP.

      (ii) Supplier and Applied shall have performed and discharged their
      respective obligations under the IPA and this Agreement.

      (iii) Supplier will return all Tooling, capital or other equipment
      (including any Tooling and capital equipment that Applied has acquired
      ownership rights in as a result of exercising its rights under this
      Agreement) and material owned by Applied. Supplier will be responsible for
      the packaging and transportation costs associated with the return of these
      items if the termination is for default; Applied shall be responsible for
      such packaging and transportation costs in all other events.

      (iv) Applied and Supplier shall each have paid the other all amounts then
      due and payable under this Agreement and any Related Agreement, except for
      amounts in bona fide dispute.


* Material has been omitted and filed separately with the Commission.


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CONFIDENTIAL TREATMENT REQUESTED

(d) "Remaining Consumable Materials" shall be determined as follows: Supplier
shall record and report to Applied, within 10 days after the date notice of
termination is given, * following the date on which notification is given, *
affected by the notification over the following *. The "Remaining Consumable
Materials" is the quantity of * that were actually on hand, or for which
Supplier had issued noncancellable purchaser orders, that were not used or
consumed in the course of operations under the Agreement. The charge or price
for Remaining Consumable Materials is determined * for the * at the date of
notification.

(e) During the period after notification and prior to termination, Applied and
Supplier shall negotiate the terms of and charges for Restock or Reconfigure
Items, and the formula provisions of Sections 2.14.4 and 2.14.6 shall not apply.
Supplier shall not be required, during a Wind Down Period relating to
termination, to accept Restock Items or Reconfigure Items that are first
designated as such during such a Wind Down Period. The provisions of this
Agreement as to cancellation of Items and as to *s, however, are not modified
during a Wind Down Period.

5.    NONCONFORMANCE.

5.1.  Nonconformance and Corrective Action.

      5.1.1. [Omitted.]

      5.1.2. Supplier Corrective Action Request.

      Applied will complete a "Supplier Corrective Action Request" (Attachment
      10) pursuant to ISO 9000 processes to record and request corrective action
      for recurring nonconformities. Upon receipt of a Supplier Corrective
      Action Request, Supplier will promptly respond as appropriate and use best
      industry practices to cure the nonconformities and the cause of
      nonconformity. A corrective action process to resolve nonconformance will
      be documented and used by the parties. In addition, Supplier will
      participate in continuous improvement plans and programs as defined by
      Applied and Supplier.

5.2.  Applied Nonconformance and Corrective Action.

      5.2.1. Items Affected.

      Applied will, at its option, return Items at Applied's expense that do not
      conform to Applied's requirements due to Applied's errors or damage caused
      by Applied. These Items will be returned to Supplier for repair or
      potential rework. Applied may, at its option, require Supplier to repair a
      Subassembly at Applied's facility. If Applied returns an Item to Supplier
      under this Section 5.2.1, Applied shall deliver to Supplier with such
      Item, when returned, certification of decontamination and preparation for
      safe handling if the Item has been exposed to toxic or corrosive gases or
      chemicals, in compliance with Section 2.14.7.D.


* Material has been omitted and filed separately with the Commission.


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CONFIDENTIAL TREATMENT REQUESTED

      5.2.2. Standard Repair Costs.

      Except for instances for which the parties have established "standard"
      repair costs (labor, Items and freight) for Items not covered under
      warranty, Supplier shall charge, and Applied shall pay, for non-warranty
      repair or correction of Items on a time and materials basis. Materials
      shall be charged at the *; Supplier's labor charges for repairs performed
      at Supplier's facilities shall not exceed *. If Supplier is required to
      provide labor at Applied facilities to meet repair times for Production
      Issue Items, the labor cost will not exceed *.

      Supplier will assess repair and rework costs and timing and quote same to
      Applied before work is performed. Upon approval of Supplier's quote,
      Applied will issue its Purchase Order for such costs. Applied may at its
      option elect (a) to have the Item repaired or reworked, or (b) to purchase
      a new Item at pricing determined under Attachment 1. Supplier shall
      prepare its quotation based on the completion terms of Section 5.2.3 and
      shall advise Applied as part of its quotation if more than five (5)
      Business Days will be required.

      5.2.3. Time for Repair.

      Supplier shall repair, replace, or correct defects or defective Items
      resulting from Applied's error or damage within * after Applied notifies
      Supplier of the defect or damage (unless a longer period is required in
      the use of best professional practices), or at such other time as is
      agreed by the parties as part of the issuance of Applied's Purchase Order,
      except for Items Applied identifies as a Production Issue in its initial
      notice under Section 2.4, as to which Supplier shall respond and act in
      accordance with Section 2.4.2. Costs and pricing for repair of damages or
      defects caused by Applied error will be established under Section 5.2.2
      above.

      5.2.4. Return of Items.

      Items repaired or reworked by Supplier will be shipped in accordance with
      generally applicable transportation and packaging requirements. Supplier
      will deliver such Items to Applied at the times determined under Section
      5.2.3 above. Prior to Supplier's return of a repaired or reworked Item to
      Applied, Supplier will mark such Item with Applied's part number, serial
      number, range and gas (if applicable). Applied shall pay costs of
      transportation and bear the risk of loss or damage during transit of
      repaired or reworked Items, whether or not such Items meet warranty or
      other requirements.

6.    SUPPLIER PERFORMANCE PLAN.

As part of this Agreement, Applied and Supplier have prepared a Supplier
Performance Plan, which is Attachment 16 to this Agreement. Supplier's
performance and compliance with the applicable Supplier Performance Plan shall
be reviewed in periodic business review meetings


* Material has been omitted and filed separately with the Commission.


                                       70


CONFIDENTIAL TREATMENT REQUESTED

conducted by Applied's SPM. A recurring failure of Supplier to perform at (or to
achieve) the standards set, or to comply with terms of, the Supplier Performance
Plan will be deemed a Dispute for purposes of Section 7.2.5, as to which either
party may initiate the Business Review Process and, if such recurring failure is
material, may be the basis of an action by Applied under Article 25(a)(iii) of
Exhibit 1. A recurring failure for purposes of this Section 6 and of the
Supplier Performance Plan is a failure that occurs in at least *.

7.    WARRANTIES AND REMEDIES.

7.1.  Supplier Warranty.

      7.1.1. Basic Warranty.

      Subject to the limitations set out in Section 7.1.4 below, Supplier
      warrants to Applied, for the warranty period set out in Section 7.1.3
      below, that each Item delivered to Applied (excluding Services separately
      warranted under Section 7.1.2 below):

            (a) will be free from defects in materials, workmanship and
            manufacture, and will be of good title;

            (b) will conform to (i) all Specifications, and (ii) those
            requirements of (or made applicable through) the following documents
            and Sections of this Agreement applicable to such Item: the Quality
            Requirements Document (Attachment 20); the Process Qualification
            Program in effect at the time of manufacture under the QRD and
            applicable to the Item; the Quality Framework (Attachment 15);
            Special Process Suppliers (Attachment 14); and Sections 4.4 and 4.5
            of this Agreement;

            (c) will have been manufactured in compliance with those provisions
            of the Quality Requirements Document (Attachment 20), Process
            Qualification Program in effect at the time of manufacture under the
            QRD and applicable to the Item, Quality Framework (Attachment 15),
            the Supplier Performance Plan (Attachment 16), and Sections 4.4 and
            4.5 of this Agreement, applicable to the manufacture of such Item
            and with manufacturing standards suitable for the manufacture of
            high quality, process sensitive components of Applied Systems
            ("Suitable Manufacturing Standards"); and will consist of new
            materials and Piece Parts;

            (d) will be of merchantable quality and fit for the intended purpose
            of use with or incorporation in Applied Systems for semiconductor
            wafer fabrication, flat panel display fabrication, thin film
            application processes or manufacturing, toxics abatement or
            recycling, or wafer inspection and metrology, as applicable; and


* Material has been omitted and filed separately with the Commission.


                                       71


CONFIDENTIAL TREATMENT REQUESTED

            (e) will, to the extent of Configuration Engineering Services, CES
            Services, CCR Services, NPT Services and Design Services or
            Development Services, provided by Supplier, be free from defect in
            such Services excluding, however, any defects caused by error in the
            applicable product design that was not itself caused by Supplier or
            its Services.

      7.1.2. Services.

      As to Services, for the warranty period set out in Section 7.1.3 below and
      subject to the limitations set out in Section 7.1.4 below, Supplier
      warrants to Applied that its Services have been performed in a competent,
      professional and workmanlike manner, and are free from defect and in
      accordance with the best professional practices of the industry.

      7.1.3. Warranty Period.

      The warranty period applicable under this Agreement commences on the date
      of delivery to Applied of the Item (and, as to Services, commences upon
      completion of the Service and delivery of the completed work product and
      any other deliverables to Applied) and extends for a period of * after
      such date *; subject, however, to applicable limitations under Section
      7.1.4(iii), and provided that Supplier's warranty period as to a Third
      Party OEM Component (as defined in Section 7.1.5. below) extends *. If
      Applied's warranty to the Applied customer by whom the Item is used or
      purchased expires during Supplier's stated 24 month warranty period, *. If
      Applied's warranty to the Applied customer by whom the Item is used or
      purchased does not have a stated period or term, *.

      7.1.4. Limitations on Warranty.

      Supplier's warranties under this Agreement are subject to the following
      limitations:

            (i) Supplier makes NO WARRANTIES under this Agreement, whether
            express, implied, statutory or otherwise, except those warranties
            provided in this Agreement. The remedies provided for in or through
            this Agreement (and as to Services, where applicable, provided for
            in or through the IPA, DSAs, or DVAs) constitute the sole and
            exclusive remedies of Applied with respect to Items that fail to
            conform to such warranties. EXCEPT FOR THE WARRANTIES EXPRESSLY SET
            FORTH IN THIS SECTION 7.1 AND THOSE EXPRESSLY PROVIDED IN THE IPA
            AND ANY DSAs OR DVAs, (a) SUPPLIER DISCLAIMS ALL OTHER WARRANTIES,
            EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE WITH RESPECT TO ITEMS
            (INCLUDING SERVICES) INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES
            OF TITLE, NON-INFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A
            PARTICULAR PURPOSE, AND (b) THE ITEMS ARE PROVIDED "AS IS."


* Material has been omitted and filed separately with the Commission.


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CONFIDENTIAL TREATMENT REQUESTED

            (ii) In determining whether an Item is of a quality that is
            merchantable (Section 7.1.1(d) above), an Item must be of a quality
            at least equal to the standards of minimum acceptability for the
            same or like Items that are employed by Applied at the time of its
            manufacture; however, such standards shall not limit application of,
            or excuse compliance with, specific warranty requirements of Section
            7.1.1 above applicable to the specific Item. In determining whether
            an Item is of a quality that is merchantable, the standards for
            merchantable quality of the Item shall be those that are currently
            applied at the time of its manufacture. In determining whether an
            Item is fit for its intended purpose, such warranty shall extend to
            use or incorporation in semiconductor wafer fabrication, flat panel
            display fabrication, thin film application processes or
            manufacturing, toxics abatement or recycling, or wafer inspection
            and metrology systems, as applicable, employed in processes (a) that
            are customary or generally contemplated within the industries using
            such systems, or (b) that are specifically identified by Applied to
            Supplier, in writing (including e-mail, facsimile and posting of
            information on the Applied website designated for Supplier's access)
            as an intended use.

            (iii) Supplier's warranties do not extend to defects, failure or
            malfunction of an Item to the extent such failure, defect or
            malfunction (a) results from conformance by Supplier with
            Specifications prepared by Applied, provided that this exclusion
            shall not alter or limit Supplier's warranties of its Services; (b)
            is caused by accident, negligence, misuse, alteration, modification
            or tampering of or caused by any person other than Supplier, or (c)
            is caused by use or operation in environments or for processes that
            are not customary or generally contemplated in those industries
            using semiconductor wafer fabrication, flat panel display
            fabrication, thin film application processes or manufacturing,
            toxics abatement or recycling, or wafer inspection and metrology
            systems, as applicable, or not specifically identified by Applied to
            Supplier as intended uses or environments.

      7.1.5. Third Party OEM Components.

            (a) A "Third Party OEM Component" is any product (i) that is
            identified by an Applied Commodity Code (under Applied's Commodity
            Code Document 0250-10856) with an initial designator equal to or
            greater than "0500" and (ii) for which the original manufacturer's
            warranty is for a period of at least thirteen (13) months from the
            date of Supplier's purchase and expressly runs to Applied or has
            been validly assigned to Applied by Supplier. The foregoing
            provision as to products with an initial Commodity Code designator
            equal to or greater than "0500" includes products: (i) that are
            identified by Applied Commodity Codes with initial designators
            between "0220" and "0229" but that would otherwise be assigned
            Applied Commodity Codes with an initial designator greater than
            "0500"; and also, (ii) that are new products to which a Commodity
            Code initial designator greater than "0500" would be assigned under
            the terms of Applied Document Commodity Code Document 0250-10856 as
            in effect on the Effective Date.


                                       73


CONFIDENTIAL TREATMENT REQUESTED

            (b) *

            (c) Effective on the shipment by Applied to its customer of the Item
            or Applied System containing a Third Party OEM Component, Supplier
            assigns to Applied, to the fullest extent permitted by applicable
            law and agreements, all of Supplier's warranties, warranty rights
            and recoveries from or against each manufacturer and supplier of
            each Third Party OEM Component installed or incorporated in the Item
            or Applied System that may not be enforced by Applied, unless so
            assigned. Supplier will cooperate with Applied in Applied's
            enforcement of and recovery under such assigned or available
            warranties of Third Party OEM Components, including the execution
            and delivery of such further instruments as Applied may reasonably
            request to perfect and protect the foregoing assignment or rights of
            Applied, provided that Supplier shall not be required to bear costs
            and expenses of such cooperation that are not reasonable under the
            circumstances. If, following the date of assignment to Applied of
            the warranty and warranty rights and recoveries, Supplier is sued
            and such warranty and warranty rights or recoveries are reasonably
            required for Supplier's defense of, or for the assertion of
            counterclaim against, the claims against Supplier, Applied will
            cooperate with Supplier with respect to such warranty and warranty
            rights and recoveries and, upon reasonable terms and
            indemnification, assign back to Supplier, to the extent so required,
            the warranty and warranty rights or recoveries.

      7.1.6. Debit Recoveries.

            (a) Prior to Applied's initiation of a debit or other offset under
            Section 2.11.3 to effect a recovery for a warranty claim of Applied
            against Supplier, Applied shall advise Supplier, to the attention of
            Supplier's Customer Service Manager - Warranty Claims (in addition
            to the notice to Supplier's Finance Manager as provided by Section
            2.11.3) of the expected debit or offset amount and shall ship to
            Supplier for inspection the Item for which Applied proposes to
            effect a debit or offset based on its warranty claim (the "Warranted
            Part"). Supplier shall cooperate in arranging for delivery and shall
            provide, promptly upon request by Applied and without prejudice to
            Supplier as to warranty coverage, Supplier's Return Materials
            Authorization ("RMA") for the return of the Warranted Part under
            this Section 7.1.6. Applied shall not use debits or offsets to
            recover amounts for warranty claims as to Services only.

            (b) If a Warranted Part has been destroyed or is not available to
            Applied for delivery for purposes of the debit process under this
            Section, Applied will not initiate a debit process for the warranty
            claim. If Applied fails to effect delivery of the Warranted Part to
            Supplier under Section 7.1.6 (a), the debit or offset shall be
            recredited in full. If Applied does not proceed under this Section,
            Applied


* Material has been omitted and filed separately with the Commission.


                                       74


CONFIDENTIAL TREATMENT REQUESTED

            retains and may pursue all its other remedies. Applied is not
            required to proceed under this Section to assert or recover for its
            warranty claims against Supplier; this Section only applies to
            debits or offsets relating to warranty claims.

            (c) If, after Supplier's examination of a Warranted Part, Supplier
            disputes the debit, offset or warranty coverage, Supplier shall
            notify its assigned Supplier Quality Engineer ("SQE") at Applied and
            shall specify the amount Supplier requests to be re-credited
            ("Disputed Amount"). This notification and specification of the
            Disputed Amount must in any event be given to Applied within thirty
            (30) days after the RMA delivery of the Warranted Part to Supplier.
            If the SQE approves the Supplier's request, the Disputed Amount
            shall be recredited.

            (d) If the SQE and Supplier do not agree on the amount to be
            re-credited, or on the disposition of the claim, Supplier may (i)
            accept the determination of the SQE or (ii) initiate the Business
            Review Process for resolution of the dispute as described in Section
            7.2.5.

      7.1.7. Survival of Warranties.

      Supplier's warranties shall survive any delivery, acceptance, inspection,
      or payment by Applied, except as expressly provided otherwise in this
      Section 7.1. Applied's approval of Supplier's material or design will not
      relieve Supplier of the warranties established in this Agreement.

7.2.  Applied's Remedies.

This Section 7.2 sets out obligations of Supplier and provides remedies of
Applied for Supplier's failure to make timely delivery of Item(s) and for breach
of Supplier's warranties as to Items. In addition to the remedies for such
failure of delivery and for breach of warranty provided for in this Section 7.2,
Applied has the remedies and rights provided under Articles 22 and 25 of Exhibit
1 (subject to the limitations and requirements of such Articles and of Article
21 of Exhibit 1). Provisions for recovery of damages by Applied in this Section
7.2 or in Article 25 are subject to applicable limitations under Article 21 of
Exhibit 1.

      7.2.1. Failure to Deliver.

      If Supplier fails to deliver one or more Items (or to provide Services
      with completed work product and deliverables) on the Committed Delivery
      Date or otherwise at the times provided by the applicable Authorized
      Demand Signal or as agreed by the parties:

            (a) Supplier shall initiate all actions necessary to complete and
            deliver the Items (or provide Services, work product and
            deliverables) promptly, without notice or demand by Applied. All
            increased costs and expenses for completion and delivery that result
            from Supplier's failure to timely deliver Items (or provide
            Services, work product and deliverables) shall be paid by Supplier.
            Supplier shall use the most expeditious manner commercially
            available to effect completion and delivery of Item(s), Services,
            work product and deliverables.


                                       75


CONFIDENTIAL TREATMENT REQUESTED

            (b) If the failure constitutes or results in a Production Issue
            under Section 2.4, Supplier shall comply with that Section of this
            Agreement.

            (c) If Supplier fails to comply with Section 2.4, where applicable,
            or if Supplier otherwise fails to cure the late delivery promptly
            after the applicable Committed Delivery Date or repudiates, Applied
            may recover its damages resulting from the failure to comply or
            deliver, from late delivery or from repudiation and may exercise all
            remedies available pursuant to the UCC and, as to Services and
            related deliverables, may recover its damages and exercise all
            remedies provided by law or equity. Where applicable, the procedures
            and limitations of (or, provided for through) Section 7.1.6,
            7.2.1(d), or 7.2.1(e) and of Article 21 of Exhibit 1 will apply to
            exercise, enforcement and recovery by Applied.

            (d) Prior to effecting cover under the preceding paragraph (c),
            Applied shall give notice of its intent to cover, which notice shall
            be given to Supplier's Customer Service Manager in Austin or
            Milpitas, as applicable by e-mail or facsimile transmission and by
            voice message (telephone, pager, or voice mail). The notice of
            intent to cover shall identify the Item(s) for which cover is
            intended, and shall specify the Cover Period (defined below). Within
            24 hours (measured during Business Days and under prevailing Pacific
            Time) from the time notice is so given, Supplier shall notify
            Applied (in the same manner as provided for the notice to Supplier)
            by e-mail or facsimile notice to the Supply Account Team Lead
            specified in Section 1.2.1 if Supplier will provide to Applied the
            Item(s) within the Cover Period or if Supplier declines to proceed.
            If Supplier elects to provide such Item(s), Supplier shall provide
            such Item(s) on or before the expiration of the Cover Period at the
            original Contract Price. The "Cover Period" is that period which is
            reasonable under the circumstances for the Item(s), or
            equivalent(s), to be completed and delivered (but not to exceed the
            period within which the Item(s), or equivalent(s), can be obtained
            from a source other than Supplier).

            (e) (i) Prior to effecting cancellation through termination for
            default, in part, with respect to the particular affected Item(s),
            as a remedy pursuant to clause (c) above, Applied shall give notice
            of intent to cancel to Supplier's Customer Service Manager in Austin
            or Milpitas, as appropriate, and may (but shall not be required to)
            initiate the Business Review Process under Section 7.2.5. This
            cancellation through termination for default as to particular
            Item(s) shall not be limited by or conducted under Article 25 of
            Exhibit 1, but Applied may proceed to exercise such right by notice
            to Supplier. If Applied does elect to utilize the Business Review
            Process and the failure is not resolved by the Business Review
            Process, when applicable, or if Supplier fails to perform in a
            material respect under a resolution developed by the Business Review
            Process, Applied may give notice of default and cancel this
            Agreement as to the particular Item(s) without compliance with
            Article 25 of Exhibit 1.


                                       76


CONFIDENTIAL TREATMENT REQUESTED

                  (ii) If Applied intends to effect cancellation as to more than
            the particular affected Item(s) through termination for default
            (which may be in part or in whole), Applied shall proceed in
            accordance with Article 25 of Exhibit 1 and the Business Review
            Process.

      7.2.2 Defective Items.

      If Supplier delivers Items (or provides Services) that do not conform to
      the warranty terms applicable to the Item(s) or Service(s) (a "Defective
      Item"), Applied shall give written notice (including notice by e-mail,
      facsimile or other electronic record) to Supplier's Customer Service
      Manager in Austin or Milpitas, as appropriate, of the Defective Item, and
      thereafter:

            (a) Supplier shall promptly correct, repair or replace, at
            Supplier's cost and expense, the Defective Item(s) without further
            notice from or demand by Applied. As to Services, Supplier's
            obligations include the prompt correction or re-performance of the
            Services and any work product or other deliverables. Supplier shall
            use the most expeditious commercially available means to effect
            repair, replacement or correction, including the provision of a new
            Item in lieu of repair. Applied may require repair, replacement or
            correction at Applied's facility.

            (b) If the failure constitutes or results in a Production Issue
            under Section 2.4, Supplier shall comply with that Section. If the
            failure is subject to Section 5.1.2, as applicable under this
            Agreement, Supplier shall comply with that Section of this
            Agreement.

            (c) If Supplier fails to comply with Section 2.4, where applicable,
            or if Supplier otherwise fails to promptly repair, replace or
            correct any Defective Item(s) or if Supplier repudiates, Applied may
            recover its damages resulting from such failure and may exercise all
            remedies available pursuant to the UCC (to include revocation of
            acceptance) and, as to Services and related deliverables, may
            recover its damages and exercise all remedies provided by law or
            equity. Applied may, as part of its recovery, include premium costs
            for expedited delivery. Where applicable, the procedures and
            limitations of (or, provided for through) Section 7.1.6, 7.2.2(e)
            and (f), and Article 21 of Exhibit 1 will apply to exercise,
            enforcement and recovery by Applied.

            (d) (i) Applied will utilize the procedures of this Section 7.2.2(d)
            to make repair, replacement or correction of a Defective Item in
            those instances in which (a) Supplier fails to comply with Section
            2.4, if applicable, (b) Supplier fails to correct, repair or replace
            the Defective Item within the period requested by Applied or
            otherwise established by the parties or this Agreement, or (c) the
            Defective Item has been shipped to or is installed at an Applied
            customer location.

                  (ii) When Applied effects repair, replacement or correction of
            a Defective Item under this Section 7.2.2(d), Applied shall be
            entitled to recover, and Supplier shall pay to Applied each of the
            following that applies:


                                       77


CONFIDENTIAL TREATMENT REQUESTED

                  1. The cost of goods obtained or used by Applied to make the
                  repair, replacement or correction of the Defective Item, and
                  of any necessary engineering or similar services relating to
                  such goods.

                  2. The cost of freight or shipping and of taxes for the goods
                  obtained for the repair, replacement or correction, and for
                  the return of any Defective Item(s).

                  3. The cost of labor required to remove, repair, replace and
                  reinstall a Defective Item (if repaired) and remove and
                  reinstall other Piece Parts necessary to the repair,
                  correction or replacement.

            Costs of labor shall be determined at Applied's then standard labor
            rates; if labor is provided at facilities of Applied's customers or
            through the Applied CPS organization, the labor charge by Applied to
            Supplier shall be equal to the field service labor charge calculated
            at Applied's CPS rates (not to exceed *). Costs of engineering
            services shall be determined by Applied at its customary rates, then
            in effect, not to exceed *. This Section 7.2.2(d) shall not limit
            Applied's other remedies or recoveries provided for in (but subject
            to the limitations of) other provisions of this Agreement.

            (e) Prior to effecting replacement under paragraph (d) above of a
            Defective Item that is an FDS, Applied shall give notice of its
            intent to make such a replacement, which notice shall be given to
            Supplier's Customer Service Manager in Austin or Milpitas, as
            appropriate, by e-mail or facsimile transmission and by voice
            message (telephone, pager, or voice mail). The notice of intent to
            replace shall identify the Item(s) for which such replacement is
            intended, and shall specify the Replacement Period (defined below).
            Within 24 hours (measured during Business Days and under prevailing
            Pacific Time) from the time notice is so given, Supplier shall
            notify Applied (in the same manner as provided for the notice to
            Supplier) by e-mail or facsimile notice to the Supply Account Team
            Lead specified in Section 1.2.1 if Supplier will replace the Item(s)
            within the Replacement Period or if Supplier declines to proceed. If
            Supplier elects to replace such Item(s), Supplier shall replace such
            Item(s) on or before the expiration of the Replacement Period. The
            "Replacement Period" is that period which is reasonable under the
            circumstances for the Item(s), or equivalent(s), to be replaced (but
            not to exceed the period within which the Item(s), or equivalent(s),
            can be obtained from a source other than Supplier).

            (f) If Applied intends to cancel the Agreement as to more than the
            particular affected Item(s) through termination for default (which
            may be in part or in whole) as a result of Supplier's breach or
            default under this Section, Applied shall proceed in accordance with
            Article 25 of Exhibit 1 and the Business Review Process.


* Material has been omitted and filed separately with the Commission.


                                       78


CONFIDENTIAL TREATMENT REQUESTED

            (g) If Applied makes a warranty claim with respect to an Item that
            has been modified or repaired, Applied shall include as part of the
            documentation of such claim the maintenance and service record
            relating to the modification or repair.

      7.2.3. Cumulative Remedies.

      The remedies of Applied and Supplier shall be cumulative, and no election
      of remedies shall occur.

      7.2.4. Remedies for Other Breach or Default.

            7.2.4.1. Subject to the exclusions provided in this Section 7.2.4 or
            provided in Article 25 of Exhibit 1 to this Agreement, if Supplier
            or Applied fails to comply with, observe or perform any term,
            provision or condition of this Agreement, or otherwise defaults
            under or breaches any term, provision or condition of this
            Agreement, the other party shall initiate the Business Review
            Process prior to proceeding to enforce or exercise its rights,
            remedies and actions available to it under this Agreement or under
            applicable law.

            7.2.4.2. The requirement in Section 7.2.4.1 of initiation of the
            Business Review Process shall not apply: (a) to the enforcement or
            exercise of equitable rights or remedies, and actions seeking
            equitable relief; or (b) to claims, matters, remedies, and actions
            that are provided for in Section 7.2.1 or Section 7.2.2 with respect
            to particular Item(s).

            7.2.4.3. If Supplier or Applied has failed to comply with, observe
            or perform, or otherwise has defaulted under or breached, any term,
            provision or condition of this Agreement, then (after any applicable
            period of notice or consultation applicable under this Agreement and
            after conclusion of the Business Review Process, where applicable)
            the other party may proceed to enforce or exercise its rights and
            remedies as provided under this Agreement or as provided by law or
            equity (subject to procedural requirements of this Agreement and,
            where applicable, to the limitations of Article 21 of Exhibit 1 to
            this Agreement), all as it may elect, concurrently and in the
            alternative, without waiver or election by the pursuit of any one or
            more right, remedy or action.

            7.2.4.4. In this Agreement, the phrase "term, provision or
            condition" shall include any term, provision, condition, covenant,
            agreement, representation, warranty, obligation, indemnity,
            undertaking, requirement, or other part of this Agreement or of
            another indicated agreement, and such phrase shall be so construed
            unless the context clearly requires otherwise.

      7.2.5 Business Review Process.

            7.2.5.1. With respect to any dispute, issue, controversy or claim of
            breach arising under this Agreement (a "Dispute"), either party may
            initiate the process described in this Section 7.2.5 (the "Business
            Review Process") to seek resolution of the Dispute. Except as
            specifically provided to the contrary in this Agreement,


                                       79


CONFIDENTIAL TREATMENT REQUESTED

            compliance with the Business Review Process is not a condition or
            requirement to the exercise of any legal remedies or proceedings, to
            the exercise of rights or remedies provided by or under this
            Agreement, or to other action by a person.

            7.2.5.2. The Business Review Process is initiated by a Notice from
            Applied or Kinetics to the other of a Dispute, which notice shall be
            given under Section 1.2.2, and a request for review of the Dispute
            under the Business Review Process. Upon such Notice and request,
            Applied shall designate a representative at its director level or
            higher, and Kinetics shall designate a representative at its
            director level or higher, to constitute their representatives for
            this Business Review Process. These representatives shall promptly
            confer and use commercially reasonable efforts in good faith to
            resolve the Dispute. The Business Review Process shall continue for
            twenty (20) Business Days after the date on which the party
            initiating the process designates its representative, unless
            otherwise agreed by the two representatives. If the Dispute is not
            resolved through the Business Review Process or a party fails to
            comply with, perform or observe the terms for cure, correction or
            waiver of the breach, default or Dispute established through the
            Business Review Process, then all parties shall be free to pursue
            all rights, remedies and relief as may be available, without further
            application of the Business Review Process or other provision for
            cure or correction.

8.    AMENDMENTS AND MODIFICATIONS; CAPTIONS AND CONSTRUCTION; INTERPRETATION.

8.1   Amendments and Modifications.

Subject to Section 1.3 above, amendments or modifications to this Agreement must
be in writing, signed by a duly authorized representative for each of Supplier
and Applied, traced by revision or amendment numbers and attached to this
original Agreement. The master copy of this Agreement and any revisions are to
be maintained by Applied.

8.2   Captions and Construction.

Headings and captions in this Agreement are for the convenience of the parties
only and shall not affect the interpretation or construction of this Agreement.
The provisions of this Agreement (including Exhibits and Attachments) shall be
construed as a whole, each supplementing the other, except for instances of
conflict which shall be governed by Section 1.3.2.2 as to precedence. This
Agreement, including also any Purchase Order issued for Items, shall control
over any invoice, delivery ticket, or other document issued by Supplier.
References to a party's internal business organization shall refer to such
organization and successor organizations performing similar functions.

8.3   Interpretation.

Supplier and Applied have each participated fully in the negotiation and
preparation of this Agreement. Each party has engaged its own legal counsel and
has relied upon its own representatives, employees and counsel, and not the
other party or its counsel, in the negotiation and preparation of this
Agreement. The rule that a contract shall be construed against the party


                                       80


CONFIDENTIAL TREATMENT REQUESTED

drafting the agreement and statutes of like effect, including California Civil
Code Section 1654, shall not apply to the construction or interpretation of this
Agreement.

9.    PROVISIONS OF GENERAL APPLICATION.

9.1.  Independent Contractor.

Throughout the term of this Agreement, the relationship between Applied and
Supplier shall be that of independent contractors. Nothing set forth herein or
in any Related Agreement shall be deemed or construed to render the parties
joint venturers, partners, or employer and employee, and under no circumstances
may either party hold itself out to be a partner, employee, franchisee,
representative, servant or agent of the other party. Neither party is authorized
to make any commitment or representation on the other's behalf. Neither party
may create any obligations or responsibilities on behalf of or in the name of
the other party. Throughout the term of this Agreement, if the term
"partnership," "partner," or "development partner" or the like is used to
describe the parties' relationship, Applied and Supplier agree to make it clear
to third parties that these terms refer only to the spirit of cooperation
between them and neither describe, nor expressly or implicitly create, the legal
status of partners or joint venturers. Each party also agrees not to make false
or misleading statements, claims or representations about the other party, its
products or the relationship of the parties.

9.2.  No Third Party Beneficiary.

Each and all of the agreements, covenants, obligations, duties, conditions,
terms, warranties, representations and benefits in or arising under this
Agreement, whether express or implied by law, are and shall be solely for the
benefit of the parties to this Agreement and the respective permitted
successors, assigns, and legal representatives of each party hereto. It is the
express intention and agreement of Applied and Supplier that no entity not a
party to this Agreement (including any customer of Applied) shall be or shall be
deemed a third-party beneficiary of this Agreement, or of any of its agreements,
covenants, obligations, duties, conditions, terms, warranties, representations
and benefits.

9.3.  Severability.

Any provision or provisions of this Agreement or of any Related Agreement that
are determined by a final judgment or order of a court of competent jurisdiction
to be invalid or unenforceable in any jurisdiction or as to any person or
circumstance shall be reformed, as permitted by law, so as to be valid and
enforceable, and, if (or to the extent) not so reformed, shall be severed, and
the remainder of the affected agreement or agreements shall continue in effect
and be enforced, construed and applied without such severed provision(s).

9.4   Waiver.

Any provision, right, remedy or requirement of this Agreement may be waived by
the party entitled to the benefit thereof by written waiver, signed by such
party. A waiver so made or given shall extend only to the specific matter or
event, and shall be effective only to the extent, specifically provided for in
such waiver. A waiver of any breach or default under this Agreement shall not be
construed as a continued waiver of other breaches of the same, or of any


                                       81


CONFIDENTIAL TREATMENT REQUESTED

other, provision of this Agreement, nor as a bar to, or waiver of, any right or
remedy as to any subsequent event, occurrence, default or breach. Except as
provided above as to written waivers, no act, omission, or course of conduct or
of performance shall be deemed to constitute a waiver hereunder. In furtherance
of the preceding provision, if Applied or Supplier delays or fails to insist on
strict performance of any of the terms, conditions, provisions, requirements,
covenants or obligations set forth in this Agreement, such delay or failure
shall not constitute a waiver.

9.5.  Successors and Assigns.

This Agreement shall be binding upon, and shall inure to the benefit of, each
party and its respective permitted successors and assigns.

9.6.  Execution.

This Agreement may be executed in any number of counterparts, each of which when
so executed and delivered shall be deemed an original, and such counterparts
shall constitute one and the same instrument. Each Party shall receive a
duplicate original of the counterpart copy or copies executed by it. For
purposes hereof, a facsimile copy of this Agreement, including the signature
pages hereto, shall be deemed to be an original. Notwithstanding the foregoing,
the Parties shall deliver original execution copies of this Agreement to one
another as soon as practicable following execution thereof.

10.   REPRESENTATIONS AND WARRANTIES OF THE PARTIES.

Each party (the "Warranting Party") warrants and represents to the other party
that:

      (a) the Warranting Party is a corporation duly incorporated, validly
      existing and in good standing under the laws of the jurisdiction in which
      it is organized, with full corporate power and authority to carry on its
      business as it is now being conducted;

      (b) the Warranting Party has full power and corporate authority to enter
      into this Agreement;

      (c) the execution, delivery and performance of this Agreement has been
      duly authorized by the Warranting Party, and does not and will not violate
      any other agreement, any provision of the charter or organizational
      documents of the Warranting Party or any applicable law, regulation,
      decree, judgment or order of any regulatory government agency or any court
      of competent jurisdiction, which violation would have a material adverse
      effect on the Warranting Party;

      (d) except as provided herein, the Warranting Party will not enter into
      any agreement, the execution and/or performance of which violates any term
      of this Agreement;

      (e) the Warranting Party is not a party to any agreement calling for the
      payment to, or receipt from, any third party by the Warranting Party of
      any commission, gratuity, or other similar thing or amount in
      consideration of the other party's entry into this Agreement;


                                       82


CONFIDENTIAL TREATMENT REQUESTED

      (f) this Agreement has been duly executed and delivered by the Warranting
      Party and constitutes a valid and binding obligation of the Warranting
      Party, enforceable against the Warranting Party in accordance with its
      terms, except that such enforceability may be subject to bankruptcy,
      insolvency, reorganization, moratorium, or similar laws now or hereafter
      in effect relating to creditors' rights and to general equitable
      principles (whether enforcement is sought through legal or equitable
      proceedings).

11.   ACCEPTANCE AND EXECUTION.

This Agreement is executed and delivered by each of the undersigned parties,
acting through its officer or other representatives, duly authorized to act for
and on behalf of the indicated party, and is effective on and as of the
Effective Date.

Accepted:

Applied Materials, Inc.                      Kinetics Fluid Systems, Inc.



BY:    /s/ Paul Hohlstein                    BY:    /s/ Dan Rubin
   ------------------------------               ------------------------------

       Name:   Paul Hohlstein                       Name:   Dan Rubin
             --------------------                         --------------------

       Title:  Vice President                       Title:  President
             --------------------                         --------------------

       Date:   5/21/02                              Date:   5/21/02
             --------------------                         --------------------


                                       83


                        LIST OF EXHIBITS AND ATTACHMENTS



      -------------------------------------------------------------------------------------------------------
                                                     EXHIBITS
      -------------------------------------------------------------------------------------------------------
      Exhibit 1:  Applied's Standard Terms & Conditions
      -------------------------------------------------------------------------------------------------------
                                                                                            * INDICATES
                                                                                            ATTACHMENTS
                                                                                             THAT HAVE
                                        ATTACHMENTS                                         NOTIFICATION
                                                                                              REVISION
                                                                                             PROCESS ON
                                                                                              WEB SITE
                                                                                         
      -------------------------------------------------------------------------------------------------------
      *
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      *
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      *
      -------------------------------------------------------------------------------------------------------



* Material has been omitted and filed separately with the Commission.


                                       84


                                                                                              
      -------------------------------------------------------------------------------------------------------
      *                                                                                          *
      -------------------------------------------------------------------------------------------------------
      18. On-site Representative Agreement                                                       *
      -------------------------------------------------------------------------------------------------------
      19. Tooling Loan Agreement
      -------------------------------------------------------------------------------------------------------
      *
      -------------------------------------------------------------------------------------------------------
      *
      -------------------------------------------------------------------------------------------------------
      *
      -------------------------------------------------------------------------------------------------------
      *
      -------------------------------------------------------------------------------------------------------
      *
      -------------------------------------------------------------------------------------------------------
      *
      -------------------------------------------------------------------------------------------------------





      * UPDATES AND CURRENT VERSIONS OF THESE ATTACHMENTS ARE POSTED ON
      APPLIED'S WEBSITE WHICH IS AVAILABLE TO SUPPLIER FOR PURPOSES OF SECTION
      1.3.


* Material has been omitted and filed separately with the Commission.


                                       85


CONFIDENTIAL TREATMENT REQUESTED

                                TABLE OF CONTENTS

                                                                                                             
DEFINITIONS..................................................................................................... 1

1.       SCOPE.................................................................................................. 8

         1.1.     Description of Agreement...................................................................... 8

         1.2.     Addresses and Contact Persons; Notices........................................................ 8

                  1.2.1.   Contact Persons...................................................................... 8

                  1.2.2.   Notices..............................................................................10

         1.3.     Entire Agreement; Related Agreements; Modification; Prior Transactions........................11

                  1.3.1.   Certain Related Agreements...........................................................11

                  1.3.2.   Entire Agreement.....................................................................12

                  1.3.3.   Provisions Continuing in Effect......................................................13

                  1.3.4.   Modification.........................................................................14

         1.4.     Items Covered.................................................................................14

         1.5.     Duration of Agreement.........................................................................15

2.       LOGISTICS, ORDERING AND OPERATIONAL FRAMEWORK..........................................................15

         2.1.     Operation and Management of Orders............................................................15

                  2.1.1.   Operating Calendar & Holidays........................................................15

                  2.1.2.   Monthly Volume Summaries.............................................................15

                  2.1.3.   Manufacture and Delivery.............................................................16

                  2.1.4.   Change in Delivery Date..............................................................16

                  2.1.5.   Orders for Items.....................................................................17

                  2.1.6.   Electronic Commerce..................................................................26

                  2.1.7.   Pro Forma............................................................................27

         2.2.     Definition of Terms for Certain Provisions Affecting Prices or Charges........................28

         2.3.     Cancellation of Items.........................................................................30

                  2.3.1.   Items Subject to Cancellation........................................................30

                  2.3.2.   Deferral.............................................................................30

                  2.3.3.   Cancellation.........................................................................30

                  2.3.4.   Applicability; Payment...............................................................31

                  2.3.5.   Other Rights.........................................................................31

                  2.3.6.   Services.............................................................................31

         2.4.     Response Time, Turnaround and Implementation Time.............................................31

                  2.4.1.   Production Issues....................................................................31

                  2.4.2.   Turnaround and Implementation Time...................................................32

         2.5.     Capacity Planning and Flexibility Requirements................................................32




                                       86


CONFIDENTIAL TREATMENT REQUESTED

                                                                                                             
                  2.5.1.   Capacity Planning....................................................................32

                  2.5.2.   Flexibility..........................................................................33

                  2.5.3.   Acceptance; Delivery.................................................................33

         2.6.     On-Site Support Requirements..................................................................34

         2.7.     [Omitted].....................................................................................34

         2.8.     *.............................................................................................34

                  2.8.1.   Modifications and *s.................................................................34

                  2.8.2.   Scope of *s..........................................................................34

                  2.8.3.   Charges for *s.......................................................................35

         2.9.     Information...................................................................................35

                  2.9.1.   Applied Internal Databases...........................................................35

                  2.9.2.   Applied New Product Plans............................................................39

                  2.9.3.   Compliance with Securities Laws......................................................39

         2.10.    Packaging and Transportation..................................................................40

                  2.10.1.  Packaging and Shipment...............................................................40

                  2.10.2.  Bar Coding...........................................................................40

                  2.10.3.  Transportation Requirements..........................................................40

         2.11.    Payment.......................................................................................41

                  2.11.1.  Invoices; Certain Acceptance Terms...................................................41

                  2.11.2.  *....................................................................................43

                  2.11.3.  Offsets, Debits......................................................................44

                  2.11.4.  Effect of Payment....................................................................44

                  2.11.5.  Reconciliation of Payment Discrepancies..............................................44

         2.12.    Disaster Recovery Plan........................................................................44

         2.13.    Performance Constraints.......................................................................45

                  2.13.1.  Constraints..........................................................................45

         2.14.    Provisions for Reconfiguration or Restocking..................................................45

                  2.14.1.  "Affected Items."....................................................................45

                  2.14.2.  Categories...........................................................................45

                  2.14.3.  "Relabel Items.".....................................................................46

                  2.14.4.  "Reconfigure Items.".................................................................46

                  2.14.5.  "Restock Items.".....................................................................49

                  2.14.6.  Restocking Process and Charges.......................................................49

                  2.14.7.  Provisions as to Restocked or Removed Parts..........................................50

                  2.14.8.  Processing and Payments..............................................................51




* Material has been omitted and filed separately with the Commission.


                                       87


CONFIDENTIAL TREATMENT REQUESTED

                                                                                                             
3.       PRICING FRAMEWORK......................................................................................51

         3.1.     Contract Prices...............................................................................51

                  3.1.1.   Pricing and Cost Model of Attachment 1...............................................51

                  3.1.2.   Application of Prices................................................................52

                  3.1.3.   Pricing Model........................................................................52

                  3.1.4.   Further Agreements as to Pricing.....................................................53

                  3.1.5.   * Terms..............................................................................53

                  3.1.6.   Adjustment for *.....................................................................57

         3.2.     Volume........................................................................................58

         3.3.     Export........................................................................................58

         3.4.     Currency......................................................................................58

4.       TECHNICAL FRAMEWORK....................................................................................59

         4.1.     Engineering Change Orders.....................................................................59

                  4.1.1.   ECO Procedures.......................................................................59

         4.2.     Tooling.......................................................................................60

                  4.2.1.   General Tooling Provisions...........................................................60

                  4.2.2.   Current FDS Test Fixtures............................................................61

                  4.2.3.   Future FDS Test Fixtures.............................................................62

                  4.2.4.   General Application..................................................................64

         4.3.     Design Changes and Resolution.................................................................65

         4.4.     Process Changes and Resolution................................................................65

         4.5.     QRD and Special Process Requirements..........................................................65

                  4.5.1    Critical and Source Specific Materials...............................................65

                  4.5.2    Supplier's Subcontractors............................................................65

                  4.5.3.   Costs of Supplier Change.............................................................66

                  4.5.4.   Waivers..............................................................................66

         4.6.     First Articles and Source Inspections.........................................................66

         4.7.     Applied's Right to Subcontract................................................................66

         4.8.     Product Support...............................................................................66

                  4.8.1.   Global Technical Support and Product Support.........................................66

                  4.8.2.   Product Support Period...............................................................67

                  4.8.3.   Product Post Term Support Options....................................................67

         4.9.     Periodic Business Review......................................................................68

         4.10.    [Omitted].....................................................................................68

         4.11.    Wind Down Provisions..........................................................................68




* Material has been omitted and filed separately with the Commission.


                                       88


CONFIDENTIAL TREATMENT REQUESTED

                                                                                                             
5.       NONCONFORMANCE.........................................................................................70

         5.1.     Nonconformance and Corrective Action..........................................................70

                  5.1.1.   [Omitted.]...........................................................................70

                  5.1.2.   Supplier Corrective Action Request...................................................70

         5.2.     Applied Nonconformance and Corrective Action..................................................70

                  5.2.1.   Items Affected.......................................................................70

                  5.2.2.   Standard Repair Costs................................................................71

                  5.2.3.   Time for Repair......................................................................71

                  5.2.4.   Return of Items......................................................................71

6.       SUPPLIER PERFORMANCE PLAN..............................................................................71

7.       WARRANTIES AND REMEDIES................................................................................72

         7.1.     Supplier Warranty.............................................................................72

                  7.1.1.   Basic Warranty.......................................................................72

                  7.1.2.   Services.............................................................................73

                  7.1.3.   Warranty Period......................................................................73

                  7.1.4.   Limitations on Warranty..............................................................73

                  7.1.5.   Third Party OEM Components...........................................................74

                  7.1.6.   Debit Recoveries.....................................................................75

                  7.1.7.   Survival of Warranties...............................................................76

         7.2.     Applied's Remedies............................................................................76

                  7.2.1.   Failure to Deliver...................................................................76

                  7.2.2    Defective Items......................................................................77

                  7.2.3.   Cumulative Remedies..................................................................79

                  7.2.4.   Remedies for Other Breach or Default.................................................80

                  7.2.5    Business Review Process..............................................................80

8.       AMENDMENTS AND MODIFICATIONS; CAPTIONS AND CONSTRUCTION; INTERPRETATION................................81

         8.1      Amendments and Modifications..................................................................81

         8.2      Captions and Construction.....................................................................81

         8.3      Interpretation................................................................................81

9.       PROVISIONS OF GENERAL APPLICATION......................................................................81

         9.1.     Independent Contractor........................................................................81

         9.2.     No Third Party Beneficiary....................................................................82

         9.3.     Severability..................................................................................82

         9.4      Waiver........................................................................................82

         9.5.     Successors and Assigns........................................................................83

         9.6.     Execution.....................................................................................83




                                       89


CONFIDENTIAL TREATMENT REQUESTED

                                                                                                             
10.      REPRESENTATIONS AND WARRANTIES OF THE PARTIES..........................................................83

11.      ACCEPTANCE AND EXECUTION...............................................................................84




                                       90


CONFIDENTIAL TREATMENT REQUESTED

APPLIED MATERIALS CONFIDENTIAL

EXHIBIT 1
APPLIED MATERIALS STANDARD TERMS AND CONDITIONS OF PURCHASE
Table of Contents

                                                                                                             
1.       ACCEPTANCE............................................................................................. 1

2.       CONFIDENTIAL INFORMATION............................................................................... 1

3.       INTELLECTUAL PROPERTY RIGHTS AND OWNERSHIP THEREOF..................................................... 1

4.       [OMITTED].............................................................................................. 1

5.       PRESS RELEASES/PUBLIC DISCLOSURE NOT AUTHORIZED........................................................ 1

6.       PRICING................................................................................................ 2

7.       DUTY DRAWBACK AND COUNTRY OF MANUFACTURE............................................................... 3

8.       OZONE DEPLETING CHEMICAL ("ODC")....................................................................... 3

9.       COMPLIANCE WITH LAWS................................................................................... 4

10.      EQUAL EMPLOYMENT OPPORTUNITY........................................................................... 4

11.      APPLICABLE LAW, CONSENT TO JURISDICTION AND VENUE...................................................... 4

12.      NOTICE OF LABOR DISPUTES............................................................................... 5

13.      TAXES.................................................................................................. 5

14.      [OMITTED].............................................................................................. 5

15.      INSURANCE.............................................................................................. 5

16.      CERTAIN EVENTS AND NOTICES; FINANCIAL INFORMATION...................................................... 6

17.      ASSIGNMENT AND SUCCESSION..............................................................................11

18.      GRATUITIES.............................................................................................14

19.      [OMITTED]..............................................................................................14

20.      [OMITTED]..............................................................................................14

21.      DISCLAIMERS AND LIMITATIONS OF LIABILITY AS TO EXCLUDED DAMAGES........................................14

22.      INDEMNITY..............................................................................................15

23.      FORCE MAJEURE..........................................................................................18

24.      CHANGES................................................................................................18

25.      TERMINATION FOR DEFAULT; OTHER REMEDIES................................................................19

26.      TERMINATION FOR CONVENIENCE............................................................................22

27.      POST-TERMINATION OBLIGATIONS...........................................................................24




                                       91


CONFIDENTIAL TREATMENT REQUESTED

Exhibit 1

APPLIED MATERIALS STANDARD TERMS AND CONDITIONS OF PURCHASE

1.    Acceptance.

      The terms and conditions stated in these Applied Materials Standard Terms
and Conditions of Purchase are an integral part of the Global Supply Agreement
between the parties to which this Exhibit 1 is attached ("Agreement") and which
covers the purchase of Items, as defined in such Agreement. Defined terms used
herein shall have the meanings ascribed to them in other provisions of the
Agreement unless otherwise defined in this Exhibit 1. Additional or different
terms or conditions of purchase will not be applicable unless accepted in
writing by a duly authorized representative of each of Supplier and Applied.

2.    Confidential Information.

      (a) Supplier and Applied, respectively, will comply with each NDA executed
by Supplier or Applied, as applicable, with or for the benefit of the other,
whether now or hereafter in effect; subject, however, to the provisions of the
Agreement as to priority among conflicting agreements.

      (b) The obligations of the parties with respect to Confidential
Information under and for purposes of the Agreement are governed by the IPA.
Such obligations include those arising pursuant to Sections 2.9.1.1.D and 2.9.2
of the Agreement and Article 5(a) of this Exhibit 1.

3.    Intellectual Property Rights and Ownership Thereof.

      Rights of the parties in, ownership of, and other matters relating to
intellectual property under and for purposes of the Agreement shall be governed
by the IPA.

4.    [Omitted]

5.    Press Releases/Public Disclosure Not Authorized.

      (a) The Agreement and Related Agreements contain Confidential Information
of Applied and Supplier, and such Confidential Information is protected as set
out in the IPA. As part of their respective obligations under the IPA as to
Confidential Information, neither Supplier nor Applied shall disclose to any
third party, including any governmental authority, or publicly release the terms
of the Agreement or of any Related Agreement without the prior written approval
of the other party; provided, however, that subject to its compliance with this
Article 5(a), either party may make any public disclosure (which shall include
disclosure in the course of litigation, as well as under other applicable law,
rule or regulation) it believes in good faith that it is required to make by
applicable law, rule or regulation. The disclosing party: shall notify the other
party in advance of such a disclosure or release; shall take commercially
reasonable efforts (at least equal to the efforts such party takes to protect
the confidentiality of its own information) to protect the confidentiality of
the Confidential Information of the other party in the Agreement, which shall
include deleting the financial terms and other Confidential Information of the
other party in the Agreement from (or requesting such deletion or equivalent
protection or confidential


                                       92


CONFIDENTIAL TREATMENT REQUESTED

treatment where approval by a court or governmental authority is required)
disclosure or public release when permitted by applicable law, rule or
regulation. Section 4.1(v) of the IPA may also apply in regard to disclosures.

      (b) Further, and without limiting the foregoing provision, Supplier and
Applied, respectively, will not, without the prior written approval of the
other, issue any press release, advertising, publicity or public statement or in
any way engage in any other form of public disclosure that indicates the
relationship of the parties (except for disclosures as may be made under, and in
compliance with, requirements applicable under Article 5(a) and disclosure of
the existence of the Agreement), or implies any endorsement by Applied of
Supplier or Supplier's products or services.

      (c) Any requests or notices under this Article 5 must be made in writing
and submitted to the person(s) designated to receive notices under Section 1.2.2
of the Agreement.

6.    Pricing.

      (a) *

      (b) In no event shall Supplier quote, or shall Applied receive, prices
that would be unlawfully discriminatory under any applicable law. *

      (c) A "Covered Product" is a good sold by Supplier (i) that is not an *
form, fit and function to an Item under this Agreement.

7.    Duty Drawback and Country of Manufacture.

      (a) Duty Drawback

      Supplier will provide Applied, or any agent designated by Applied for this
purpose, with all U.S. Customs entry and shipment data concerning applicable
Items that Applied determines is necessary for Applied to qualify for duty
drawback ("Duty Drawback Information"). Such data shall include information and
receipts for duties paid, directly or indirectly, on all Items that are either
imported or contain imported Piece Parts. Such data shall further include serial
numbers, unique part numbers, lot numbers and any other data that will assist
Applied in identifying imported Items sold to Applied. This data will be
provided to Applied within thirty (30) days after the end of each calendar
quarter and shall be accompanied by a completed Certificate of Delivery of
Imported Merchandise or Certificate of Manufacture and Delivery of Imported
Merchandise (Customs Form 331) as promulgated pursuant to U. S. 19 CFR 191.

      (b) Country of Manufacture

      Supplier shall provide Applied with country of manufacture data for each
Item Supplier provides to Applied. This data shall identify each Item by Applied
part number and shall list the corresponding country of manufacture for the
Item. This data shall be provided to Applied


* Material has been omitted and filed separately with the Commission.


                                       93


CONFIDENTIAL TREATMENT REQUESTED

within fifteen (15) days after the end of each month and as requested by
Applied. If Supplier is a United States manufacturer of any Item supplied to
Applied, as defined by United States Customs regulations, Supplier shall, on an
annual basis and in accordance with Applied's written instructions, provide
Applied with a signed manufacturer's affidavit.

      (c) All information to be provided to Applied under this Article 7 shall
be sent to the attention of:

            Manager, Customs Compliance
            Applied Materials
            2881 Scott Blvd.
            M/S 2041
            Santa Clara, CA  95050

            or any agent designated by Applied in writing to Supplier.

8.    Ozone Depleting Chemical ("ODC").

      In the event that the Items are manufactured with or contain Class I ODCs,
as defined under Section 602 of the Federal Clean Air Act (42 USC Section 7671a)
and implementing regulations, or if Supplier believes that such a condition
exists with respect to any one or more Items, Supplier shall notify Applied
prior to performing any further work with respect to such Items pursuant to the
Agreement. Applied shall have the right to: (a) terminate the Agreement as to
such Items, upon notice and without penalty, and without application of the
termination procedures of Articles 25 and 26; and, in addition, (b) return any
and all Items delivered that are found to contain or have been manufactured with
Class I ODCs. Supplier shall pay (or if already paid by Applied, then reimburse
Applied for) all costs of shipping, special handling, and returning, for labor
to remove and replace, and for the purchase price paid by Applied as to such
Items.

9.    Compliance With Laws.

      Supplier represents and warrants that no law, rule or ordinance of the
United States, any state, any other governmental agency, or any country has been
or will be violated in manufacturing or supplying the Items purchased, or to be
purchased, under the Agreement.

10.   Equal Employment Opportunity.

      Supplier represents and warrants that it is in compliance with Executive
Order 11246, any amending or supplementing Executive Orders and implementing
regulations, unless exempted.

11.   Applicable Law, Consent to Jurisdiction and Venue.

      (a) THE AGREEMENT SHALL BE GOVERNED BY, SUBJECT TO, AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, EXCLUDING
CONFLICTS OF LAW RULES. THE PARTIES AGREE THAT ANY SUIT ARISING OUT OF THE
AGREEMENT FOR ANY CLAIM OR CAUSE OF ACTION, WHETHER IN CONTRACT, IN TORT,
STATUTORY, AT LAW OR IN EQUITY, SHALL EXCLUSIVELY BE


                                       94


CONFIDENTIAL TREATMENT REQUESTED

BROUGHT IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF
CALIFORNIA, THE SUPERIOR COURTS OF SANTA CLARA COUNTY, CALIFORNIA, THE UNITED
STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS, AUSTIN DIVISION, OR THE
TEXAS STATE DISTRICT COURTS OF TRAVIS COUNTY, TEXAS, PROVIDED THAT SUCH COURT
HAS JURISDICTION OVER THE SUBJECT MATTER OF THE ACTION. EACH PARTY AGREES THAT
EACH OF THE NAMED COURTS SHALL HAVE PERSONAL JURISDICTION OVER IT AND CONSENTS
TO SUCH JURISDICTION. EACH PARTY FURTHER AGREES THAT VENUE OF ANY SUIT ARISING
OUT OF THE AGREEMENT IS PROPER AND APPROPRIATE IN ANY OF THE COURTS IDENTIFIED
ABOVE.

      (b) WITH RESPECT TO TRANSACTIONS TO WHICH THE 1980 UNITED NATIONS
CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS WOULD OTHERWISE
APPLY, THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THE AGREEMENT, INCLUDING
THESE TERMS AND CONDITIONS, SHALL NOT BE GOVERNED BY THE PROVISIONS OF THE 1980
UNITED NATIONS CONVENTION OF CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS.
APPLICABLE LAWS OF THE STATE OF CALIFORNIA, INCLUDING THE UNIFORM COMMERCIAL
CODE AS ADOPTED THEREIN (BUT EXCLUSIVE OF SUCH 1980 UNITED NATIONS CONVENTION),
SHALL GOVERN THE AGREEMENT AND ALL TRANSACTIONS RELATED TO THE AGREEMENT (EXCEPT
TO THE EXTENT THE PROVISIONS OF SUCH APPLICABLE LAWS HAVE BEEN MODIFIED OR
SUPERSEDED BY EXPRESS PROVISIONS OF THIS AGREEMENT).

12.   Notice of Labor Disputes.

      Whenever an actual or potential labor dispute, or any government embargo
or regulatory or tribunal proceedings relating thereto, is delaying or threatens
to delay the timely performance of the Agreement, Supplier will immediately
notify Applied of such dispute and furnish all relevant details, regardless of
whether said dispute arose directly or indirectly as a result of an actual or
potential dispute within the Supplier's sub-tier supply base or Supplier's own
operations.

13.   Taxes.

      (a) Supplier shall not charge or collect sales or use tax for Items for
which an applicable sales and use tax exemption or resale certificate is
provided by Applied. For all other Items, Supplier will include all applicable
federal, state, and local taxes, where applicable, on Supplier's invoices, or
(when payment is made under Applied's ERS Program) in Pro Formas, stated as a
separate item.

      (b) Supplier may request from Applied information or documentation of
facts relating to Supplier's periodic application for property tax abatement or
tax reduction under rules regarding a "Texas Freeport Exemption"; Applied will
provide reasonable cooperation and assistance to Supplier in responding to
requests by Supplier for this purpose through provision of information or
completion of documentation to support Supplier's application(s) for such tax
benefits.

14.   [Omitted]

15.   Insurance.


                                       95


CONFIDENTIAL TREATMENT REQUESTED

      (a) Supplier shall maintain (i) comprehensive general liability insurance
covering bodily injury, property damage, contractual liability, products
liability and completed operations, (ii) Worker's Compensation and employer's
liability insurance, and (iii) auto insurance, all in such amounts as are
necessary to insure against the risks to Supplier's operations.

      (b) *, Supplier will obtain and keep in force, insurance of the types
and in the amounts set forth below:

        Insurance                                     *

        Worker's Compensation                         *
        Employer's Liability                          *
        Automobile Liability                          *  per occurrence
        Comprehensive General Liability
        (including Products Liability)                *  per occurrence
        Umbrella/Excess Liability                     *  per occurrence

      All policies must be primary and non-contributing and shall include
Applied as an additional insured. Supplier will require, and will use
commercially reasonable efforts to verify, that each of its subcontractors
carries at least the same insurance coverage and minimum limits of insurance as
Supplier is required to carry pursuant to the Agreement. Supplier shall notify
Applied at least thirty (30) days prior to the cancellation or implementation of
any material change in the foregoing policy coverage that would affect Applied's
interests. Upon request, Supplier shall furnish to Applied as evidence of
insurance a certificate of insurance stating that the coverage would not be
canceled or materially altered without thirty (30) days prior notice to Applied
or, as to cancellation for failure to pay premiums, without ten (10) days prior
notice to Applied.

16.   Certain Events and Notices; Financial Information.

      16.1  Certain Events and Notices.

      (a) As used in this Exhibit 1, a "Notice Event" means any of the
following: (i) a change in the person or persons with power to direct, or to
cause the direction of, management or policies of Supplier or of any Guarantor;
(ii) a change, however such occurs (including, by way of example, sale,
purchase, merger, or business combination), in the ownership of capital stock of
Supplier or of any Guarantor for which notice is to be given under Article
16.1(b) below; (iii) a sale or disposition of all or substantially all of the
assets of Supplier, or sale or disposition of a line of business of Supplier or
of all or substantially all of the assets of Supplier relating to or used in a
line of business, whether or not the Agreement is assigned; or (iv) a sale or
disposition of all or substantially all of the assets of a Guarantor, or a sale
or disposition of a line of business of a Guarantor or of all or substantially
all the assets of a Guarantor relating to or used in a line


* Material has been omitted and filed separately with the Commission.


                                       96


CONFIDENTIAL TREATMENT REQUESTED

of business, which sale or disposition results in (or will result in) a material
change in the nature of the business of such Guarantor or in a material adverse
change in the financial condition of the Guarantors as a whole.

      (1)   A Notice Event may result from a single transaction or from a series
            of related transactions. Transactions with a single person, with a
            group of persons covered by Section 13(d)(3) of the Securities
            Exchange Act of 1934 (the "Exchange Act"), or with persons under
            common control shall be considered a single transaction.

      (2)   A "Public Offering Event" is the issuance by Supplier or any
            Guarantor of capital stock to the public in an underwritten public
            offering of capital stock registered pursuant to a registration
            statement on Form S-1 with the federal Securities and Exchange
            Commission.

      (b) Supplier shall provide (and shall cause an affected Guarantor to
provide) notice to Applied in accordance with Section 1.2.2 of the Agreement as
to matters provided for by this Section 16.1(b).

      (1)   If a Notice Event will result from a transaction to which Supplier
            or any Guarantor is a party, Supplier shall give (and shall cause
            the affected Guarantor to give) notice to Applied, in accordance
            with Section 1.2.2 of the Agreement, (i) except when such notice
            would violate applicable securities laws or regulations or another
            obligation of confidentiality, (x) at least five (5) Business Days
            prior to the date of actual public disclosure of the transaction or,
            if earlier, the date such public disclosure should have been made if
            Supplier or the affected Guarantor, as applicable, were a company
            with publicly traded securities, but (y) in any event no later than
            twenty-one (21) calendar days prior to the closing or consummation
            of such transaction, and (ii) of the consummation or closing of such
            transaction, at the time of such closing or consummation. The Notice
            Event shall not occur, however, until the closing or consummation of
            the transaction(s) or event(s) that cause or will result in the
            Notice Event. If the giving of notice to Applied under this Article
            16.1(b)(1) is restricted by an obligation of confidentiality,
            Supplier (or such Guarantor) shall make a good faith effort to
            obtain approval or consent to give the notice provided for in this
            Article 16.1(b)(1).

      (2)   If securities of Supplier or any Guarantor are or are to be the
            subject of a Public Offering Event, Supplier shall give (and shall
            cause an affected Guarantor to give) Applied notice of (and
            concurrently with) each of the following: the filing of a
            registration statement with respect to any such securities; and a
            registration statement becoming effective as to any securities of
            Supplier or any Guarantor.

      (3)   Supplier shall, in addition to notices provided for in Article
            16.1(b)(1) and (2), give (and shall cause an affected Guarantor to
            give) notice to Applied in accordance with Section 1.2.2 of the
            Agreement of each of the following events, occurrences or
            transactions, each of which is a Notice Event:


                                       97


CONFIDENTIAL TREATMENT REQUESTED

                  (i) Notice shall be given promptly upon the occurrence of any
            Notice Event of a type covered by Article 16.1(a)(i), (iii) or (iv)
            above.

                  (ii) If Supplier or a Guarantor does not have capital stock
            registered with the federal Securities and Exchange Commission, a
            Notice Event occurs upon, and the affected company shall give
            Applied notice promptly upon (a) the acquisition of ownership of ten
            percent (10%) or more of the outstanding capital stock of such
            company by any person that is a Competitor (as defined below) of
            Applied, and also promptly upon (b) the acquisition of ownership of
            twenty-five percent (25%) or more of the outstanding capital stock
            of such company by any person, whether or not a Competitor of
            Applied.

                  (iii) If any class of capital stock of Supplier or any
            Guarantor is registered with the federal Securities and Exchange
            Commission, a Notice Event occurs (with respect to the company
            having registered stock) upon, and the affected company shall give
            Applied notice promptly upon, (a) the acquisition of ownership of
            five percent (5%) or more of the outstanding capital stock of each
            such a class by a person that is a Competitor of Applied in a
            transaction to which Supplier, any Guarantor, or any Affiliate of
            Supplier or a Guarantor is a party, and (b) (x) receipt of a
            Schedule 13D pursuant to the Exchange Act, or (y) Supplier or any
            Guarantor having actual knowledge of, any acquisition of ownership
            of five percent (5%) or more of the outstanding capital stock of
            such a registered class. Notice under this clause (b) shall be given
            (where notice is received by Supplier or the affected Guarantor
            through the receipt of a Schedule 13D) by forwarding a copy of such
            schedule to Applied.

                  (iv) If any capital stock of any class of Supplier or any
            Guarantor is registered with the federal Securities and Exchange
            Commission, the affected company shall give Applied notice of the
            occurrence of any event reportable pursuant to Item 1 of Form 8-K as
            in effect pursuant to the Exchange Act by notice given concurrently
            with filing of the report or announcement of such event.

      (c)   The following provisions and definitions are part of this Article
            16.1:

      (1)   In addition to notices provided for above, Supplier shall give (and
            shall cause each Guarantor to give) to Applied, on the 15th day of
            each January and July during the term of this Agreement, a schedule
            showing the name of each owner of five percent (5%) or more of the
            ownership of capital stock of Supplier or any Guarantor as of
            January 1 and July 1 of such year. This requirement shall apply only
            to those companies that do not have publicly traded securities.

      (2)   In compliance with the confidentiality obligations of the IPA,
            Supplier shall not provide Confidential Information of, or received
            from, Applied to any third party in connection with a Notice Event
            or the negotiation or evaluation of same, without Applied's prior
            written consent (and upon such conditions as Applied may require).
            Information received by Applied from Supplier or a Guarantor
            pursuant to Article 16.1(b) and Article 16.1(c)(1) shall be deemed
            Confidential


                                       98


CONFIDENTIAL TREATMENT REQUESTED

            Information of Supplier under Article 4 of the IPA, subject to the
            exclusions of Section 4.1 of the IPA.

      (3)   References to "capital stock" shall include any equity interest,
            ownership interest or like right or interest, such as interests of
            members in a limited liability company. References to "ownership"
            shall include legal or beneficial ownership or the right to vote.

      (4)   A "Competitor" of Applied means (I) any person identified to
            Supplier by Applied as a competitor in any of the Fields of Use (as
            specified below) through written notice given in accordance with
            Section 1.2.2 of the Agreement, if Applied elects to provide such a
            notice or (II) any person that an executive officer of Supplier
            knows is a competitor of Applied in any Field of Use. The
            information in a notice from Applied under this Article
            16.1(c)(4)(I) is Confidential Information of Applied, subject to the
            exclusions of Section 4.1 of the IPA. The "Fields of Use" applicable
            to this definition of Competitor are the design, manufacturing and
            marketing of: (a) semiconductor wafer fabrication equipment, (b)
            wafer inspection and metrology equipment, (c) flat panel display
            fabrication equipment, (d) wafer fabrication factory control
            software, (e) toxics abatement or recycling equipment, or (f) thin
            film application processes.

      (5)   "Affiliate" means any person that directly or indirectly controls,
            is under common control with, or is controlled by, Supplier or any
            Guarantor.

      (6)   "Promptly" means, for purposes of this Article 16.1 only, not later
            than the third Business Day after the occurrence of the event or
            transaction for which notice is to be given.

      (7)   The following are excluded from "Notice Event":

      a)    The acquisition of ownership of capital stock by a person that, on
            the Effective Date, owns 5% or more of the outstanding capital stock
            of any class of Supplier or of the affected Guarantor, unless such
            acquisition constitutes or results in another Notice Event.

      b)    A change in corporate form of Supplier or a Guarantor that does not
            alter the ownership, management or control of the Supplier or
            Guarantor, such as conversion from a corporation to a limited
            liability company through a transaction in which ownership and
            control are maintained as such existed in a corporate form prior to
            the conversion.

      c)    A distribution of all outstanding capital stock of Supplier or KGI
            to the shareholders of KHC in proportion to their ownership in KHC.

      d)    A merger, consolidation or business combination of Supplier with or
            into, or a sale of all outstanding stock of Supplier to, another


                                       99


CONFIDENTIAL TREATMENT REQUESTED

            entity that is wholly owned (directly or indirectly) by KHC that
            does not cause or result in a material change in the nature of the
            business conducted by Supplier prior to such event or in a material
            adverse change in the management or operations of Supplier.

      e)    A merger, consolidation or business combination of KGI with or into,
            or a sale of all outstanding stock of KGI to, another entity that is
            wholly owned (directly or indirectly) by KHC that does not cause or
            result in a material change in the nature of the business conducted
            by KGI prior to such event or in a material adverse change in the
            financial condition of the Guarantors as a whole.

      16.2  Financial Information of Supplier and Guarantors.

      (a) Supplier will provide Applied with financial information, and shall
cause KHC to provide to Applied financial information, as follows: (i) within 90
days after the end of each fiscal year, and within 45 days after the end of each
fiscal quarter, financial statements for such year or period as to KHC, to
include the balance sheet, statement of income, and statement of cash flow (on a
consolidated basis with its subsidiaries) of KHC, such annual (but not
quarterly) financial statements to have been audited by independent certified
public accountants of recognized national standing; and (ii) from time to time
such additional financial information as Applied may reasonably request. All
financial statements of KHC shall be prepared on the basis of generally accepted
accounting principles in effect in the United States of America ("GAAP"),
consistently applied. Applied's request for financial information from Supplier
or from KHC to be provided through Applied's Form F-15 shall be deemed a
reasonable request under clause (ii) of this Article 16.2(a) when Applied has
determined that it requires information in addition to that contained in the KHC
financial statements referred to in Article 16.2(a)(i). Information on Form F-15
is not required to be presented in compliance with GAAP.

      (b) Supplier agrees to keep true, complete and accurate books and records,
of Supplier's costs and other information relevant to price and cost reduction
provisions of the Agreement and billings by Supplier to Applied under the
Agreement. Supplier will provide:

      (1)   upon request by Applied's Supply Chain Management organization or
            successor organization of Applied performing the functions of such
            organization ("SCM"), made on a case by case basis, a complete
            costed bill of materials for those FDS(s) delivered to Applied that
            are specified in the applicable request(s), to include detailed
            Piece Part costs at Supplier's Standard Cost of Materials, Current
            Average Cost of Materials, or other Piece Part price, in each case
            as applicable to the Piece Parts in such bill of materials, to be
            provided to Applied's SCM organization or to such other recipient at
            Applied as specifically identified in instructions given to Supplier
            by Applied's SCM through the Supply Account Team Lead;

      (2)   upon request by Applied's SCM, access to Supplier's books and
            records (at Supplier's facilities and during regular business hours)
            to determine the accuracy of Supplier's Piece Part prices charged to
            Applied and, as applicable, Supplier's


                                      100


CONFIDENTIAL TREATMENT REQUESTED

            adjustments thereto under cost reduction provisions of the Agreement
            (including Sections 3.1.5 and 3.1.6); and

      (3)   copies of its books and records (or access to its books and
            records), upon request and upon reasonable notice, for review or
            audit during regular business hours (to include access to original
            records or data) to reconcile differences between the parties as to
            billings and payments. At the conclusion of a review or audit as to
            billing and payment differences, Applied shall provide to Supplier a
            report with reasonably detailed supporting information from
            Applied's books and records to support the conclusions reached with
            respect to such differences.

      (c) Upon mutual agreement of the parties after request by Applied, Applied
(or independent nationally recognized accountants designated by Applied and
reasonably acceptable to Supplier) shall have the right, at Applied's expense
and upon reasonable notice, to conduct audits of all of Supplier's books and
records and of any financial statements or other information provided by
Supplier. This Article 16.2(c) does not limit Applied's rights under Article
16.2(b).

17.   Assignment and Succession.

      (a) The Agreement shall be binding upon, and inure to the benefit of, each
of the parties and its respective successors and permitted assigns. Neither
Supplier nor Applied shall assign, transfer to or permit to vest in another
person the Agreement, or its rights, interests and obligations under the
Agreement, in whole or in part, whether voluntarily or by operation of law, (i)
without the express, prior written consent of the other party, or (ii) except as
permitted by the following provisions of this Article 17, as applicable.

      (b) Applied may assign the Agreement in whole or in part to any other
person(s), as follows:

      (i)   Assignment in whole or in part is permitted if Applied remains
            obligated, either primarily or equally with the assignee, for
            performance of the obligations assigned by Applied;

      (ii)  Assignment in whole or in part is permitted in connection with, or
            to effect, a change in manufacturing operations resulting from an
            agreement between Applied and a Subassembler under Section 4.7 of
            the Agreement, or to accomplish a change in manufacturing of any
            Applied Systems relating to such an agreement;

      (iii) Assignment in whole or in part is permitted in connection with, or
            to effect, a sale or transfer of assets used in manufacturing
            operations of Applied Systems, where such occurs to facilitate or as
            part of any bona fide change in the organization or structure of the
            manufacturing or integration of Applied Systems, which may include
            manufacture or integration by a third party, and which may be
            related to changes as to any product line(s), type(s) or model(s) of
            Applied System(s), line(s) of business of Applied, or geographic or
            other reorganization; or


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CONFIDENTIAL TREATMENT REQUESTED

      (iv)  Assignment in whole or in part is permitted in connection with, or
            to effect, arrangements or agreements for outsourcing, contract,
            turnkey or similar manufacturing, or for modular build, of Applied
            Systems or assemblies or subassemblies, where such occurs to
            facilitate (or as part of) any bona fide change in the organization
            or structure of the manufacturing or integration of Applied Systems,
            which may include manufacture or integration by a third party, and
            which may be related to changes as to any product line(s), type(s)
            or model(s) of Applied System(s), line(s) of business of Applied, or
            geographic or other reorganization.

An assignee from Applied under an assignment made by Applied pursuant to this
Article 17(b) may not further assign, either in whole or in part, the Agreement
(or the portion of the Agreement assigned to the assignee) without the prior
written consent of Supplier to such subsequent assignment.

      (c) A transfer or vesting of the Agreement, and rights and obligations
hereunder, in whole but not in part, in another person in the event of or
incident to a merger, consolidation or business combination to which Applied is
a party shall be permitted.

      (d) Supplier may assign the Agreement, in whole or in part, to any other
person, and the Agreement may be transferred to, or vest in, another person, in
whole but not in part, by reason of a merger, consolidation or business
combination to which Supplier is a party, as follows:

      (i)   Assignment, in whole or in part, is permitted if, after notice from
            Supplier under Article 17(f), Applied (x) has determined, in the
            reasonable discretion of Applied, that: (A) such person is
            reasonably likely to qualify, or is then qualified, as a "preferred"
            supplier under the then-current standards of Applied, without
            prejudice to subsequent assessments during the term of the
            Agreement; (B) such person and the terms of the assignment do not
            present an adverse risk to Applied with respect to: manufacturing
            process, delivery cycle time, product pricing, quality, or financial
            responsibility or condition; (C) such person and the terms of the
            assignment do not present an adverse risk to Applied with respect to
            protection, confidentiality, misuse or misappropriation of, access
            to, or control over confidential or proprietary information, trade
            secrets and like property of Applied (or in which it has an
            interest); (D) such person and the terms of the Assignment do not
            present an adverse risk to Applied that a Competitor of Applied (or
            an Affiliate of such a Competitor (as the terms Competitor and
            Affiliate are defined in Article 16.1(c)) would be or become a party
            to, or in control of a party to, the Agreement or the Related
            Agreements; and (y) has issued its written consent based on such
            determination. In its assessment as to financial responsibility and
            condition under Clause B above, Applied may consider whether the
            Performance Guaranty Agreement will continue in effect as to the
            Agreement (or portion assigned).

      (ii)  Transfer or vesting, in whole but not in part, is permitted in the
            event of a merger, consolidation or business combination of Supplier
            with or into, or a sale of all


                                      102


CONFIDENTIAL TREATMENT REQUESTED

            outstanding stock of Supplier to, another entity that is wholly
            owned (directly or indirectly) by KHC, or as part of a transfer of a
            substantial part of the assets of Supplier to a third party that is
            wholly owned (directly or indirectly) by KHC, provided that a
            transaction under this Article 17(d)(ii) does not cause or result in
            a material change in the nature of the business conducted by
            Supplier prior to such transaction or a material adverse change in
            the management or operations of Supplier.

      (e) Any assignee or successor of Applied or Supplier shall also assume, be
bound by and be (or become) a party to and obligated under this Agreement, the
IPA and other Related Agreements (as such agreements are then in effect), either
in whole (if the permitted assignment or other transaction is as to the
Agreement in whole), or in part (if in part).

      (f) Each party shall endeavor to provide the other with prior written
notice and, if applicable, a request for consent with respect to a transaction
to which this Article 17 applies, and a brief description of the transaction and
of the assignee or transferee at least seventy-five (75) days before the closing
of such transaction. Further, each party shall give the other party, at least
fifteen (15) days prior to the closing of such a transaction, written notice of,
and, if applicable, a request for consent as to, any proposed or permitted
transaction to which this Article 17 applies and a brief description of the
transaction and of the assignee or transferee of such transaction, if not
previously provided. Failure to give such notice shall not, by itself, affect
the validity of such assignment or transfer as between the parties thereto.

      (g) In the event of, and to the extent of, an assignment, merger or other
transaction to which Supplier is a party with respect to the Agreement of a type
described in Article 17(d), Supplier shall maintain during the period prior to
the assignment, merger or such other transaction becoming effective the supply
of Item(s) without interruption or delay and without breach of other provision
of the Agreement. An assignment or transfer of this Agreement, or of obligations
hereunder, shall not apply to, or relieve an assigning or transferring party of,
the obligations, liabilities and debts accrued, incurred or existing at the date
of assignment or transfer or subsequently accruing, arising, or existing under
or in connection with transactions between the parties prior to such date, but
the assigning or transferring party shall remain primarily and directly
obligated and liable for such obligations, liabilities and debts.

      (h) Any assignment, merger or other transaction subject to this Article 17
that is not made in compliance with this Article 17, shall, at the option of the
party (Applied or Supplier, as the case may be) that is not a party to such
assignment, merger or other transaction, be deemed a breach of and a default
under the Agreement and not be binding upon that party. The party, Applied or
Supplier, exercising such option to declare breach and default shall give
written notice of such exercise to the other party, and shall not be required to
proceed with any period of review or cure under Article 25, however, the party
so in breach shall continue to be bound by, and shall perform and observe all
its obligations applicable under this Agreement through the conclusion of a Wind
Down Period, if applicable, and thereafter under provisions that survive.

      (i) Assignment of this Agreement in part shall mean that all rights,
interests and obligations of the party assigning and all terms, provisions and
conditions of the Agreement shall be assigned to and assumed by (or apply to)
the assignee with respect to the Item(s), product


                                      103


CONFIDENTIAL TREATMENT REQUESTED

line(s), type(s) or model(s) of Applied System(s) or FDSs, or line(s) of
business to which the assignment applies (the "Assigned Products").
Notwithstanding the foregoing, (i) only those pricing provisions (whether set
forth in Attachment 1 or elsewhere in the Agreement) applicable to Assigned
Products affected by the assignment shall be assigned to the assignee and (ii)
the liability of Supplier to Applied and any assignee(s) of Applied * below
shall be apportioned pursuant to the assignment among Applied and each assignee
* liability of Supplier to Applied and such assignee(s) *. In the event of
an assignment, the parties shall cooperate in the implementation of operational
processes and procedures to effect the assignment.

18.   Gratuities.

      Supplier represents and warrants that it has not offered or given and will
not offer or give any gratuity to induce any person or entity to enter into,
execute or perform the Agreement or any other agreement between Supplier and
Applied. Upon Applied's written request, an officer of Supplier shall certify in
writing that Supplier has complied with and continues to comply with this
Article. Any breach of this representation and warranty shall be a material
breach of the Agreement and any other agreement between Applied and Supplier.

19.   [Omitted]

20.   [Omitted]

21.   Disclaimers and Limitations of Liability as to Excluded Damages.

      (a) As used in this Article 21, "Excluded Damages" means all special,
indirect, punitive, consequential or contingent damages that arise from or
relate to the Agreement.

      (b) The exclusions and limitations of this Article 21 as to the
liabilities of Applied * for Excluded Damages are expressly made a part of the
Agreement and are accepted by each party.

      (c) Subject to the exceptions provided in Article 21(e), Applied EXCLUDES
all liability to Supplier for Excluded Damages, whether or not Applied has been
advised of the possibility of such Excluded Damages.

      (d) *:

      (e) An exclusion or limitation, as applicable, that is provided by this
Article 21 shall only apply to Excluded Damages and further shall not apply to
damages of any type, obligations of a party, or claims or liabilities against a
party that:

      (i)   arise from or relate to matters covered by an indemnity under
            Article 22 of this Exhibit 1;

      (ii)  arise from or relate to the IPA, or matters covered by an indemnity
            under the IPA; or


* Material has been omitted and filed separately with the Commission.


                                      104


CONFIDENTIAL TREATMENT REQUESTED

      (iii) arise from or relate to, or are for, personal injury, death, or
            damage to or loss of tangible property.

22.   Indemnity.

      (a) Supplier's Indemnity Obligation. In the event a third party brings a
claim or asserts liability against Applied alleging that Items or the work
product of Services ("Work Product"), as provided by Supplier under this
Agreement, or the manufacture, use, sale or offer for sale of such Items or Work
Product by Applied or the use of same by Applied's customers infringes,
misappropriates or otherwise violates third party IP Rights (an "Applied Third
Party Claim"), SUPPLIER SHALL DEFEND, INDEMNIFY AND OTHERWISE HOLD HARMLESS
APPLIED against such Applied Third Party Claim, including the payment of
reasonable fees and expenses of any attorneys and other professionals employed
by Applied in accordance with Article 22(f) in defending the Applied Third Party
Claim and the payment of any judgment finally awarded against Applied or the
payment of any settlement amount agreed to by Supplier to settle such Applied
Third Party Claim. Supplier will not be liable for any settlement of an Applied
Third Party Claim made by Applied without Supplier's consent, except as provided
in Article 22(h) below.

      (b) Exceptions to Supplier's Indemnity Obligation. Supplier's obligations
pursuant to Article 22(a) will not apply to any claims or assertions of
liabilities if: (x) Supplier would not otherwise be liable for inducing or
contributing to infringement, misappropriation or other violation; and (y) the
infringement, misappropriation or other violation: (1) was unavoidably caused by
Supplier's compliance with specifications or designs furnished and required by
Applied or by Applied's non-compliance with Supplier's prior written advice or
warning of a possible and likely infringement, misappropriation or other
violation relating to such compliance, or (2) arises from a combination not
performed by Supplier of Items and/or Work Product with other equipment,
hardware, software, materials or components not provided by Supplier and any
such claim or assertion of infringement, misappropriation or other violation
would not arise but for such combination, or (3) is a direct result of
Supplier's combination of components mandated by Applied.

      (c) *

      (d) Reduction of Indemnification Amounts. The amount that any party is or
may be required to pay to or on behalf of any other person pursuant to an
indemnity under this Article 22 shall be reduced (including retroactive
reduction or reimbursement) by (i) any amounts received by an indemnified party
from an insurance carrier or paid and resolved by an insurance carrier on behalf
of the insured indemnified party (in a manner that results in no further
liability to the indemnified person), in either case net of any applicable
premium adjustment, retrospectively rated premium, deductible, retention, cost
or reserve paid or held by or for the benefit of the insured, or (ii) any other
amounts or tax benefits actually recovered by or on behalf of such indemnified
person in reduction of such payment. If an indemnified person shall have
received the payment required by this Article 22 from an indemnifying party and
shall subsequently actually receive insurance proceeds or other amounts or tax
benefits in respect of such payment


* Material has been omitted and filed separately with the Commission.


                                      105


CONFIDENTIAL TREATMENT REQUESTED

as specified above, then such indemnified person shall pay to such indemnifying
party a sum equal to the amount of any such double recovery actually received.
This provision shall not, however, operate to relieve a party of liability to an
insurer subrogated to the rights of the insured.

      (e) Indemnified Party's Obligations. A party seeking indemnification (i)
shall give the other party prompt written notice of any Applied Third Party
Claim or Supplier Third Party Claim, as applicable (each a "Third Party Claim"),
that may give rise to any indemnification obligation under this Article 22,
together with the estimated amount (if reasonably available) of such Third Party
Claim, and (ii) shall provide reasonable cooperation and assistance to the
indemnifying party in the defense and/or settlement of such claim, including, to
the extent reasonably requested, the retention, and the provision to the
indemnifying party (which shall pay the reasonable costs incurred in providing
or collecting such records) of records and information reasonably relevant to
such Third Party Claim. Failure to give such notice or to provide the
cooperation provided for herein shall not affect the indemnification obligations
hereunder in the absence of material prejudice to the indemnifying party. Except
for the foregoing obligation to pay the reasonable costs incurred in providing
or collecting records, the indemnifying party shall not be liable under this
Article 22 for any internal personnel costs or expenses (including opportunity
costs) suffered or incurred by the indemnified party in connection with a Third
Party Claim.

      (f) Selection of Counsel. The indemnifying party shall have the right to
conduct and control the defense and, as herein provided, settlement (at its own
expense) of any such Third Party Claim through counsel of its own choosing by so
notifying the party seeking indemnification within thirty (30) calendar days of
the indemnifying party's first receipt of notice of the Third Party Claim;
provided, however, that any such counsel shall be reasonably satisfactory to the
party seeking indemnification. If the indemnifying party assumes such defense,
the party seeking indemnification shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the indemnifying party. If, under applicable standards of
professional conduct, a conflict with respect to any significant issue between
any indemnified party and the indemnifying party exists in respect of such Third
Party Claim, the indemnifying party shall also pay the reasonable fees and
expense of such additional counsel as may be required to be retained by reason
of such conflict.

      (g) Indemnified Party's Consent to Settlement. The indemnifying party
shall not, without the prior written consent of the indemnified party: (i) agree
to the settlement, compromise or discharge of such Third Party Claim unless, by
its terms, such settlement, compromise or discharge actually, fully and finally
discharges the indemnified party from the full amount of liability in connection
with such Third Party Claim; nor (ii) agree to the entry of any judgment or
enter into any settlement that: (1) provides for injunctive or other
non-monetary relief adversely affecting the indemnified party, or (2) does not
include as an unconditional term thereof the giving of a release for all
liability with respect to such claim by each claimant or plaintiff to each
indemnified party that is the subject of such Third Party Claim.

      (h) Consequences of Breach by Indemnifying Party. In the event that the
indemnifying party does not assume and conduct the defense of a Third Party
Claim in


                                      106


CONFIDENTIAL TREATMENT REQUESTED

accordance with this Article 22, or fails to perform any of its other
obligations under Article 22(a), (c), (f) or (g), and therefore is in breach of
its obligations under this Article 22: (i) the indemnified party may defend such
Third Party Claim in any manner it reasonably may deem appropriate (and the
indemnified party need not consult with, or obtain any consent from, the
indemnifying party in connection therewith); (ii) the indemnified party may
consent to the entry of any judgment or enter into any settlement with respect
to such Third Party Claim, provided that, before so consenting to entry of
judgment or entering into a settlement : (1) the indemnified party gives the
indemnifying party written notice of the terms of the proposed consent judgment
or settlement, and (2) the indemnifying party does not thereafter comply with
its obligations under this Article 22 in respect of the Third Party Claim and,
within three Business Days after receipt of such notice, give to the indemnified
party a signed written statement acknowledging that the indemnifying party is
liable under this Article 22 in respect of the Third Party Claim and undertakes
to comply promptly with its obligations under this Article 22; and (iii) subject
to compliance by the indemnified party with the foregoing obligations, as
applicable, the indemnifying party will remain liable to the fullest extent
provided in this Article 22.

      (i) IPA Indemnity Obligations. The indemnities and related obligations
under this Article 22 are in addition to the indemnities and related obligations
provided in the IPA; however, this Article 22 shall not apply to any Third Party
Claim that is also subject to an indemnity provided in the IPA. Accordingly, the
indemnity provisions in the IPA shall supersede the provisions of this Article
22 in respect of any Third Party Claim to which the IPA indemnity applies, to
avoid any double indemnity liability or conflicting indemnity liability. The
parties' indemnity obligations as to matters covered by the IPA shall be as
provided in the IPA, except as to Excluded Damages that are limited by Article
21(d).

      (j) Relation to Warranty Terms. Limitations or disclaimers of warranties
shall not be construed or applied to alter or affect the obligations and
liabilities of Applied or Supplier, as the case may be, that arise under or are
provided for by the indemnity provisions of this Article 22 or of the IPA.

23.   Force Majeure.

      (a) A failure by either party to perform its obligations under the
Agreement due to causes, events or conditions beyond its control and without the
fault or negligence of the party shall be deemed excusable during the period in
which the cause of the failure persists. Such causes may include, but not be
limited to, acts of God or the public enemy, acts of the government in either
sovereign or contractual capacity, fires, floods, epidemics, strikes, freight
embargoes and unusually severe weather. If the failure to perform by Supplier is
caused by the default of a sub-tier supplier of Supplier, and such default
arises out of causes beyond the control of both Supplier and sub-tier supplier,
and without the fault or negligence of either of them, Supplier will not be
liable for any excess cost for failure to perform, unless the supplies or
services to be furnished by the sub-tier supplier were obtainable from other
sources in sufficient time to permit Supplier to meet the required delivery
releases of Items. When Supplier or Applied becomes aware of any potential force
majeure condition as described above, that party shall immediately notify the
other of the condition and provide relevant details.


                                      107


CONFIDENTIAL TREATMENT REQUESTED

      (b) A failure by Supplier to perform its obligations under this Agreement
will be deemed excused to the extent caused by Applied's failure to timely
perform its obligations under the FUAs or under the IS&T Agreement (as such is
modified by the Agreement), each as in effect from time to time, including but
not limited to, an interruption in services or failure to provide or maintain
services that Applied is obligated to provide under an FUA or such IS&T
Agreement, which interruption or failure is not timely cured by Applied,
adversely affects Supplier's ability to perform under the Agreement, and
Supplier is unable to perform through use of available alternative services.

24.   Changes.

      Applied may at any time, by a written order and without notice to
Guarantors, make changes within the general scope of the Agreement to any one or
more of the following:

      (a) Specifications;

      (b) method of shipment or packing;

      (c) place and date of delivery; or

      (d) place and date of inspection or acceptance.

      Changes in costs, pricing or other terms resulting from changes made
pursuant to this Article shall be determined pursuant to the Agreement. If any
such change not otherwise provided for under the Agreement causes an increase or
decrease in the cost of or time required for performance of the Agreement, an
equitable adjustment shall be made in the Contract Price or delivery schedule,
or both, and the Agreement shall be modified in writing accordingly. No claim by
Supplier for adjustment under this Article 24 shall be valid unless in writing
and received by Applied within sixty (60) days from the date of receipt by
Supplier of the notification of change, provided, however, such period may be
extended upon the written approval of Applied. However, nothing in this Article
shall excuse Supplier from proceeding with the Agreement as changed or amended.

25.   Termination for Default; Other Remedies.

      (a) Any of the following events, failures, occurrences or breaches and,
when applicable with respect to an event, failure, occurrence or breach to which
Article 25(a)(i) or (a)(iii) applies, the failure of Supplier, after notice by
Applied under Article 25(b), to cure or correct same, if curable, during the
Business Review Process under Section 7.2.5 of the Agreement (or such period as
is established by the Business Review Process) shall constitute a "Default"
under the Agreement:

      (i)   the recurring material failure by Supplier to deliver Items on time
            and in compliance with the warranty provisions of the Agreement;

      (ii)  Supplier's becoming insolvent; the filing by Supplier of a voluntary
            petition under any bankruptcy, insolvency or like law; the filing
            against Supplier of an


                                      108


CONFIDENTIAL TREATMENT REQUESTED

            involuntary petition under any bankruptcy, insolvency or like law
            (which is not dismissed within 45 days after its filing); the making
            of an assignment by Supplier for the benefit of creditors; and/or
            any material adverse change in the business, properties, operation
            or condition (financial or otherwise) of Supplier;

      (iii) other than those failures to which Article 25(a)(i) applies, the
            material failure by Supplier to perform, observe, or comply with any
            term, provision, or condition of the Agreement, including recurring
            failures that together constitute a material failure, or the
            occurrence of any event or condition constituting a default or
            breach in a material respect under any term, provision or condition
            of the Agreement; or

      (iv)  (a) the occurrence of any event or condition constituting a material
            default under or breach of any provision of (i) the Performance
            Guaranty Agreement, as in effect from time to time, or (ii) the APA
            or an FUA, as in effect from time to time, without cure or
            correction after notice pursuant to the APA or an FUA, as
            applicable, or (b) the exercise by Applied of a right of termination
            of the IPA in accordance with its terms pursuant to Section 5.2 of
            the IPA.

Upon the occurrence of a Default, Applied shall have the right, at its option,
to terminate the Agreement, either in whole or in part. A termination in part
for Default shall apply to the Items, product line(s), type(s) or model(s) of
Applied Systems or FDSs, or line(s) of business affected by the Default and as
to which Applied exercises its right to terminate for Default (the "Terminated
Products").

A termination of the Agreement in part for a default or the exercise of other
rights and remedies pursuant to Section 7.2.1 or Section 7.2.2 with respect to
the particular Item(s) affected shall not be subject to the procedural
requirements of this Article 25. A default as to which Section 7.2.1 or Section
7.2.2 applies may, however, also become an element of a Default under this
Article 25. In addition to its rights of termination for Default as to the
Agreement under this Article 25, Applied shall have the rights provided by the
UCC as to transactions governed by such statute (and by other law of the State
of California where the UCC does not apply) to terminate for default (or cancel)
or revoke acceptance with respect to any particular Item(s) and to recover its
damages in connection with such Item(s), without the application of the
procedures of this Article 25 or the Business Review Process.

      (b) Following the occurrence of an event, failure, occurrence or breach
that constitutes or may constitute a Default under Article 25(a), Applied may,
at its sole option, initiate and proceed with termination of the Agreement, as
follows:

            (i) Applied shall give initial notice to Supplier, in accordance
            with Section 1.2.2 of the Agreement, which shall include the
            following: notice of the Default or potential Default and of
            Applied's intent to terminate the Agreement; notice that the parties
            shall proceed with the Business Review Process as referred to in
            Article 25(a) with respect to an event, failure, occurrence or
            breach to which Article 25(a)(i) or 25(a)(iii) applies, (except that
            a breach as to the 15 day notice under Article 17(f) shall not be
            subject to the Business Review Process); notice of


                                      109


CONFIDENTIAL TREATMENT REQUESTED

            any event, occurrence, failure or breach which is determined by
            Applied to be an incurable or uncorrectable Default; and notice of
            the period of cure or correction for any event, occurrence, failure
            or breach (that is curable or correctable but not otherwise subject
            to the Business Review Process) established by Applied in such
            notice (such a period to be not less than ten (10) days).

            (ii) If (x) the event, occurrence, failure, or breach has not been
            cured to Applied's reasonable satisfaction at or before the
            expiration of the Business Review Process (where applicable) or of
            such period for cure or correction as is established by such
            process, or at the expiration of such other period (of not less than
            ten (10) days) established by Applied for matters not otherwise
            subject to the Business Review Process, or (y) the event,
            occurrence, failure or breach is incurable, Applied may at such time
            or at any time thereafter issue a written or electronic notice of
            termination (a "Notice of Termination for Default"), and the
            Agreement shall terminate on and as of the date for termination
            specified in the Notice of Termination for Default.

      (c) *

      (d) *

      (e)   (i) The rights and remedies of each party pursuant to this Article
25 or any other provision of the Agreement for any purpose are in addition to
and shall not limit or preclude resort to any other rights and remedies provided
by agreement, by law (subject to procedural requirements of the Agreement) or in
equity. With respect to equitable relief, a party may proceed to seek and obtain
such relief, where authorized under applicable law, without the declaration of a
Default * or compliance with other procedural requirements of the Agreement.

            (ii) In the event of a Default *, the non-defaulting party shall
retain, and may exercise, all rights and remedies provided for by this Agreement
or other applicable law for the recovery of damages and/or other relief or
remedies with respect to the failure, breach, default or other event (subject,
however, to applicable limitations of the Agreement as to damages and to
procedural requirements of the Agreement). Termination of the Agreement for
Default * shall constitute "cancellation" under the UCC.

      (f) Damages shall not be recoverable with respect to Items for which no
Authorized Demand Signal has been accepted by Supplier prior to the effective
date of termination.

26.   Termination for Convenience.

      (a) Applied may terminate the Agreement with respect to some or all of the
Items at any time for Applied's convenience (to "terminate for convenience" or a
"Termination for Convenience"), by giving Supplier written or electronic notice
of such Termination for Convenience in accordance with Section 1.2.2 of the
Agreement, which notice shall state the extent of the termination and the
conduct requested of Supplier in connection therewith as to


* Material has been omitted and filed separately with the Commission.


                                      110


CONFIDENTIAL TREATMENT REQUESTED

matters described in Article 27 below, but excluding Article 27(v) (a "Notice of
Termination for Convenience"). Upon the effective date of the Notice of
Termination for Convenience, the Agreement shall terminate to the extent
indicated in the Notice of Termination for Convenience, and Applied shall pay to
Supplier the Termination Charges as determined in accordance with paragraphs (c)
and (d) below.

      (b) Each Notice of Termination for Convenience shall:

      (i)   Specify the Item(s), product lines, types of Applied Systems, or
            other method by which the Item(s) or scope of the Termination for
            Convenience will be determined, if less than all.

      (ii)  Specify the effective date of the Termination for Convenience, which
            shall be at least three (3) months after the date of issuance of the
            Notice of Termination for Convenience.

      (iii) Provide such instructions or procedures as shall in Applied's
            commercially reasonable judgment be appropriate to implement Section
            4.11 of the Agreement as to the Termination for Convenience.

Upon a Termination for Convenience of the Agreement in whole or in part by
Applied, Supplier shall promptly follow Applied's directions as set forth on the
Notice of Termination for Convenience, and the parties shall implement the Wind
Down Procedures of Section 4.11, as applicable.

      (c) Within ninety (90) days from the effective date of termination
pursuant to a Notice of Termination for Convenience, Supplier shall deliver to
Applied a written statement setting forth all of Supplier's claims in connection
with the Termination of Convenience (the "Termination Charges"), in the form and
containing such documentation as required by Applied. Failure by Supplier to
deliver such claim for Termination Charges within said ninety (90) day period
shall constitute a waiver by Supplier of all claims against Applied for such
Termination for Convenience and a release of all Applied's liability arising out
of such Termination for Convenience.

      (d) If Applied does not agree with the amount specified in Supplier's
claim for Termination Charges, Applied and Supplier will attempt to agree upon a
reasonable amount for Termination Charges. If Applied and Supplier fail to agree
upon such an amount within * after receipt by Applied of the claim for
Termination Charges from Supplier, then the Termination Charges will be
conclusively presumed to be the sum of the following (provided that no costs
shall be duplicated):

*


* Material has been omitted and filed separately with the Commission.


                                      111


CONFIDENTIAL TREATMENT REQUESTED

      (c) The provisions of this Article 26 apply solely to a Termination for
Convenience by Applied and shall not affect or impair any right of Applied to
terminate the Agreement due to the default or breach of Supplier as provided in
Article 25 or to seek any remedies in the event of such breach or default of
Supplier as otherwise permitted.

      (d) Applied shall have the right to initiate Termination for Convenience,
in whole or in part, based on the occurrence of a Notice Event. Such right to
terminate for convenience shall not limit Applied's right to terminate for
convenience, in whole or in part, at any other time.

27.   Post-termination Obligations.

On the date termination of the Agreement becomes effective as specified in the
applicable Notice of Termination for Default or for Convenience, Supplier shall
(i) stop work being performed by Supplier pursuant to the Agreement, (ii) cancel
orders for parts and/or materials with Supplier's sub-tier suppliers and cease
ordering any such parts and/or materials, (iii) cancel work being performed by
Supplier's sub-tier suppliers for Supplier for the Agreement, (iv) assign to
Applied Supplier's interests in contracts with Supplier's sub-tier suppliers (to
the extent such contracts are assignable, are for goods used in the manufacture
of Items, and any required consents to assignment are obtained), (v) (except in
the case of Termination for Convenience) make commercially reasonable efforts to
furnish Applied with releases of claims from Supplier's sub-tier suppliers
resulting from orders and/or work canceled by Supplier, (vi) protect all
property in which Applied has or may acquire an interest, and (vii) comply with
the provisions of this Agreement, and of the TLA as to Tooling, Test Fixtures
and Wind Down.


                                      112


CONFIDENTIAL TREATMENT REQUESTED

                                  ATTACHMENT 18

                                     FORM OF

                        ON-SITE REPRESENTATIVE AGREEMENT

This On-Site Representative Agreement ("Agreement") is made this day of ____, by
and between Applied Materials, Inc. ("Applied") and Kinetics Fluid Systems, Inc.
("Supplier") (collectively referred to as the "Parties").

Whereas, Supplier provides parts or services to Applied or desires to sell parts
or services to Applied under the terms of, and pursuant to, a Global Supply
Agreement effective as of June 1, 2002 ("GSA"); and

Whereas, the Parties agree that if certain duties and functions were to be
performed by an employee of Supplier on Applied's premises or at an Applied
facility it would facilitate Supplier's performance and benefit both Supplier
and Applied;

Now, therefore the Parties agree as follows:

1.    Statement of Work

      Supplier will assign, at no cost to Applied, an individual on-site
      representative ("OSR") to perform, on Applied's premises, functions ("OSR
      Functions") described in the Statement of Work attached hereto as Exhibit
      No. 1 (the "SOW").

      Supplier agrees to notify Applied immediately of any changes in its
      staffing assignments involving the OSR, or in the OSR Functions, whereby
      access to Applied's facilities or IS&T systems may no longer be essential
      to performing the OSR Functions.

2.    Status of OSR

      The OSR is an employee of Supplier, subject to its right of direction,
      control and discipline. The OSR is not an employee of Applied, nor shall
      he or she be entitled to any rights, benefits, or privileges of an Applied
      employee. Prior to the commencement by the OSR of an assignment at
      Applied, Supplier represents that it will review this Agreement with the
      OSR, inform the OSR of the obligations under this Agreement and the
      "Joinder" required under this Agreement, and have the OSR enter into a
      "Kinetics Employee Joinder" in the form set out in Schedule 4.4
      ("Joinder") to the Restated and Amended Intellectual Property Agreement
      between Applied and Supplier of even date with the GSA (the "IPA").

3.    Confidentiality and Performance

      Applied shall inform the OSR of hours of access to Applied's premises,
      pertinent safety regulations, and all other requirements which Applied
      deems necessary. The OSR shall comply with any applicable policies and
      regulations of Applied. Compliance with all policies and regulations of
      Applied is mandatory and is the responsibility of both the


                                      113


CONFIDENTIAL TREATMENT REQUESTED

      OSR and Supplier; failure to comply with these policies and regulations
      will be cause for immediate removal of the OSR from the premises.

      Supplier agrees that the OSR Functions to be performed by the OSR will
      comply with this Agreement, including Attachments 1 and 2 to this OSR
      Agreement, and will also comply with any purchase, confidentiality,
      supplier-planner access, nondisclosure, intellectual property, joint
      design, joint development or other agreements that may be in effect
      between Supplier and Applied and including the Amended and Restated
      Intellectual Property Agreement with an Effective Date of June 1, 2002
      (the "Related Agreements") at the time this Agreement is executed by the
      Parties or that is subsequently in effect.

4.    OSR Associated Expenses

      All salary, benefits, and travel and business expenses for OSR will be the
      sole responsibility of Supplier.

5.    Access

      Subject to Applied's approval and the completion of the security
      background check, the OSR may be granted access to the following:

            -     Only those specific Applied facilities to which the OSR
                  requires access in order to perform the tasks stated in the
                  SOW

            -     Telephone and fax lines (for matters related to Applied only)

            -     Computer/modem and/or database or system information access as
                  deemed necessary by Applied in order for the OSR to perform
                  the tasks stated in the SOW.

      If a Joinder is attached to this Agreement and executed by the OSR, then
      such Joinder shall apply to all "Confidential Information" (as therein
      defined), and all Applied databases, applications and servers, that the
      OSR obtains, accesses or is exposed to as a result of the OSR Functions
      under this Agreement. If a Joinder is not attached and executed by the
      OSR, the OSR shall not have access to any information that is
      confidential, proprietary, or sensitive or to any Applied databases,
      applications or servers.


                                      114


CONFIDENTIAL TREATMENT REQUESTED

6.    Termination of Agreement

      This Agreement may be terminated immediately by either Party at any time
      without penalty; if not earlier terminated, this Agreement shall terminate
      upon completion of the tasks identified in the SOW.

7.    Entire Agreement

      This Agreement, including its Attachments, and together with all Related
      Agreements constitutes the entire agreement between Supplier and Applied
      Materials with respect to OSR Functions, and with respect to OSR Functions
      it supersedes all preexisting agreements or arrangements, except for (a)
      the GSA and any Facilities Use Agreement as in effect for Applied
      facilities which the OSR may access, (b) any Supplier-Planner Access
      Agreement now or hereafter in effect, (c) any claims or causes of action
      of Applied relating to breach of a pre-existing OSR agreement or
      arrangement, and (d) any ongoing duty or obligation(s) of Supplier under a
      pre-existing OSR agreement or arrangement. In the event of any conflict
      between the terms of this Agreement and the terms of a Related Agreement,
      the GSA or any Facilities Use Agreement as in effect for Applied
      facilities which the OSR may access, precedence shall be given in
      accordance with Section 1.3.2.2 of the GSA.



Kinetics Fluid Systems, Inc.                 Applied Materials, Inc.
("Supplier")                                 ("Applied")

By:                                          By:
    ------------------------------                -----------------------------

Its:                                         Its:
     -----------------------------                -----------------------------

Date:                                        Date:
      ----------------------------                  ---------------------------


                                      115


CONFIDENTIAL TREATMENT REQUESTED

Exhibit 1 - Statement of Work

(On-site Representative Agreement)

This Attachment describes the activities and services included in the OSR
Functions of the Supplier's OSR. Changes in the OSR Functions may be made by
agreement of Applied and Supplier. The OSR Functions include

      -     Daily consultation with Applied's representatives concerning
            Supplier performance, production or project scheduling, and
            resolution of problems or errors.

      -     Evaluation and reporting of problems or errors, and of anticipated
            problems, and constraints or delays.

      -     Consultation with Applied's engineering and production
            representatives concerning product quality, product delivery, and
            product technical problems and revisions.

      -     [To be added and revised by Applied's representatives.]

      -     [To be added and revised by Applied's representatives.]


                                       i


CONFIDENTIAL TREATMENT REQUESTED

                                    EXHIBIT 2

                        On-Site Representative Agreement

            The "Joinder" required by this On-Site Representative Agreement is
            the "Kinetics Employee Joinder" set out in Schedule 4.4 to the
            Amended and Restated Intellectual Property Agreement of the Parties
            identified in this On-Site Representative Agreement.


                                       i


                                  ATTACHMENT 19

                             TOOLING LOAN AGREEMENT

      This Tooling Loan Agreement, is dated as of June 1, 2002 (the "Effective
Date"), and made by and between Applied Materials, Inc., a Delaware corporation
("Applied"), and Kinetics Fluid Systems, Inc., a California corporation
("Supplier"). This Tooling Loan Agreement, together with all Attachments hereto,
is referred to herein as the "Agreement." This Agreement is entered into in
connection with the Global Supplier Agreement between Applied and Supplier,
which itself has an effective date of June 1, 2002 ("GSA"), and is the Tooling
Loan Agreement referred to in Sections 4.2.1 through 4.2.4 of the GSA.

      Solely for Supplier's use in fulfilling its obligations to Applied under
the GSA, under Design Services Agreements and Development Services Agreements
entered into from time to time as contemplated by the GSA (the terms "Design
Services Agreement" and "Development Services Agreement" being used herein as
defined in the GSA), and under the Amended and Restated Intellectual Property
Agreement of even date ("IPA"), Applied has agreed to loan to Supplier, on the
terms and conditions contained herein, the property identified in the
Attachments to this Agreement (collectively, the "Tooling"), which Attachments
will be updated from time to time. The Tooling includes * identified in Schedule
4.2.2.(c) to the GSA, the * provided under the "IS&T Agreement" identified in
Section 2.9.1.1 of the GSA, and * in or used in the operation of *. The GSA,
Design Services Agreements, Development Services Agreements, and the IPA, all as
amended from time to time, are collectively called the "Operational Agreements."

      In consideration of the premises, the agreements of the parties set forth
herein and in the Operational Agreements, and Applied's lending the Tooling to
Supplier, Applied and Supplier agree as follows:

1.0   Ownership.

      (a) Title to and ownership of the Tooling (other than * "Third Party
Applications", as such term is defined in the IPA) shall remain exclusively in
Applied at all times, and Supplier shall have no ownership or beneficial
interest therein, except as provided in Section 1.3 (b) as to Supplier Provided
Improvements. Title to and ownership of * Third Party Applications shall remain
exclusively in the owner of same, and Supplier shall have no ownership or
beneficial interest therein. Supplier shall affix and maintain prominently on
each item of Tooling a label indicating that the Tooling is owned by Applied or
the other owner thereof. All additions, attachments, alterations, and
modifications to the Tooling (except for *) shall become part of the Tooling and
the exclusive property of Applied or the other owner thereof.

* Material has been omitted and filed separately with the Commission.


                                       1


CONFIDENTIAL TREATMENT REQUESTED

      (b) Supplier authorizes Applied to file this Agreement or any copy hereof,
as well as to make any other filings, in any jurisdiction as Applied may deem
appropriate to protect its interests or those of any other owner of Tooling.
Upon Applied's request, Supplier shall execute or obtain from third parties and
deliver to Applied such statements or other instruments as Applied deems
necessary or advisable to confirm or perfect the interests of Applied or other
owner in the Tooling, including filings under the Uniform Commercial Code and
landlord or mortgagee waivers, and Supplier hereby grants to Applied the right
to execute Supplier's name thereon where permitted by law.

      (c) Supplier shall, at its expense, protect and defend title to the
Tooling of Applied or other owner against all persons claiming against or
through Supplier, at all times keeping the Tooling free from any legal process
or encumbrance whatsoever including but not limited to liens, attachments,
levies, executions and other claims by third parties, and shall give Applied
immediate written notice of any such third party claim and shall indemnify
Applied against any cost, liability or loss caused thereby.

      (d) The Tooling is, and shall at all times be and remain, personal
property notwithstanding that the Tooling or any part thereof may now be, or
hereafter become, in any manner affixed or attached to real property or any
improvements thereon.

1.1   Delivery.

      Applied shall package the Tooling for shipment to Supplier to provide for
handling and protection of the Tooling sufficient to comply with the carrier's
requirements and consistent with the manner in which Applied packages shipments
of a like nature for its own use. Absent Applied's agreeing otherwise in
writing, Applied shall arrange shipping as it deems appropriate to the
applicable destination specified in the Attachment applicable to the item of
Tooling. Upon delivery of the Tooling to Supplier, Supplier shall inspect the
Tooling. If Supplier believes the Tooling is not in good working order and
repair, it shall notify Applied promptly in writing. If such notice is not
received by Applied within five business days after installation of the Tooling
by Supplier, then Supplier shall be deemed to have accepted the Tooling, and the
Tooling shall be deemed in good working order and repair.

1.2   Risk of Loss.

      Supplier shall bear all risks of loss, damage or destruction to the
Tooling from and after the date the Tooling is delivered to Supplier until
Applied accepts return of the Tooling. During such period, Supplier shall
maintain, in addition to any other insurance required under its other contracts
with Applied, all risk insurance with respect to the Tooling, comprehensive
general liability insurance covering bodily injury, property damage, contractual
liability, products liability and completed operations and workers compensation
and employer's liability insurance with financially sound and reputable insurers
in amounts and on terms customarily insured against in similar circumstances (or
in such greater amounts or on such different terms as may be requested by
Applied). Supplier shall furnish evidence of such insurance to Applied prior to
execution of this Agreement, and such insurance shall require the insurer to
give at least 30 days' advance notice to Applied of any material alteration or
cancellation thereof (at least 10 days' prior notice as to cancellation for
nonpayment of premiums). In the event of any loss or damage


                                       2


CONFIDENTIAL TREATMENT REQUESTED

to the Tooling, Supplier shall pay Applied within 45 days following the event of
loss or damage the amount of loss or damage to the Tooling, which, in the event
of a total loss shall be the value of the item of Tooling. Applied shall have
the discretion to determine whether to replace any item of Tooling that is lost,
damaged or destroyed.

1.3   Use, Maintenance and Alteration.

      (a) Supplier shall cause each item of Tooling to be installed and used at
the applicable location set forth in the Attachment applicable to the item, and
shall not copy, remove, reinstall or modify any software, and shall not relocate
any Tooling to any other location (except as provided in Section 4.2.2 (a) of
the GSA) without Applied's prior written permission. Except as otherwise agreed
in writing by Applied, Supplier shall use the Tooling solely to fulfill its
obligations to Applied under one or more of the Operational Agreements, all in
compliance with this Agreement and the Operational Agreements. Supplier shall
operate, protect, maintain and calibrate the Tooling in compliance with all
applicable laws, rules and regulations (including those relating to safety), the
conditions of all applicable insurance policies and best industry practices
(including any maintenance schedules delivered by Applied or furnished by the
Tooling manufacturer or distributor). Supplier shall obtain training for the
Supplier personnel who will operate the Tooling, and Supplier shall operate the
Tooling in compliance with such training. Under no circumstances shall Supplier
operate the Tooling in a manner which could cause injury or death to any person
or damage or injury to any property, including the Tooling. If Applied or the
Tooling manufacturer or distributor specifies certain parties who are authorized
to service the Tooling or special equipment required to maintain or calibrate
the Tooling, Supplier shall use such authorized parties and/or special
equipment. Supplier shall maintain logs and reports of the maintenance and
operation of the Tooling and permit Applied, on reasonable prior notice, to
inspect the Tooling to determine whether the Tooling is being used, protected,
maintained and calibrated in accordance with this Agreement and to make copies
of such logs and reports. Supplier shall correct immediately any deficiencies
disclosed by such inspection upon notice from Applied. No such inspection or
lack of inspection by Applied shall in any way diminish the sole responsibility
of Supplier for the proper use, protection, maintenance and calibration of all
Tooling. If an item of Tooling becomes inoperable, Supplier shall (subject to
the limitations of Section 1.3(b) below) make immediate reasonable attempts to
restore it to operating condition before requesting assistance from Applied's *
Department.

      (b) Without the prior written consent of Applied, Supplier shall not make
any alterations, modifications or additions to the Tooling except as provided in
this Section 1.3(b). Further, Supplier shall comply with the IPA, as such
applies to all Tooling or to the use of or rights in Tooling. Modifications or
improvements to Tooling that constitute Capacity FDS Hardware or Product Change
Hardware provided or purchased by Applied pursuant to Section 4.2.3 of the GSA
shall be owned by Applied as part of the Tooling. Supplier may acquire and
install on the Tooling, * those alternations, modifications, improvements or
additions to Tooling that are items of Capacity FDS Hardware or Product Change
Hardware that have been proposed by Supplier and Applied does not provide or
procure under the procedures of Section 4.2.3 of the GSA and * (the "Supplier
Provided Improvements").


* Material has been omitted and filed separately with the Commission.


                                       3


CONFIDENTIAL TREATMENT REQUESTED

      (c) Costs associated with Applied approved or directed alterations,
modifications, improvements or additions, as well as any third-party calibration
services required to keep the Tooling within specified dimensional or sampling
tolerances, shall be borne by Applied. Supplier shall not undertake, or incur
any costs associated with, such activity until an authorizing purchase order has
been received from the Applied organization ordering the Items that require
usage of the Tooling.

      (d) Routine care, maintenance, and calibration performed by Supplier as
part of normal operations shall be done at no cost to Applied.

      (e) Supplier shall comply with the requirements of the * Support Work
Instruction (Form *) which can be found at http:// *.

1.4   Reserved Rights; Return of Tooling.

      (a) Applied may at its discretion, which discretion is to be reasonably
exercised, access, inspect, modify, upgrade, replace, or remove from use any
Tooling. Applied may also direct Supplier to allow Applied or its
representatives to use Tooling at Supplier's location on a temporary basis as
part of Applied's efforts to review and develop its products and processes.
Supplier agrees to accept, subject to the terms of this Agreement, and
incorporate into its manufacturing, testing and other processes any item of
Tooling designated and furnished by Applied.

      (b) To the extent practicable, Applied will give Supplier reasonable
advance notice of any action by Applied under the preceding Section 1.4 (a) or
that would otherwise make the Tooling unavailable for use by Supplier on a
temporary or permanent basis. If Applied requires a temporary or permanent
cessation of use of any Tooling and such results in delays in Supplier's testing
or delivery of Items under the GSA, then the extension period provided to
Supplier under Section 4.2.4(b) of the GSA shall apply until Tooling required
for testing or completion of Items is returned to use or replaced by Applied,
unless otherwise agreed at the time.

      (c) At the time of termination or expiration of the GSA, in whole or in
part, and also as provided in Section 4.2.4 of the GSA, Applied may exercise
rights to purchase, repossess or remove Tooling in accordance with the GSA and
this Agreement and the procedures of Section 4.2.4 of the GSA. In the event of
Termination for Default pursuant to the GSA, Applied may require that Supplier
return any or all items of Tooling to Applied, and in that event Supplier shall
return such item(s) of Tooling, labeled and shipped in accordance with Applied's
then current policies and specifications, which Supplier shall obtain from
Applied. Supplier shall deliver each such item of Tooling at the appropriate
location (which may be Supplier's facility in those instances in which Applied
is proceeding under Section 4.2.4 of the GSA) in proper operating order, free
from any legal process or encumbrance whatsoever. As to items of Tooling to
which the IPA applies, Supplier shall also comply with Section 5.3 of the IPA
upon


* Material has been omitted and filed separately with the Commission.


                                       4


CONFIDENTIAL TREATMENT REQUESTED

termination or expiration of the IPA. If Supplier shall fail to deliver, as
required, any item of Tooling in good working order and condition (reasonable
wear and tear excepted), Supplier shall be responsible for all costs and
expenses incurred by Applied in replacing the Tooling or in returning the
Tooling to such required condition or any reduction in the value as a result
thereof.

      (d) Upon receipt of notice from Applied that Applied will purchase,
repossess or remove Tooling, Supplier shall remove from the affected Tooling all
Supplier Provided Improvements. If Supplier has not removed such Supplier
Provided Improvements at the time Applied takes possession of the Tooling
pursuant to the notice, Applied shall be entitled to remove such improvements,
using commercially reasonable procedures, and shall tender possession of such
removed Supplier Provided Improvements to Supplier.

2.0   Exclusions of Warranties.

      SUPPLIER ACCEPTS EACH ITEM OF TOOLING "AS IS" AND "WITH ALL FAULTS."
SUPPLIER ACKNOWLEDGES THAT IT HAS HAD AN OPPORTUNITY TO INSPECT THE TOOLING, AND
THAT SUPPLIER IS EXPERIENCED IN THE OPERATION AND MAINTENANCE OF SUCH TOOLING.
APPLIED MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF
THE TOOLING OR ANY PART THEREOF. APPLIED HEREBY DISCLAIMS ALL IMPLIED
WARRANTIES, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF TITLE,
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND WARRANTIES OF
NONINFRINGEMENT; PROVIDED, THAT THE EXCLUSION AND DISCLAIMERS OF THIS AGREEMENT
ARE, HOWEVER, SUBJECT TO, AND SHALL NOT ALTER, IMPAIR OR MODIFY, ANY WARRANTIES
MADE BY APPLIED IN THE IPA OR GSA THAT ARE APPLICABLE TO TOOLING.

2.1   Exclusion of Certain Damages.

      IN NO EVENT SHALL APPLIED BE LIABLE FOR ANY SPECIAL, INDIRECT, PUNITIVE,
CONSEQUENTIAL OR CONTINGENT DAMAGES ("EXCLUDED DAMAGES") THAT ARISE FROM OR
RELATE TO THIS AGREEMENT FOR ANY REASON, WHETHER OR NOT APPLIED HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES, AND APPLIED EXCLUDES AND SUPPLIER WAIVES ANY
LIABILITY OF APPLIED FOR ANY SUCH EXCLUDED DAMAGES; PROVIDED, THAT THIS
EXCLUSION AS TO EXCLUDED DAMAGES IS, HOWEVER, SUBJECT TO AND SHALL NOT ALTER,
IMPAIR OR MODIFY ANY INDEMNITY OBLIGATION OF APPLIED PURSUANT TO THE IPA OR GSA
THAT IS APPLICABLE TO TOOLING OR THIS AGREEMENT.

3.0   [Omitted.]

3.1   Intellectual Property.

      (a) Nothing in this Agreement shall be deemed to grant to Supplier any
license or other right under any of Applied's intellectual property (including,
without limitation, Applied's patents, copyrights, trade and service marks,
trade secrets and Confidential Information, such


                                       5


CONFIDENTIAL TREATMENT REQUESTED

latter term being used as defined in the IPA) for Supplier's own benefit or to
provide or offer Items or other products or services to any party other than
Applied.

      (b) The IPA shall apply to and govern the rights and obligations of
Applied and of Supplier with respect to "IP Rights" and "Confidential
Information" (as such terms are defined in the IPA) in or relating to Tooling,
including *, *, and * in or used in the operation of * or *.

3.2   Injunctive Relief; Reports.

      Supplier acknowledges and agrees that Applied would suffer immediate and
irreparable harm for which monetary damages would be an inadequate remedy if
Supplier were to breach its obligations under Sections 1.4 or 3.1. Supplier
further acknowledges and agrees that equitable relief would be appropriate to
protect Applied's rights and interests if such a breach were to arise, or were
threatened, or were asserted.

4.0   Entire Agreement; Amendments.

      (a) This Agreement (including the Attachments hereto and provisions
incorporated herein by reference), provisions of the GSA applicable to Tooling
(including Section 4.2 of the GSA), those provisions of the IPA applicable to
Tooling (including related software) and the IS&T Agreement (such term being
used as defined in the GSA), all as amended, set forth the entire understanding
and agreement of the parties as to the loan of the Tooling and supersede all
prior agreements, understandings, negotiations and discussions between the
parties as to such subject matter. The parties may be, or may become, parties to
other agreements relating to the manufacture or sale of products to Applied or
the provision of services to Applied, which other agreements shall govern their
respective subject matters.

      (b) No amendment to, modification of or waiver of any provision of this
Agreement will be binding unless in writing and signed by a duly authorized
representative of the party sought to be bound.


* Material has been omitted and filed separately with the Commission.


                                       6


CONFIDENTIAL TREATMENT REQUESTED

4.1   Notices.

      Revisions, updates or other amendments or modifications to this Agreement
(including Attachments) shall be effective only if in set out in a writing (or
other record) executed (or authenticated) by each of Applied and Supplier, and
communications hereunder may be given by mail, fax or e-mail to the individuals
listed below.

   Supplier:

                     
      ----------------------------------------------------------------
      (Name)            Joe Foster, Senior Vice President
      ----------------------------------------------------------------
      (Address 1)       2805 Mission College Blvd.
      ----------------------------------------------------------------
      (Address 2)       Santa Clara, California  95054
      ----------------------------------------------------------------
      (Phone)           (408) 935-4570
      ----------------------------------------------------------------
      (FAX)             (408) 934-6302
      ----------------------------------------------------------------
      (E-mail)          jfoster@kineticsgroup.com
      ----------------------------------------------------------------



Applied:

Applied Materials, Inc.

9700 U.S. Hwy 290 East M/S 3300

Austin, Texas  78724

Phone: 512-272-2535

Fax:   512-272-3908

Attn:  Mr. Craig Romick (email address is: Craig_A_Romick@AMAT.com)

Each party shall advise the other in writing of any change to such party's
contact persons.

4.2   Applicable Law; Consent to Jurisdiction; Venue.

      This Agreement shall be governed by, subject to and construed in
accordance with the internal laws of the State of California, excluding
conflicts of law rules. The parties incorporate by reference Article 11 of
Exhibit 1 of the GSA and agree that the provisions of such Article apply to this
Agreement.

4.3   Assignments.


                                       7


CONFIDENTIAL TREATMENT REQUESTED

      The parties incorporate by reference Article 17 of Exhibit 1 of the GSA
and agree that the provisions of such Article apply to this Agreement.

4.4   Waiver.

      In the event Applied delays or fails to insist on performance of any of
the terms and conditions set forth herein or delays or fails to exercise any of
its rights or privileges under this Agreement, such delay or failure shall not
constitute a waiver of such terms, conditions, rights or privileges.

4.5   Indemnity by Supplier.

      SUPPLIER SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS APPLIED FROM AND
AGAINST, AND SHALL SOLELY AND EXCLUSIVELY BEAR AND PAY, ANY AND ALL CLAIMS,
SUITS, LOSSES, PENALTIES, DAMAGES (WHETHER ACTUAL, PUNITIVE, CONSEQUENTIAL OR
OTHERWISE) AND ALL LIABILITIES AND THE ASSOCIATED COSTS AND EXPENSES, INCLUDING
ATTORNEY'S FEES, EXPERT'S FEES, AND COSTS OF INVESTIGATION (ALL OF THE FOREGOING
BEING COLLECTIVELY CALLED "INDEMNIFIED LIABILITIES"), WHICH ARISE FROM OR RELATE
TO, OR ARE FOR, PERSONAL INJURY, DEATH, OR DAMAGE TO OR LOSS OF TANGIBLE
PROPERTY RESULTING (IN WHOLE OR IN PART) FROM THE USE OR OPERATION OF THE
TOOLING BY SUPPLIER, OTHER THAN (a) AS A RESULT OF DEFECTS IN THE TOOLING
EXISTING AT THE TIME OF DELIVERY TO SUPPLIER OR (b) FOR INFRINGEMENT OR OTHER
MATTERS AS TO WHICH APPLIED HAS WARRANTY OR INDEMNITY OBLIGATIONS TO SUPPLIER.
THIS INDEMNITY IS SUBJECT TO, AND SHALL NOT ALTER, IMPAIR OR MODIFY, ANY
WARRANTY OR INDEMNITY BY APPLIED OR SUPPLIER TO OR FOR THE BENEFIT OF THE OTHER
UNDER THE IPA OR GSA.

4.6   Supplier's Expense and Risk; Taxes.

      Supplier shall perform all of its obligations hereunder at its own expense
and risk, including without limitation those specified herein as being at
Supplier's expense. Supplier shall be responsible for paying any use tax
assessed in connection with the loan of Tooling contemplated by this Agreement.

4.7   Captions and Severability.

      Captions in this Agreement are for the convenience of the parties only and
shall not affect the interpretation or construction of this Agreement. In the
event any provision of this Agreement is held to be invalid or unenforceable,
such provision shall be severed from the remainder of this Agreement, and such
remainder will remain in force and effect.

4.8   Counterparts and Attachments.

      This Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute one and the same instrument.
Particular items of Tooling subject to this Agreement may be added or deleted by
the parties from time to time; as items are added or deleted, a new Attachment
(or an amendment to a current Attachment) to this Agreement shall be executed by
the parties to identify changes in Tooling.


                                       8


CONFIDENTIAL TREATMENT REQUESTED

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                       9


CONFIDENTIAL TREATMENT REQUESTED

IN WITNESS WHEREOF, the parties hereto have caused their names to be signed
hereto by their respective duly authorized officers, all as of the Effective
Date.

APPLIED:                                SUPPLIER:

APPLIED MATERIALS, INC.                 KINETICS FLUID SYSTEMS, INC.

By:    /s/ Paul Hohlstein               By:    /s/ Dan Rubin
   -------------------------------         -------------------------------

Name:  Paul Hohlstein                   Name:  Dan Rubin
     -----------------------------           -----------------------------

Title: Vice President                   Title: President
      ----------------------------            ----------------------------


                                       10


CONFIDENTIAL TREATMENT REQUESTED

               ATTACHMENT 1

The * Attachment 1 consists of:

      (a) Schedule 4.2.2(c) to the GSA as of the Effective Date;

      (b) The Test Fixture Software (as defined in Section 4.2.3(c) of the GSA,
      and which is not required to be scheduled);

      (c) The * identified on Addendum * to the * Agreement and all * the Third
      Party Applications set out on Schedule 2.3.8 to the IPA and the *
      identified under * in Schedule 2.8 to the IPA; and

      (d) The * identified under * in Schedule 2.8 to the IPA.


* Material has been omitted and filed separately with the Commission.


                                       11


CONFIDENTIAL TREATMENT REQUESTED

As to Tooling delivered *, the following form shall be used:

                           Supplement to Attachment 1

Applied Materials, Inc. ("Applied") and the below named Supplier ("Supplier")
agree that the property described below to Supplier has been delivered to
Supplier as "Tooling" under, and is subject to, that certain Tooling Loan
Agreement dated as of _________ __, _____ between Applied and the Supplier:



Place of Delivery for Tooling and any Packaging or Shipping Instructions:



[Enter "Deliver To" Address]





Detailed Description of Each Item of Tooling         Identification Number              Agreed Value
                                                                                  

- --------------------------------------------         ---------------------              ------------



- --------------------------------------------         ---------------------              ------------



- --------------------------------------------         ---------------------              ------------




TOTAL VALUE OF TOOLING
                   $ TBD



Dated:
      ---------------------


* Material has been omitted and filed separately with the Commission.


                                       12


CONFIDENTIAL TREATMENT REQUESTED

APPLIED MATERIALS, INC.                      KINETICS FLUID SYSTEMS, INC.



By:                                          By:
   --------------------------------             --------------------------------

Name:                                        Name:
     ------------------------------               ------------------------------

Title:                                       Title:
      -----------------------------                -----------------------------


                                       13

EX-10.16

                                                                   Exhibit 10.16

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been
omitted pursuant to a request for confidential treatment and, where applicable,
has been marked with an asterisk to denote where omissions have been made. The
confidential material has been filed separately with the Commission.




                              AMENDED AND RESTATED

                              INTELLECTUAL PROPERTY

                                    AGREEMENT




                                TABLE OF CONTENTS



                                                                                                   Page
                                                                                                   ----
                                                                                                
ARTICLE 1 --GENERAL BACKGROUND..................................................................... 1

           1.1       Applied's Business............................................................ 1

           1.2       Kinetics' Business............................................................ 1

           1.3       Existing Business Relationship between the Parties............................ 1

           1.4       Renegotiation of the Outsource Relationship................................... 2

           1.5       Scope of this Agreement....................................................... 2

           1.6       Statement of Agreement........................................................ 2

ARTICLE 2 - DEFINITIONS............................................................................ 3

           2.1       Affiliate..................................................................... 3

           2.2       Agreement..................................................................... 3

           2.3       Applied....................................................................... 3

           2.4       Applied FDS or Applied Fluid Delivery System.................................. 3

           2.5       Applied FDS Technology........................................................ 3

           2.6       Applied Future IP............................................................. 3

           2.7       Applied IP.................................................................... 3

           2.8       Applied Pre-Existing IP....................................................... 3

           2.9       Applied System................................................................ 4

           2.10      Component..................................................................... 4

           2.11      Confidential Information...................................................... 4

           2.12      Current Applied FDS Technology................................................ 4

           2.13      Current Applied FDS or Current Applied Fluid Delivery Systems................. 4

           2.14      Design IP..................................................................... 4

           2.15      Design Services............................................................... 4

           2.16      Design Services Agreement or DSA.............................................. 5

           2.17      Design SOW.................................................................... 5

           2.18      Development Services.......................................................... 5

           2.19      Development Services Agreement or DVA......................................... 5

           2.20      Documentation................................................................. 5

           2.21      Effective Date................................................................ 5

           2.22      Existing Component............................................................ 5

           2.23      FDS Technology................................................................ 6

           2.24      Fluid Delivery System or FDS.................................................. 6





                                TABLE OF CONTENTS



                                                                                                   Page
                                                                                                   ----
                                                                                                
           2.25      Future Applied FDS............................................................ 6

           2.26      Future Applied FDS Technology................................................. 6

           2.27      Future Modifications.......................................................... 6

           2.28      GSA........................................................................... 6

           2.29      IP Rights..................................................................... 7

           2.30      Kinetics...................................................................... 7

           2.31      Kinetics Future IP............................................................ 7

           2.32      Kinetics IP................................................................... 7

           2.33      Kinetics Pre-Existing IP...................................................... 7

           2.34      Manufacturing Process......................................................... 7

           2.35      Outsource Relationship........................................................ 8

           2.36      Party(ies).................................................................... 8

           2.37      Standard Services............................................................. 8

           2.38      Third Party Applications...................................................... 8

           2.39      Third Party FDS Technology.................................................... 8

ARTICLE 3 - INTELLECTUAL PROPERTY.................................................................. 8

           3.1       Pre-Existing IP............................................................... 8

           3.2       License to Kinetics for FDS Operations........................................ 8

           3.3       Future Modifications - Generally.............................................. 9

           3.4       Standard Services............................................................. 9

           3.5       Design Services............................................................... 9

                     3.5.1     Design Services Procedure........................................... 9

                     3.5.2     Performance of Design Services...................................... 9

                     3.5.3     Ownership of Design IP..............................................10

           3.6       Development Services..........................................................10

           3.7       Applied's Approval of Design Services and Development Services................10

           3.8       Ownership of Manufacturing Processes..........................................10

           3.9       Trademark Rights..............................................................10

           3.10      Applications for IP Rights....................................................11

           3.11      Existing Third Party FDS Technology...........................................11

           3.12      Future Third Party FDS Technology.............................................11

           3.13      License to Applied For Cover and Support......................................12





                                TABLE OF CONTENTS



                                                                                                   Page
                                                                                                   ----
                                                                                                
           3.14      Reservation of Rights.........................................................12

ARTICLE 4 - CONFIDENTIALITY........................................................................13

           4.1       Definition....................................................................13

           4.2       Confidentiality Obligations...................................................15

           4.3       Identification As Confidential................................................16

           4.4       Need-To-Know Disclosure.......................................................17

           4.5       Remedies......................................................................17

           4.6       Visual Information............................................................17

ARTICLE 5 - TERM AND TERMINATION...................................................................17

           5.1       Term..........................................................................17

           5.2       Termination...................................................................18

           5.2.1     In Event of a GSA Termination.................................................18

                     5.2.2     By Either Party in Event of an IPA Default..........................18

                     5.2.3     By Either Party Immediately Upon Confidentiality Breach.............18

                     5.2.4     By Either Party of a DSA............................................18

                     5.2.5     By Either Party of a Development Services Agreement.................19

                     5.2.6     Effective Date of Termination Upon GSA Termination..................19

           5.3       Consequences of Termination or Expiration.....................................20

           5.4       Termination of the Amended IPA................................................22

ARTICLE 6 - WARRANTIES AND REPRESENTATIONS.........................................................22

           6.1       Kinetics Pre-Existing IP Rights...............................................22

           6.2       Applied Pre-Existing IP Rights................................................22

           6.3       Future Modifications..........................................................22

           6.4       Completeness of Schedules of Pre-Existing IP Rights...........................23

           6.5       Disclaimer of Warranties......................................................23

           6.6       Limitation of Liability.......................................................23

ARTICLE 7 - INDEMNITIES............................................................................23

           7.1       Indemnification - Performance of Agreement....................................23

           7.2       Indemnification - Infringement/Misappropriation...............................24

           7.3       Indemnification/Duty to Defend Set-Off........................................24

           7.4       Indemnified Party's Obligations...............................................25





                                TABLE OF CONTENTS



                                                                                                   Page
                                                                                                   ----
                                                                                                
ARTICLE 8 - GENERAL PROVISIONS.....................................................................25

           8.1       Entire Agreement..............................................................25

           8.2       Succession and Assignment.....................................................25

           8.3       Export Regulation.............................................................26

           8.4       Rules of Construction.........................................................27

           8.5       Attorneys' Fees...............................................................27

           8.6       General Provisions............................................................27





CONFIDENTIAL TREATMENT REQUESTED

                              AMENDED AND RESTATED

                         INTELLECTUAL PROPERTY AGREEMENT

      This Amended and Restated Intellectual Property Agreement (the
"Agreement") is by and between Applied Materials, Inc., a Delaware corporation,
having places of business in Santa Clara, California and Austin, Texas, and
Kinetics Fluid Systems, Inc., a California corporation, having places of
business in Santa Clara, California and Austin, Texas.

                                    ARTICLE 1
                               GENERAL BACKGROUND

      1.1 APPLIED'S BUSINESS. Applied, among other activities, designs,
manufactures and markets (a) semiconductor wafer fabrication equipment, (b)
wafer inspection and metrology equipment, (c) flat panel display fabrication
equipment, (d) wafer fabrication factory control software, (e) toxics abatement
or recycling equipment, (f) thin film application processes, and (g) parts,
components and processes related to any of the foregoing.

      1.2 KINETICS' BUSINESS. Kinetics, among other activities, designs,
develops, manufactures and markets, for use in semiconductor fabrication
equipment and other applications, (a) Fluid Delivery Systems, (b) Components,
(c) chemical and slurry delivery systems, (d) process chillers, (e) thermal
measurement and control devices, (f) utility infrastructure and delivery systems
for semiconductor fabrication facilities, (g) ancillary equipment to connect the
utility infrastructure of semiconductor fabrication facilities to semiconductor
fabrication equipment, and (h) waste recycling systems for chemicals and slurry.

      1.3 EXISTING BUSINESS RELATIONSHIP BETWEEN THE PARTIES. The Parties
previously established a business relationship, according to which Kinetics
manufactures for Applied fluid delivery systems for incorporation into various
systems sold by Applied, including semiconductor fabrication equipment, flat
panel display fabrication equipment and thin film application process equipment
("Outsource Relationship"). The Outsource Relationship is


                                     - 1 -


CONFIDENTIAL TREATMENT REQUESTED

defined by a series of agreements, including an "Intellectual Property
Agreement" dated June 28, 1999 ("Original IPA.") The Original IPA was amended by
a series of three amendments -- (1) First Amendment to Intellectual Property
Agreement dated September 20, 1999, (2) Second Amendment to Intellectual
Property Agreement dated September 20, 1999, and (3) Third Amendment to
Intellectual Property Agreement dated June 25, 2000 (the thrice-amended Original
IPA and any of its predecessor agreements, including the Original IPA, are
referred to hereinafter as the "Amended IPA"). The Amended IPA defines each
Party's intellectual property rights and obligations related to the fluid
delivery systems manufactured for Applied by Kinetics until the Effective Date
of this Agreement.

      1.4 RENEGOTIATION OF THE OUTSOURCE RELATIONSHIP. The Parties have
renegotiated the Outsource Relationship to reflect developments since the
relationship was initially created. As a part of these renegotiations, the
Parties have renegotiated their respective duties, obligations and rights
relating to intellectual property in and related to fluid delivery systems, and
desire to reflect same in this Agreement. More specifically, the Parties desire
that this Agreement supersede the Amended IPA, which terminates on the Effective
Date of this Agreement.

      1.5 SCOPE OF THIS AGREEMENT. The Parties desire to enter into new
agreements, including a new agreement defining their respective intellectual
property rights, to reflect more accurately the current business conditions
surrounding the Outsource Relationship.

      1.6 STATEMENT OF AGREEMENT. Now, therefore, in consideration of the mutual
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Parties agree to
the following terms, conditions and obligations.


                                     - 2 -


CONFIDENTIAL TREATMENT REQUESTED

                                    ARTICLE 2
                                   DEFINITIONS

      2.1 AFFILIATE means "affiliate" as defined in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act.

      2.2 AGREEMENT means this Amended and Restated Intellectual Property
Agreement.

      2.3 APPLIED means Applied Materials, Inc. and all of its domestic and
international divisions and subsidiaries.

      2.4 APPLIED FDS or APPLIED FLUID DELIVERY SYSTEM means Current Applied FDS
and Future Applied FDS.

      2.5 APPLIED FDS TECHNOLOGY means Current Applied FDS Technology and Future
Applied FDS Technology.

      2.6 APPLIED FUTURE IP means all IP Rights relating to Future Modifications
owned by Applied, including, without limitation, Design IP. Applied Future IP
includes any and all IP Rights in and to software for "Capacity FDS Hardware"
and "Product Change Hardware" and to "Improved Software" (all as defined in
Section 4.2 of the GSA) provided or purchased by Applied in accordance with
Section 4.2 of the GSA.

      2.7 APPLIED IP means Applied Pre-Existing IP and Applied Future IP.
Applied IP includes any and all IP Rights in and to "Test Fixture Software" (as
defined in Section 4.2 of the GSA) provided or purchased by Applied in
accordance with Section 4.2 of the GSA.

      2.8 APPLIED PRE-EXISTING IP means all existing IP Rights relating to the
Current Applied FDS or Current Applied FDS Technology that are owned by Applied,
or to which Applied otherwise has rights (but only to the extent of such
rights), as of the Effective Date, as set forth in Schedule 2.8. Applied
Pre-Existing IP, for purposes of the license of Section 3.2,


                                     - 3 -


CONFIDENTIAL TREATMENT REQUESTED

does not include Applied business information (such as sub-tier supplier
information and Component pricing information) relating to the Current Applied
FDS Technology.

      2.9 APPLIED SYSTEM means capital equipment sold by Applied that
incorporates a Fluid Delivery System.

      2.10 COMPONENT means a component, part or sub-assembly of a Fluid Delivery
System, including but not limited to, valves, tubing, mass flow controllers,
base plates, brackets, sticks, manifolds (final and SLD), safety sensors, GPLIS,
VDS, ozonators, pneumatics, manifolds, filters, cables, transducers, fluid
delivery controllers and enclosures.

      2.11 CONFIDENTIAL INFORMATION means Confidential Information as defined in
Section 4.1.

      2.12 CURRENT APPLIED FDS TECHNOLOGY means the FDS Technology currently
utilized in connection with the Current Applied Fluid Delivery Systems.

      2.13 CURRENT APPLIED FDS or CURRENT APPLIED FLUID DELIVERY SYSTEMS means
the Fluid Delivery Systems sold to Applied by Kinetics for incorporation into an
Applied System as of the Effective Date.

      2.14 DESIGN IP means any and all IP Rights, other than Kinetics
Pre-Existing IP or *, relating to a Future Modification created, conceived or
first reduced to practice by or for a Party after the Effective Date and during
the course of, and as a result of, Design Services.

      2.15 DESIGN SERVICES means those services provided by Kinetics to Applied
hereunder for the preparation and delivery of a detailed design of a Future
Applied FDS or Component, comprised exclusively of Existing Components,
implementing Applied's specific requirements


* Material has been omitted and filed separately with the Commission.


                                     - 4 -


CONFIDENTIAL TREATMENT REQUESTED

and including one or more of the following activities: (a) the selection and
configuration of Existing Components; (b) the preparation or release, or both,
of bills of materials, drawings, product definition forms, engineering change
orders or other documentation related to the selection and configuration of
Existing Components; and (c) the manufacture, testing and delivery of such
Future Applied FDS.

      2.16 DESIGN SERVICES AGREEMENT OR DSA means an agreement with respect to
Design Services entered into and executed by Kinetics and Applied in accordance
with Section 3.5 of this Agreement.

      2.17 DESIGN SOW means a written statement of work for Design Services
agreed to and executed by both Parties, specifying the scope of Design Services
to be provided by Kinetics, the related fees payable by Applied and any other
related responsibilities of each Party in accordance with Section 3.5.1.

      2.18 DEVELOPMENT SERVICES means any services with respect to Future
Modifications provided by Kinetics to Applied other than Design Services and
Standard Services.

      2.19 DEVELOPMENT SERVICES AGREEMENT OR DVA means a written agreement with
respect to Development Services entered into and executed by Kinetics and
Applied, in accordance with Section 3.6 of this Agreement.

      2.20 DOCUMENTATION means all blueprints, drawings, schematics, manuals,
flowcharts, specifications, prototypes, specimens, software, manuals and other
tangible materials related to the FDS Technology.

      2.21 EFFECTIVE DATE means June 1, 2002.


                                     - 5 -


CONFIDENTIAL TREATMENT REQUESTED

      2.22 EXISTING COMPONENT means a Component of a Current Applied FDS, or any
other Component that is commercially available to or from Kinetics as of the
effective date of the applicable DSA.

      2.23 FDS TECHNOLOGY means the technology, both tangible and intangible,
related to the design and manufacture of a Fluid Delivery System.

      2.24 FLUID DELIVERY SYSTEM OR FDS means a product that distributes or
controls fluid (liquid, vapor or gas) to a tool or chamber, including all
hardware that is embodied in or that is inside or attached to any such fluid
delivery system, including but not limited to Components, but not including the
Applied system controller or weldments that connect the fluid delivery system to
the tool or chamber.

      2.25 FUTURE APPLIED FDS means any future Fluid Delivery System that
incorporates a Future Modification.

      2.26 FUTURE APPLIED FDS TECHNOLOGY means any Future Modification relating
to Standard Services, Design Services, or Development Services. Future Applied
FDS Technology also means any Future Modification relating to: (a) the FDS test
fixture(s) identified in Schedule 4.2.2(c) of the GSA; and (b) Purchased FDS
Test Fixture(s), Capacity FDS Hardware, Product Change Hardware and Improved
Software, all as defined in Section 4.2 of the GSA, provided or purchased by
Applied in accordance with Section 4.2 of the GSA.

      2.27 FUTURE MODIFICATIONS means improvements, enhancements or
modifications created, conceived or first reduced to practice by or for a Party
pursuant to the provisions hereof after the Effective Date to an Applied FDS or
the Applied FDS Technology, or both, and


                                     - 6 -


CONFIDENTIAL TREATMENT REQUESTED

inventions, discoveries, works of authorship, know-how, technical information,
work product and/or other information related thereto, but in any case excludes
any *.

      2.28 GSA means the Global Supply Agreement concurrently entered into by
the Parties or any subsequent Global Supply Agreement entered into by the
Parties.

      2.29 IP RIGHTS means all patent rights, copyrights, trade secret rights,
mask work rights and other intellectual or intangible proprietary rights (other
than trademarks, service marks and similar rights) in any jurisdiction.

      2.30 KINETICS means (a) Kinetics Fluid Systems, Inc.; (b) all
unincorporated divisions of Kinetics Fluid Systems, Inc.; and (c) those
subsidiaries and affiliates of Kinetics Fluid Systems, Inc. that are approved
(through written supplement to this Agreement or the GSA) by Applied as
permitted to perform obligations hereunder. Unit Instruments, Inc. shall not be
included in the term "Kinetics" unless a written amendment to this Agreement,
executed by Unit Instruments, Inc. and by both Parties, so provides.

      2.31 KINETICS FUTURE IP means all IP Rights relating to Future
Modifications and owned by Kinetics, including all *.

      2.32 KINETICS IP means Kinetics Pre-Existing IP and Kinetics Future IP.

      2.33 KINETICS PRE-EXISTING IP means all existing IP Rights relating to the
Current Applied FDS or Current Applied FDS Technology that are owned by
Kinetics, or to which Kinetics otherwise has rights (but only to the extent of
such rights), as of the Effective Date, as set forth in Schedule 2.33.


* Material has been omitted and filed separately with the Commission.


                                     - 7 -


CONFIDENTIAL TREATMENT REQUESTED

      2.34 MANUFACTURING PROCESS means: (a) each process or apparatus for
manufacturing Fluid Delivery Systems, Components or both, developed *, but
excluding any process or apparatus owned by * under the specific provisions of
the GSA or any "Tooling Loan Agreement" between the Parties; (b) any IP Rights
and know-how related to each process or apparatus as defined in paragraph (a),
both tangible and intangible; and (c) related documentation, including without
limitation assembly procedures, test procedures, operational method sheets,
process mapping, product synchronizations and sequence of events documentation;
but, in each case, excludes *.

      2.35 OUTSOURCE RELATIONSHIP means the business relationship between the
Parties, according to which Kinetics manufactures for Applied FDS's for
incorporation into Applied Systems.

      2.36 PARTY(ies) means Applied, Kinetics or both, depending upon context.

      2.37 STANDARD SERVICES shall have the meaning given such term by the GSA.

      2.38 THIRD PARTY APPLICATIONS means those computer software applications
as set forth in Schedule 2.38.

      2.39 THIRD PARTY FDS TECHNOLOGY means FDS Technology owned by a party
other than the Parties.

                                    ARTICLE 3
                              INTELLECTUAL PROPERTY

      3.1 PRE-EXISTING IP. Each Party's Pre-Existing IP shall remain such
Party's sole property.


* Material has been omitted and filed separately with the Commission.


                                     - 8 -


CONFIDENTIAL TREATMENT REQUESTED

      3.2 LICENSE TO KINETICS FOR FDS OPERATIONS. Applied grants to Kinetics a
non-exclusive, non-transferable (except as provided in Section 3.7 and Section
8.2), royalty-free, worldwide license to reproduce, distribute, create
derivative works of, use, make, have made, sell, offer to sell, import,
practice, modify and improve Applied IP and, to the extent possible, the Third
Party Applications for the limited purposes of fulfilling its obligations under
this Agreement, the GSA and each DSA and DVA. With respect to the Third Party
Applications, Applied's license of rights is subject to any and all limitations
on such license as set forth in Applied's contracts with the applicable vendors.
Applied does not represent or warrant that Kinetics requires a license to or
that Applied has the right to license the Third Party Applications,
notwithstanding Applied's representation and warranty of Section 6.2.

      3.3 FUTURE MODIFICATIONS - GENERALLY. Future Modifications may involve
Design Services, Development Services or Standard Services.

      3.4 STANDARD SERVICES. The Parties have agreed, as part of the GSA, to
terms and conditions relevant to the provision by Kinetics of Standard Services.
Applied shall own any Fluid Delivery System and FDS Technology, and any IP
Rights related thereto, created, conceived or first reduced to practice by or
for a Party during the course of, and as a result of, Standard Services, but in
no event shall Applied own any *.

      3.5 DESIGN SERVICES.

            3.5.1 DESIGN SERVICES PROCEDURE. If the Parties agree that Kinetics
will perform Design Services for Applied, then the Parties will execute a Design
SOW, addressing the issues referred to in Schedule 3.5.1, which shall be part of
the Purchase Order (as defined in

* Material has been omitted and filed separately with the Commission.


                                     - 9 -


CONFIDENTIAL TREATMENT REQUESTED

the GSA) under which Kinetics will provide the Design Services. Each Design SOW,
together with the related Purchase Order, shall form a separate contract (a
"Design Services Agreement") between the Parties relating to those Design
Services, which contract incorporates the terms of this Agreement, the GSA, the
Design SOW and the related Purchase Order. In the event (and to the extent) of
conflict between or among this Agreement, the GSA, the Design SOW and the
related Purchase Order, precedence shall be given first to this Agreement,
second to the GSA, third to the Design SOW and fourth to the Purchase Order.

            3.5.2 PERFORMANCE OF DESIGN SERVICES. Kinetics shall provide the
Design Services to Applied as specified in the DSA. Applied shall pay Kinetics
the fees specified in the DSA for the Design Services in accordance with the
GSA.

            3.5.3 OWNERSHIP OF DESIGN IP. Applied shall own any and all Design
IP, and Kinetics hereby assigns and transfers to Applied any and all rights
Kinetics may have in Design IP. Furthermore, Kinetics shall obtain any and all
necessary assignments from its employees or subcontractors, as the case may be,
to assure that Kinetics and, in turn, Applied receives full and complete
ownership of Design IP.

      3.6 DEVELOPMENT SERVICES. If the Parties agree that Kinetics will perform
Development Services, then the Parties will negotiate in good faith to agree
upon and execute a Development Services Agreement.

      3.7 APPLIED'S APPROVAL OF DESIGN SERVICES AND DEVELOPMENT SERVICES.
Applied has the right to perform services substantially similar to Design
Services and Development Services solely, jointly with a third party or jointly
with Kinetics. Kinetics may not perform any Design Services or Development
Services unless performed jointly with Applied or otherwise approved by Applied;
however, Kinetics may subcontract those obligations to perform any


                                     - 10 -


CONFIDENTIAL TREATMENT REQUESTED

agreed-to Design Services or Development Services that Kinetics reasonably
determines to be outside Kinetics' core competency or as necessary to
efficiently meet Applied's requirements, and sublicense to the subcontractor
associated licenses and rights required to perform those obligations, with
Applied's prior written approval, such approval not to be unreasonably withheld,
delayed or denied.

      3.8 OWNERSHIP OF MANUFACTURING PROCESSES. * will own each Manufacturing
Process.

      3.9 TRADEMARK RIGHTS. Applied grants to Kinetics a non-exclusive,
royalty-free, worldwide license to use Applied's trademarks, as defined in
Schedule 2.8, in the manner designated by Applied in connection with any Applied
Fluid Delivery Systems. Kinetics will not include any of its trademarks on any
Applied Fluid Delivery Systems, except that Kinetics may place the Kinetics
trademark(s) on Components manufactured by or for Kinetics and utilized in any
Applied Fluid Delivery Systems. The Parties acknowledge the importance of
maintaining the quality of Applied Fluid Delivery Systems and, accordingly,
Kinetics agrees to follow all the quality requirements of Sections 4.1 and 4.3
through 4.7 of the GSA.

      3.10 APPLICATIONS FOR IP RIGHTS. Each Party has the sole right to control
the process of preparing, filing, prosecuting and/or maintaining an application
or applications in relation to any IP Rights allocated to such Party hereunder,
and such Party shall bear the costs thereof. Each Party agrees to (i) disclose
promptly in writing to the other Party all IP Rights allocated to the other
Party hereunder; and (ii) assist the other Party as reasonably necessary to
obtain, register or apply for any such IP Rights, including by causing its
personnel and contractors to assign such IP Rights, sign or provide documents
and render assistance.


* Material has been omitted and filed separately with the Commission.


                                     - 11 -


CONFIDENTIAL TREATMENT REQUESTED

      3.11 EXISTING THIRD PARTY FDS TECHNOLOGY. In the event that Applied has a
license to Third Party FDS Technology which is necessary for Applied Fluid
Delivery Systems being requested by Applied, Applied, in its sole discretion,
will either: (a) sublicense that Third Party FDS Technology to Kinetics, if
Applied has the right to do so; or (b) make commercially reasonable efforts to
assist Kinetics in obtaining a license to the Third Party FDS Technology from
the owner; provided that neither Party will be required to take any act in
violation of existing agreements with third parties.

      3.12 FUTURE THIRD PARTY FDS TECHNOLOGY. In the event that the Parties
agree to introduce in the future Third Party FDS Technology into any Applied
Fluid Delivery System, then the Party with the relationship to the Third Party
will obtain all necessary rights from the Third Party to allow Kinetics to
manufacture Applied Fluid Delivery Systems incorporating the Third Party
Technology.

      3.13 LICENSE TO APPLIED FOR COVER AND SUPPORT. If Applied obtains Applied
Fluid Delivery Systems from a second source (i) in accordance with Applied's
"cover" rights under GSA Section 7.2 or (ii) to effect support as provided by
GSA Section 4.8.3.b, then Kinetics agrees to extend to Applied a non-exclusive,
non-transferable, royalty-free, worldwide, irrevocable (provided that Applied
complies with all related obligations) license to manufacture, have manufactured
for sale to Applied (and grant a sublicense to the manufacturer as necessary to
exercise this right to have manufactured for sale to Applied), use and sell any
such Applied Fluid Delivery Systems incorporating any Kinetics IP solely for
incorporation into an Applied System in accordance with Applied's "cover" rights
under GSA Section 7.2 or "Post Term Support" rights under GSA Section 4.8.3.b,
as required. The license will expire upon expiration or termination in each case
of Applied's "cover" rights under GSA Section 7.2(d) or "Post Term


                                     - 12 -


CONFIDENTIAL TREATMENT REQUESTED

Support" rights under GSA Section 4.8.3.b. Furthermore, in order for Applied to
fully enjoy its licenses pursuant to this Section, Kinetics agrees to provide to
Applied assistance, FDS Technology and Documentation, and otherwise take all
action, necessary to allow Applied or a reasonably skilled FDS manufacturer, in
the case that Applied exercises its sublicensing rights, to manufacture the
Applied Fluid Delivery System. Notwithstanding the foregoing, Kinetics shall not
be required to provide * to Applied or its manufacturer.

      3.14 RESERVATION OF RIGHTS. All IP Rights of each Party that are not
expressly granted in this Agreement are reserved and retained by such Party.
Except as expressly provided in this Agreement, as of the Effective Date, no
other licenses of IP Rights are granted whatsoever, whether expressly or by
implication or estoppel, by either Party to the other Party.

                                    ARTICLE 4
                                 CONFIDENTIALITY

      4.1 DEFINITION. Confidential Information means all non-public, proprietary
information of, or disclosed by, a Party ("Disclosing Party") that, from
time-to-time, may be acquired by a Party ("Receiving Party") from the Disclosing
Party that is: (i) related to an Applied FDS or Applied FDS Technology; or (ii)
related to the provision of Applied FDS or Applied FDS Technology pursuant to
this Agreement, the GSA, a DSA or a Development Services Agreement; or (iii)
Visual Information as defined in Section 4.6. The Confidential Information may
be in any form, medium, state or condition, inclusive of information that is
embodied in a product or tangible item or that is intangible, whether disclosed
in oral, written, graphic, machine recognizable (including computer programs,
algorithms or databases), model or sample form or any derivation thereof, and
shall include all of the following:


* Material has been omitted and filed separately with the Commission.


                                     - 13 -


CONFIDENTIAL TREATMENT REQUESTED

            (a) Processes; formulas; trade secrets; know-how; proprietary
      information; innovations; inventions; discoveries; improvements; research;
      development; product analysis or evaluations and test results, information
      and design; operations; systems; specifications; standards; drawings;
      designs; devices; data; patterns; compilations; methods; programs;
      technical documentation; manufacturing techniques or sequences;
      schematics; configurations; computer programs, codes and operating
      standards; all whether or not patented or patentable.

            (b) Product plans; customer configurations or product designs;
      confidential information received from customers; supplier configurations
      or product designs; confidential information received from suppliers.

            (c) Marketing plans; business plans; business activities;
      facilities; warehousing and leasing; inventory; inventory management
      plans, methods and procedures; inventory, materials and Components
      qualification and evaluation; business and product forecasts; corporate
      financial information and budgets or projections; business processes.

            (d) Personnel information; organizational structure; salaries and
      benefits; employee qualifications, requirements, resumes and individual
      data; labor cost models.

            (e) Supplier information, including identity; product sales; product
      manufacturing; supply; pricing; evaluation and performance histories;
      forecasts; requirements or standards; logistics; delivery or freight
      arrangements or requirements; materials handling techniques, standards or
      requirements; supplier personnel.

            (f) Customer information including: identity, product sales; product
      purchase histories or forecasts; customer agreements, terms and pricing;
      customer personnel.


                                     - 14 -


CONFIDENTIAL TREATMENT REQUESTED

            (g) The terms, but not existence, of this Agreement, the GSA, any
      DSA or Development Services Agreement, and any and all information
      relating to the Outsource Relationship. Notwithstanding the above,
      Confidential Information does not include information:

            (i) of which the Receiving Party was rightfully in possession prior
      to disclosure, as evidenced by appropriate documentation;

            (ii) that was independently developed by employees or agents of the
      Receiving Party without use of Confidential Information provided by the
      Disclosing Party hereunder;

            (iii) that the Receiving Party rightfully receives from a third
      party not owing a duty of confidentiality to the Disclosing Party;

            (iv) that becomes publicly available without fault of the Receiving
      Party; or

            (v) whose disclosure is required by order of a court or government
      authority, provided that Disclosing Party shall notify the other party in
      advance of such a disclosure or release; shall take commercially
      reasonable efforts (at least equal to the efforts such party takes to
      protect the confidentiality of its own information) to protect the
      confidentiality of the Confidential Information in the Agreement, which
      shall include deleting the financial terms of or other Confidential
      Information in the Agreement from (or obtaining confidential treatment of
      such terms and information in) disclosure or public release when permitted
      by applicable law, rule or regulation (and requesting such deletion or
      equivalent protection or confidential treatment where approval by a court
      or governmental authority is required).


                                     - 15 -


CONFIDENTIAL TREATMENT REQUESTED

      4.2 CONFIDENTIALITY OBLIGATIONS. The Receiving Party shall hold the
Disclosing Party's Confidential Information in strictest confidence for * years
after receipt, using such measures as the Receiving Party uses to protect the
confidentiality of its own Confidential Information of like importance, but in
no event using less than reasonable care. The Receiving Party shall not make any
disclosure of such Confidential Information, other than to its employees,
consultants, agents and representatives on a need to know basis. This
prohibition against disclosure includes a prohibition against disclosure by
Kinetics to any Kinetics Affiliate, unless (1) Kinetics notifies Applied of a
commercially reasonable need for such disclosure and (2) Kinetics obtains
Applied's prior written consent to such disclosure, which consent will not be
unreasonably withheld, and (3) the Affiliate executes an Non-Disclosure
Agreement (NDA) having confidentiality obligations at least equal to those of
this Article 4. The Receiving Party shall inform each such employee, consultant,
agent and representative of the Receiving Party's confidentiality obligations
under this Agreement, and shall be jointly and severally liable for any breach
of this Agreement by any such employee, consultant, agent or representative. The
Receiving Party shall use the Confidential Information solely to perform the
activities contemplated by this Agreement, the GSA, and each DSA and Development
Services Agreement entered into by the Parties pursuant to Section 3 hereof.
Kinetics will not, without Applied's prior written consent: (i) use IP Rights
contributed by Applied in connection with the sale to Applied's customers of
Fluid Delivery Systems or Components, or (ii) sell to Applied's customers Fluid
Delivery Systems or Components to which Applied contributed IP Rights. The
preceding provision relates to Applied Pre-Existing IP Rights, as well as IP
Rights in Future Modifications.


* Material has been omitted and filed separately with the Commission.


                                     - 16 -


CONFIDENTIAL TREATMENT REQUESTED

      4.3 IDENTIFICATION AS CONFIDENTIAL. Unless such information is disclosed
orally or as Visual Information (as defined by Section 4.6), Confidential
Information shall be designated as such by an appropriate legend, such as
"Kinetics Confidential" or "Applied Confidential". Confidential Information that
is disclosed orally shall be identified as confidential before or at the time of
disclosure, and shall be confirmed as confidential in a written notice given by
the Disclosing Party to the Receiving Party within thirty (30) days after such
oral disclosure. Such notice must contain a reasonable summary of the orally
disclosed Confidential Information and a statement to the effect that such
information is Confidential Information. Applied shall not be required to
designate or identify Visual Information (as defined by Section 4.6) as
"Confidential".

      4.4 NEED-TO-KNOW DISCLOSURE. The Receiving Party agrees to limit
disclosure of Confidential Information of the Disclosing Party only to those
employees, agents, contractors and representatives of the Receiving Party who
have a need to know the Confidential Information in order to perform the
obligations set forth in the this Agreement, the GSA and each DSA and
Development Services Agreement entered into by the Parties pursuant to Section 3
hereof, and provided that, before any such disclosure, each such employee,
agent, consultant and representative shall execute an Employee Joinder of the
form and substance of Schedule 4.4.

      4.5 REMEDIES. The Parties acknowledge and agree that money damages above
will not be an adequate remedy for any breach of the obligations set forth in
this Article 4 of this Agreement or of any confidentiality obligation between
the Parties. Accordingly, the Parties agree that the Disclosing Party may be
irreparably harmed and shall be entitled to seek injunctive relief, including a
temporary or preliminary injunction or a permanent injunction, or to any other


                                     - 17 -


CONFIDENTIAL TREATMENT REQUESTED

appropriate relief to restrain or redress any breach or threatened breach of
confidentiality, in addition to any other remedies either Party may have in law
or equity.

      4.6 VISUAL INFORMATION. The Parties recognize and acknowledge that, in
order for Kinetics to perform its GSA obligations, select Kinetics employees
will have access to Applied information stored within and presented by Applied's
computer system, or as a result of access to and presence on Applied facilities
("Visual Information"). The Visual Information will include both FDS-related and
non-FDS information.

                                    ARTICLE 5
                              TERM AND TERMINATION

      5.1 TERM. This Agreement shall commence on the Effective Date and expire
concurrently with expiration of the GSA, unless terminated earlier in accordance
with Section 5.2.

      5.2 TERMINATION.

            5.2.1 IN EVENT OF A GSA TERMINATION. This Agreement will be
terminated in the event of a termination of the GSA.

            5.2.2 BY EITHER PARTY IN EVENT OF AN IPA DEFAULT. This Agreement may
be terminated by either Party by written notice to the other Party in the Event
of IPA Default by the other Party upon the failure by the other Party to correct
the Event of IPA Default within thirty (30) days of receipt of written notice of
the Event of Default. An Event of IPA Default means a material breach of the
warranties, representations, covenants or obligations under this Agreement. In
the event that the allegedly defaulting party disputes the claim that an Event
of Default has occurred, then either party may exercise its rights in and to the
Business Review Process of Section 7.2.5 of the GSA.


                                     - 18 -


CONFIDENTIAL TREATMENT REQUESTED

            5.2.3 BY EITHER PARTY IMMEDIATELY UPON CONFIDENTIALITY BREACH. If a
Party materially breaches its confidentiality obligations under Article 4 in a
manner that cannot be cured, then, in addition to any rights under Section
5.2.2, the other Party may give written notice to the breaching Party that the
other Party intends to promptly terminate this Agreement. During the five (5)
business days after receipt of such notice, the breaching Party shall meet with
the other Party to discuss the confidentiality breach and whether the breaching
Party can cure it, but if the Parties do not agree in writing within such period
on a plan to be implemented by the breaching Party to cure the confidentiality
breach, then after such period the other Party may immediately terminate this
Agreement by written notice to the breaching Party. During such period, the
breaching party will take appropriate steps to remedy or mitigate its breach.

            5.2.4 BY EITHER PARTY OF A DSA. A Party may terminate a DSA by
written notice to the other Party if the other Party is in material breach of
that DSA and fails to remedy that material breach within thirty (30) days after
receiving written notice of the material breach from the terminating Party. In
addition, any and all DSA's pending upon a termination pursuant to Section 5.2.1
- -- 5.2.3 shall terminate concurrently with the termination of the respective GSA
or IPA, as applicable. Upon termination of a DSA: (i) each Party shall cease all
activities pursuant to the DSA; (ii) Kinetics shall deliver to Applied all
work-in-progress as of the termination date on each deliverable specified in the
DSA; and (iii) Applied shall pay to Kinetics a quantum meruit of fees payable
for the Design Service commenced but not completed under the DSA.

            5.2.5 BY EITHER PARTY OF A DEVELOPMENT SERVICES AGREEMENT. A Party
may terminate a DVA by written notice to the other Party if the other Party is
in material breach of that DVA and fails to remedy that material breach within
thirty (30) days after receiving written


                                     - 19 -


CONFIDENTIAL TREATMENT REQUESTED

notice of the material breach from the terminating Party. In addition, any and
all DVA's pending upon a termination pursuant to Section 5.2.1 -- 5.2.3 shall
terminate concurrently with the termination of the respective GSA or IPA, as
applicable. Upon termination of a DVA: (i) each Party shall cease all activities
pursuant to the DVA; (ii) Kinetics shall deliver to Applied all work-in-progress
as of the termination date on each deliverable specified in the DVA; and (iii)
Applied shall pay to Kinetics a quantum meruit of fees payable for the
Development Services commenced but not completed under the DVA.

            5.2.6 EFFECTIVE DATE OF TERMINATION UPON GSA TERMINATION. Any such
termination pursuant to Section 5.2.1 will become effective upon that date
determined by the GSA. A Party shall exercise such right of termination by the
issuance of a notice of termination with respect to this Agreement that is
issued concurrently with a Notice of Termination for Default with respect to the
GSA pursuant to Article 25(b)(ii), or a Notice of Termination for Applied
Default with respect to the GSA pursuant to Article 25(d)(iii), and the date on
which termination of this Agreement is effective shall be the same date on which
such termination of the GSA becomes effective, in accordance with the
requirements of the GSA. The period between the notice of termination and the
date on which such termination is effective is hereafter referred to as the
"Wind-Down Period." During the Wind-Down Period, each Party will continue to
comply with its obligations under the GSA, including particularly the provisions
thereof related to the Wind-Down Period.

      5.3 CONSEQUENCES OF TERMINATION OR EXPIRATION. Upon the date of expiration
of this Agreement or the date on which termination of this Agreement is
effective, as the case may be:


                                     - 20 -


CONFIDENTIAL TREATMENT REQUESTED

            (a) Each Party shall cease all activities pursuant to this
      Agreement, the then existing GSA and any DSA or Development Services
      Agreement entered into by the Parties pursuant to Section 3 hereof,
      respectively, other than the activities provided for by this Section 5.3;

            (b) Each Party shall cease use of and return to the other Party all
      Confidential Information, including all Documentation reflecting and all
      other tangible embodiments of the Confidential Information, owned by the
      other Party, except as provided for in this Section 5.3;

            (c) Each Party shall confirm in writing to the other Party that all
      Confidential Information has been returned; (d) The obligations of
      Articles 4, 6 and 7 and Sections 3.10, 5.4, 8.4 and 8.5 (as applicable)
      shall remain in full force and effect, unless expressly terminated by
      mutual written agreement of the Parties;

            (e) The licenses of Sections 3.2 and 3.9 will terminate;

            (f) Kinetics agrees to provide to Applied any and all training or
      training materials reasonably necessary for Applied to assume
      manufacturing and servicing of the Applied Fluid Delivery Systems being
      manufactured or developed as of the date of termination in the same manner
      as then practiced by Kinetics, but Kinetics shall not be required to
      provide *;


* Material has been omitted and filed separately with the Commission.


                                     - 21 -


CONFIDENTIAL TREATMENT REQUESTED

            (g) Kinetics will disclose to Applied all FDS Technology necessary
      to manufacture the Applied Fluid Delivery Systems being manufactured or
      developed as of the date of termination in the same manner as then
      practiced by Kinetics, but Kinetics shall not be required to provide *;

            (h) Kinetics will provide to Applied all Documentation (and all
      copies of same) necessary to manufacture the Applied Fluid Delivery
      Systems being manufactured or developed as of the date of termination in
      the same manner as then practiced by Kinetics, but Kinetics shall not be
      required to provide *; and

            (i) Notwithstanding the above, each Party may retain the other
      Party's Confidential Information to the extent and for the period
      necessary to perform any obligations during the Wind-Down Period and any
      post-termination obligations under the GSA, and each party shall perform
      such obligations under the GSA.

The above itemization of consequences is not exhaustive; instead, the Parties
agree that, upon termination, Kinetics will take any and all steps necessary to
place Applied in the same position as Kinetics at the time of termination with
respect to the manufacturing, developing or both of Fluid Delivery Systems being
manufactured or developed by Kinetics for Applied at the date of termination.
These steps include the provisions by Kinetics of all information, in whatever
form, relevant to FDS Technology, as it relates to the Applied Fluid Delivery
Systems, and the license by Kinetics of all IP Rights, necessary for Applied to
continue the manufacture of and have manufactured the then existing Applied
Fluid Delivery Systems and utilization of the associated FDS Technology.
Notwithstanding the foregoing, Kinetics shall not be required to provide
Manufacturing Processes.


* Material has been omitted and filed separately with the Commission.


                                     - 22 -

CONFIDENTIAL TREATMENT REQUESTED

      5.4 TERMINATION OF THE AMENDED IPA. The Parties hereby terminate the
Amended IPA on the Effective Date of this Agreement. This Agreement supersedes
the Amended IPA on and from the Effective Date, and accordingly each party
waives its rights, and shall not perform its obligations, under Section 5.3 of
the Amended IPA related to termination or expiration of the Amended IPA.

                                    ARTICLE 6

                         WARRANTIES AND REPRESENTATIONS

      6.1 KINETICS PRE-EXISTING IP RIGHTS. Kinetics represents and warrants that
(a) it is the owner of Kinetics' Pre-existing IP, (b) it is not aware of any
claim of ownership or infringement by any third party with respect to the
Kinetics Pre-Existing IP, (c) it has the right to grant the licenses granted
under this Agreement, and (d) it has not and will not grant to any third parties
rights inconsistent with the rights granted to Applied hereunder.

      6.2 APPLIED PRE-EXISTING IP RIGHTS. Applied represents and warrants that
(a) it is the owner of Applied's Pre-existing IP, (b) it is not aware of any
claim of ownership or infringement by any third party with respect to the
Applied Pre-Existing IP, (c) it has the right to grant the licenses granted
under this Agreement, and (d) it has not and will not grant to any third parties
rights inconsistent with the rights granted to Kinetics hereunder.

      6.3 FUTURE MODIFICATIONS. The Parties represent and warrant that they will
not knowingly infringe upon or misappropriate any third-party's IP Rights in
performing any jointly agreed-to Future Modifications pursuant to this Agreement
and any DSA or DVA.

      6.4 COMPLETENESS OF SCHEDULES OF PRE-EXISTING IP RIGHTS. The Parties
represent and warrant that the Schedules of Pre-Existing IP Rights are complete
and accurate as to the best of the Parties' belief. In the event that any
additional Pre-Existing IP Rights of a Party are


                                     - 23 -


CONFIDENTIAL TREATMENT REQUESTED

identified after the Effective Date and upon the Parties' agreement that the
information constitutes a Pre-Existing IP Right, the Parties agree to amend the
Schedule(s) accordingly.

      6.5 DISCLAIMER OF WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS
AGREEMENT, THE GSA, OR ANY DSA OR DVA, ANY FDS TECHNOLOGY OR CONFIDENTIAL
INFORMATION PROVIDED BY EITHER PARTY UNDER ANY SUCH AGREEMENT IS PROVIDED "AS
IS" AND WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED, IMPLIED, OR STATUTORY,
INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS
FOR A PARTICULAR PURPOSE, TITLE, OR NON-INFRINGEMENT, AND NEITHER PARTY SHALL
STATE, COMMUNICATE, SUGGEST, OR REPRESENT TO ANY THIRD PARTY OTHERWISE.

      6.6 LIMITATION OF LIABILITY. EXCEPT AS EXPRESSLY SET FORTH IN THIS
AGREEMENT, THE GSA, OR ANY DSA OR DVA, IN NO EVENT SHALL EITHER PARTY BE LIABLE
FOR ANY SPECIAL, INDIRECT, PUNITIVE, CONSEQUENTIAL, OR CONTINGENT DAMAGES,
WHETHER OR NOT THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH EXCLUDED
DAMAGES.

                                    ARTICLE 7

                                   INDEMNITIES

      7.1 INDEMNIFICATION - PERFORMANCE OF AGREEMENT. * (The "Indemnifying
Party") shall indemnify, defend, and hold * harmless from and against any and
all claims, suits, losses, and liabilities or portions thereof and the
associated costs and expense, including attorneys' fees, to the extent awarded
by a court of competent jurisdiction or pursuant to a settlement, caused in


* Material has been omitted and filed separately with the Commission.



                                     - 24 -


CONFIDENTIAL TREATMENT REQUESTED

whole or in part by the breach by the Indemnifying Party of any term or
provision of this Agreement or any DSA or DVA, or any negligent, grossly
negligent or intentional acts, errors, or omissions by the Indemnifying Party,
its employees, officers, agents or representatives in the performance of this
Agreement or any DSA or DVA.

      7.2 INDEMNIFICATION - INFRINGEMENT/MISAPPROPRIATION. In the event that *
is charged with infringement, misappropriation or other violation of any
third-party's IP Rights as a result of any IP Rights licensed by * under this
Agreement or any DSA or DVA, but not including the Third Party Applications, *
shall have the sole responsibility to:

            (a) defend against any such claim at its sole expense, and

            (b) account for any injury, loss, or damage, of any kind or nature,
                or any other liability incurred by or imposed upon * charged
                with infringement or misappropriation.

Notwithstanding the foregoing and the priority of agreements provision of
Section 1.3 of the GSA, Kinetics' indemnification duty relating to its supply
obligations will be governed by the GSA.

      7.3 INDEMNIFICATION/DUTY TO DEFEND SET-OFF. If a claim of infringement,
misappropriation or other violation is made by a third party as a result of
Kinetics' performance pursuant to this Agreement and Applied incurs expenses in
connection with the defense of such matter as a result of Kinetics' failure to
comply with its obligations set forth in Sections 7.1 and 7.2, Applied may apply
up to fifty percent (50%) of any future royalties that otherwise may be payable
to Kinetics hereunder in order to recover such expenses.

* Material has been omitted and filed separately with the Commission.



                                     - 25 -


CONFIDENTIAL TREATMENT REQUESTED

      7.4 INDEMNIFIED PARTY'S OBLIGATIONS. In connection with any indemnity
provided under this Agreement, the indemnified Party shall (a) provide
reasonable cooperation and assistance to the indemnifying Party; and (b) provide
prompt written notice of any claim that would trigger an indemnity obligation.
The indemnifying Party will not be responsible for any obligation under any
settlement agreement entered into without the indemnifying Party's consent.

                                    ARTICLE 8

                               GENERAL PROVISIONS

      8.1 ENTIRE AGREEMENT. This instrument, including the exhibits and
schedules hereto, sets forth the entire agreement between the Parties and merges
and supersedes any and all previous agreements, understandings and negotiations
between the Parties as to such subject matter, except for the GSA executed
concurrently herewith. The GSA shall determine the priority of provisions
amongst this Agreement, the GSA and each DSA and Development Services Agreement
in the event of inconsistency among them. Any representation, promise, or
condition in connection with such subject matter that is not incorporated in
this instrument shall not be binding upon either Party. This Agreement may not
be amended, modified or supplemented by the Parties in any manner, except by an
instrument in writing signed by the Parties.

      8.2 SUCCESSION AND ASSIGNMENT.

          (a) This Agreement shall be binding upon and inure to the benefit of
each of the Parties and its respective permitted successors and permitted
assigns. Neither Kinetics nor Applied shall assign or transfer to another person
this Agreement, or its rights, interests or obligations under this Agreement, in
whole or in part, whether voluntarily or by operation of law, (i) without the
prior express written consent of the other party, or (ii) under and in
accordance



                                     - 26 -


CONFIDENTIAL TREATMENT REQUESTED


with the requirements set out in Article 17 of Exhibit 1 to the GSA, which
Article is incorporated herein by this reference to apply to this Agreement.

            (b) If a Party assigns or transfers the GSA, or permits the GSA to
vest in another, in whole or in part, pursuant to any transaction in accordance
with the provisions of the GSA, then that Party shall also assign, transfer or
cause to vest in such other person, this Agreement, in whole or in like part.

            (c) Except as permitted and as provided in or under Sections 8.2 (a)
and (b) above, neither Party may assign, transfer or permit this Agreement or
any rights or obligations hereunder to vest in any other person, in whole or in
part, without the express prior written consent of the other.

            (d) With prior notice to and express written consent by Applied
(which may be included as part of a DSA or DVA), Kinetics may, solely for the
purpose of providing Design or Development Services to Applied, delegate part,
but not all, of its obligations hereunder, and may assign and sublicense part
but not all of its rights hereunder, to an Affiliate of Kinetics if Kinetics
remains primarily, or equally with the Affiliate, obligated for performance of
all of Kinetics' obligations as a party to this Agreement and the Affiliate
agrees in writing to be bound by the terms and conditions of this Agreement.

            (e) Any assignment, transfer or vesting of this Agreement not made
in compliance with and approved as required under this Section shall be void
and, at the option of the other Party, may be deemed a breach of and default
under this Agreement.

      8.3 EXPORT REGULATION. The Parties will not knowingly export directly or
indirectly, any technology or know-how to any countries, agencies, groups or
companies prohibited by the


                                     - 27 -


CONFIDENTIAL TREATMENT REQUESTED

United States Department of Commerce or United States Department of State unless
prior authorization is obtained.

      8.4 RULES OF CONSTRUCTION. Capitalized terms used herein shall have the
meaning assigned to them by the definitions in Article 2. Additionally, the
singular includes the plural and the plural includes the singular; words
importing any genders include the other gender; references to "writing" include
printing, typing, lithography and any other means of reproducing words in
tangible, visible form; references to articles, section (or any subdivision of
sections), schedules and exhibits are to those of this Agreement, unless
otherwise indicated; the words "hereof," "hereunder," "herein," and any other
words of similar import refer to this Agreement, including its schedules and
exhibits; and the word "including," when used in this Agreement, is not intended
to be exclusive and, in all cases, means "including without limitation". The
headings contained in this Agreement are intended for reference only and shall
not be referred to in the interpretation of this Agreement.

      8.5 ATTORNEYS' FEES. If either Party seeks to enforce its rights under
this Agreement by legal proceedings or otherwise, the non-prevailing Party shall
pay all costs and expenses, including reasonable attorneys' fees, incurred by
the prevailing Party.

      8.6 GENERAL PROVISIONS. The following provisions of the GSA and of Exhibit
1 of the GSA are incorporated into this Agreement by reference, provided that
references in such provisions to the "Agreement" shall, when used herein, be
references to this Amended and Restated Intellectual Property Agreement:

          (i)     Article 11 of Exhibit 1 to the GSA, entitled "Applicable Law,
                  Consent to Jurisdiction and Venue."

          (ii)    Article 23 of Exhibit 1 to the GSA, entitled "Force Majeure."

          (iii)   Section 9.1 of the GSA, entitled "Independent Contractor."




                                     - 28 -


CONFIDENTIAL TREATMENT REQUESTED

          (iv)    Section 9.2 of the GSA, entitled "No Third Party Beneficiary."

          (v)     Section 9.3 of the GSA, entitled "Severability."

          (vi)    Section 9.4 of the GSA, entitled "Waiver."

          (vii)   Section 9.6 of the GSA, entitled "Execution."

          (viii)  Section 10 of the GSA, entitled "Representations and
                  Warranties of the Parties."

          (ix)    Section 1.2.2 of the GSA, entitled "Notices." (x) Article 17
                  of Exhibit 1 to the GSA, entitled "Assignment and Succession",
                  pursuant to Section 8.2 of this Agreement

      IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date set forth below to be effective as of the Effective Date.

                                  APPLIED MATERIALS, INC.

                                  By: /s/ Paul Hohlstein
                                      ------------------------------------------
                                  Name: Paul Hohlstein
                                      ------------------------------------------
                                  Title: Vice President
                                         ---------------------------------------
                                  Date: 5/21/02
                                        ----------------------------------------


                                  KINETICS FLUID SYSTEMS, INC.

                                  By: /s/ Dan Rubin
                                      ------------------------------------------
                                  Name: Dan Rubin
                                        ----------------------------------------
                                  Title: Vice President
                                         ---------------------------------------
                                  Date: 5/21/02
                                        ----------------------------------------



                                     - 29 -

CONFIDENTIAL TREATMENT REQUESTED







                                    SCHEDULES



                                     - 30 -


CONFIDENTIAL TREATMENT REQUESTED

                                  SCHEDULE 2.8

                           APPLIED FDS PRE-EXISTING IP

APPLIED FDS CONFIDENTIAL INFORMATION

      1.  Confidential Information with respect to: (a) * fixture hardware and
          test fixture hardware that is based upon *; and (b) "Current TF
          Software", as defined in GSA Section 4.2.3(c), being all software
          used, as of the Effective Date, in the testing operation of all * and
          test fixtures listed in GSA Schedules 4.2.2(a), (c) and (d).

      2.  Confidential Information with respect to *.

      3.  Confidential Information with respect to process *.

      4.  Confidential Information with respect to *.

      5.  Confidential Information embodied in the documentation related to *.

      6.  Confidential Information embodied in the * drawings, * procedures, *
          and engineering change orders related to the * Applied Fluid Delivery
          Systems.

      7.  Confidential Information embodied in the Applied Software and * listed
          below.

APPLIED FDS TRADEMARKS

      "APPLIED MATERIALS", including U.S. Trademark Regs. No. 1,980,572 and No.
      1,943,850

      Stylized "A" and "APPLIED MATERIALS", including U.S. Trademark Regs. No.
      1,690,615 and No. 1,588,182


      Stylized "A", including U.S. Trademark Reg. No. 1,549,863

      "AMAT" (unregistered)

APPLIED COPYRIGHTS

      Copyrights, whether or not registered, related to Applied-owned
Documentation and, as appropriate, to Applied's *.

* Material has been omitted and filed separately with the Commission.



                                     - 31 -


CONFIDENTIAL TREATMENT REQUESTED

* DATABASES:

      A. In-House Developed *

         *

      B. In-House *and *

         *

      C. Test Fixture Software

         All "Current TF Software", as defined in GSA Section 4.2.3(c), being
all software used, as of the Effective Date, in the testing operation of all
test fixtures listed in GSA Schedules 4.2.2(a), (c) and (d).


* Material has been omitted and filed separately with the Commission.



                                     - 32 -


CONFIDENTIAL TREATMENT REQUESTED

                                  SCHEDULE 2.33

                            KINETICS PRE-EXISTING IP

PATENTS AND PATENT APPLICATIONS:

                 PATENTS OWNED BY KINETICS FLUID SYSTEMS, INC.



                                                    PATENT                                PATENT
                                                 APPLICATION    FILING      PATENT        ISSUE
MATTER NUMBER        PATENT        COUNTRY       SERIAL NO.     DATE        NUMBER         DATE        INVENTOR          PRODUCTS
- -------------        ------        -------      ------------    ------     ---------     ---------     --------          --------
                                                                                           
I0294/7005          Integrated       U.S.A.      08/404,485    3/17/1995   5,605,179     2/25/1997     Benjamin    very early Insync
I0294/7003          Gas Panel                                                                          Strong,     gas panel (like
                                                                                                       Brent       was in lobby at
                                                                                                       Elliot,     Centre Pointe);
                                                                                                       Frank       multiple valves
                                                                                                       Balma       in single block,
                                                                                                                   MFCs connected
                                                                                                                   on VCR tube
                                                                                                                   stubs;

I0294/7005          Integrated       U.S.A.      08/736,354    10/22/1996                              Benjamin    see above
                    Gas Panel                                                                          Strong,
                                                                                                       Brent
                                                                                                       Elliot,
                                                                                                       Frank
                                                                                                       Balma

I0294/7006EP        Building Blocks  EP          97947611.6    12/3/1996                 11/17/1998    Jeffrey R.  foreign filing
                    for Integrated                                                                     Markulec    off US#5,836,355;
                    Gas Panel                                                                          et al       "IGS" modular
                                                                                                                   blocks (long
                                                                                                                   bolts);

I0294/7006JP        Building Blocks  JP          525622/98     11/19/1997                              Jeffrey R.  foreign filing
                    for Integrated                                                                     Markulec    off US#5,836,355;
                    Gas Panel                                                                          et al       "IGS" modular
                                                                                                                   blocks (long
                                                                                                                   bolts);

I0294/7006KR        Building Blocks  KR          99-7004883    11/19/1997                              Jeffrey R.  foreign filing
                    for Integrated                                                                     Markulec    off US#5,836,355;
                    Gas Panel                                                                          et al       "IGS" modular
                                                                                                                   blocks (long
                                                                                                                   bolts);



                                     - 33 -

CONFIDENTIAL TREATMENT REQUESTED

                                                                                           
I0294/7006PCT       Building Blocks  PCT         PCT/US97/2    11/19/1997  WO            6/11/1998     Jeffrey R.  foreign filing
                    for Integrated               1327                      98/25058                    Markulec    off
                    Gas Panel                                                                          et al       US#5,836,355;
                                                                                                                   "IGS" modular
                                                                                                                   blocks (long
                                                                                                                   bolts);

                    Building Blocks  U.S.A       08/760,150    12/3/1996   5,836,355     11/17/1998    Jeffrey R.  variations upon
                    for Integrated                                                                     Markulec    Insync "IGS"
                    Gas Panel                                                                          et al       style multiple
                                                                                                                   block modular
                                                                                                                   substrates on two
                                                                                                                   planes;

I0294/7006          Building Blocks  U.S.A       08/931,060    9/15/1997   6,302,141     10/16/2001    Jeffrey R.  Insync "IGS"
                    for Integrated                                                                     Markulec    style multiple
                    Gas Panel                                                                          et al       block modular
                                                                                                                   substrates on two
                                                                                                                   planes;

                    Improved         U.S.A       08/672,826    6/28/1996                               Benjamin
                    Compression Seal                                                                   Strong,
                                                                                                       Dennis Rex

                    MFC - Quick      PCT         PCT/US96/0    4/4/1996                                Benjamin
                    Change Method                4708                                                  Strong,
                    and Apparatus                                                                      Frank Balma,
                                                                                                       Brent
                                                                                                       Elliot,
                                                                                                       Michael
                                                                                                       Green

                    MFC - Quick      U.S.A       08/437/093    5/5/1995                                Benjamin
                    Change Method                                                                      Strong,
                    and Apparatus                                                                      Frank Balma,
                                                                                                       Brent
                                                                                                       Elliot,
                                                                                                       Michael
                                                                                                       Green

I0294/7005EP        Mounting Plane   EP          98925252.3    6/4/1998    PCT/US98      1/21/1999     Jeffrey R.  foreign filing
                    For Integrated                                         115474                      Markulec,   for US#6,231,260;
                    Gas Panel                                              WO99/028                    Dennis G.   "Versaplane"
                                                                           67                          Rex,        modular gas panel
                                                                                                       Richard E.  mounting plate;
                                                                                                       Schuster,
                                                                                                       Brent D.
                                                                                                       Elliot





                                     - 34 -


CONFIDENTIAL TREATMENT REQUESTED

                                                                                           
I0294/7005JP        Mounting Plane   Japan       2000-502327                                           Jeffrey R.  foreign filing
                    For Integrated                                                                     Markulec,   for US#6,231,260;
                    Gas Panel                                                                          Dennis G.   "Versaplane"
                                                                                                       Rex,        modular gas panel
                                                                                                       Richard E.  mounting plate;
                                                                                                       Schuster,
                                                                                                       Brent D.
                                                                                                       Elliot

I0294/7005KR        Mounting Plane   Korea                                                             Jeffrey R.  foreign filing
                    For Integrated                                                                     Markulec,   for US#6,231,260;
                    Gas Panel                                                                          Dennis G.   "Versaplane"
                                                                                                       Rex,        modular gas panel
                                                                                                       Richard E.  mounting plate;
                                                                                                       Schuster,
                                                                                                       Brent D.
                                                                                                       Elliot

I0294/7005PCT       Mounting Plane   PCT         PCT/US598/    6/4/1998    WO99/028      01/25/199     Jeffrey R.  foreign filing
                    For Integrated               11574                     67                          Markulec,   for US#6,231,260;
                    Gas Panel                                                                          Dennis G.   "Versaplane"
                                                                                                       Rex,        modular gas panel
                                                                                                       Richard E.  mounting plate;
                                                                                                       Schuster,
                                                                                                       Brent D.
                                                                                                       Elliot

I0294/7005          Mounting Plane   U.S.A       08/893,773    7/11/1997   6,231,260     5/15/2001     Jeffrey R.  "Versaplane"
                    For Integrated                                                                     Markulec,   mounting plate;
                    Gas Panel                                                                          Dennis G.
                                                                                                       Rex,
                                                                                                       Richard E.
                                                                                                       Schuster,
                                                                                                       Brent D.
                                                                                                       Elliot

I0294/7007CA        Sieve Like       Canada      2332286       3/31/1999                                           foreign filing
                    Structure for                                                                                  for US#6,158,454;
                    Fluid Flow                                                                                     venting modular
                    Through                                                                                        backplance;
                    Structural
                    Arrangement

I0294/7007CN        Sieve Like       China       99807334.2                                                        foreign filing
                    Structure for                                                                                  for US#6,158,454;
                    Fluid Flow                                                                                     venting modular
                    Through                                                                                        backplance;
                    Structural
                    Arrangement

I0294/7007EP        Sieve Like       EP          PCT99914326.6                                                     foreign filing
                    Structure for                Pursuant to                                                       for US#6,158,454;
                    Fluid Flow                   PCT/US99/07223                                                    venting modular
                    Through                                                                                        backplance;
                    Structural
                    Arrangement





                                     - 35 -

CONFIDENTIAL TREATMENT REQUESTED

                                                                                           
I0294/7007JP        Sieve Like       JP          PCT99914326.6                                                     foreign filing
                    Structure for                Pursuant to                                                       for US#6,158,454;
                    Fluid Flow                   PCT/US99/07223                                                    venting modular
                    Through                                                                                        backplance;
                    Structural
                    Arrangement

I0294/7007KR        Sieve Like       KR          2000-7011447                                                      foreign filing
                    Structure for                                                                                  for US#6,158,454;
                    Fluid Flow                                                                                     venting modular
                    Through                                                                                        backplance;
                    Structural
                    Arrangement

I0294/7007PCT       Sieve Like       PCT         PCT/US99/0    3/31/1999   WO99/531      10/21/1999                foreign filing
                    Structure for                7223                      15                                      for US#6,158,454;
                    Fluid Flow                                                                                     venting modular
                    Through                                                                                        backplance;
                    Structural
                    Arrangement

I0294/7007          Sieve Like       U.S.A       09/060,519    4/14/1998   6,158,454     12/12/2000    Michael J.  mounting plate
                    Structure for                                                                      Duret,      design allowing
                    Fluid Flow                                                                         Erin Martin exhaust air to
                    Through                                                                            HasenKamp,  sweep past
                    Structural                                                                         Jeffrey R.  mechanical seals
                    Arrangement                                                                        Markulec,   of surface
                                                                                                       Dennis G.   mounted modular
                                                                                                       Rex,        components;
                                                                                                       Richard E.
                                                                                                       Schuster

I0294/7008TW        System Of        Taiwan      89125954      12/6/2000                                           foreign filing
                    Modular                      based on US                                                       for US#6,283,155;
                    Substrates For               09/456,226                                                        "K.1" modular
                    Enabling The                                                                                   (1.5");
                    Distribution of
                    Process Fluids
                    Thorough
                    Removable
                    Components

I0294/7008          System Of        U.S.A       09/456,226    12/6/1999   6,283,155     9/4/2001      Kim Ngoc    "K.1" modular
                    Modular                                                                            Vu          substrates (1.5"
                    Substrates For                                                                                 wide) using
                    Enabling The                                                                                   internal seal to
                    Distribution of                                                                                avoid welded
                    Process Fluids                                                                                 caps;
                    Thorough
                    Removable
                    Components





                                     - 36 -


CONFIDENTIAL TREATMENT REQUESTED

                                                                                           

I0294/7008WO        System Of        WO          PCT/US00/4    12/6/2000   WO                                      foreign filing
                    Modular                      2589 based                01/42694                                for US#6,283,155;
                    Substrates For               on US                                                             "K.1" modular
                    Enabling The                 09/456,226                                                        (1.5");
                    Distribution of
                    Process Fluids
                    Thorough
                    Removable
                    Components

I0294/7008          System of        USA         09/456,226    12/6/1999                               Kim Ngoc    "K.1" modular
                    Modular                                                                            Vu          (1.5") no-welds
                    Substrates of                                                                                  substrates;
                    Enabling the
                    Distribution of
                    Process Fluids
                    Through
                    Removable
                    Components

I0294/7008TW        System of        Taiwan      09/456,226    12/6/1999                               Kim Ngoc    "K.1" modular
                    Modular                                                                            Vu          (1.5") no-welds
                    Substrates of                                                                                  substrates;
                    Enabling the
                    Distribution of
                    Process Fluids
                    Through
                    Removable
                    Components







                                                     PATENTS OWNED BY UNIT INSTRUMENTS, INC.
                                            (KINETICS FLUID SYSTEMS, INC HAS RIGHTS TO THESE PATENTS.)
                                                                                           
                    Welded           USA         09/398,302    9/20/1999   6,125,887     10/3/2000     James V.    modular substrate
                    Interconnection                                                                    Pinto       system which
                    Modules For High                                                                               combines
                    Purity Fluid                                                                                   individual
                    Flow Control                                                                                   component station
                    Applications                                                                                   with orbitally
                                                                                                                   welded elbow-tee-
                                                                                                                   cross-etc. as
                                                                                                                   single part

                    Torque Tight     USA         501682        7/12/1995   5,524,936     6/11/1996     Barr        mechanism to
                    Locking Device                                                                     et. al.     prevent VCR
                                                                                                                   fittings from
                                                                                                                   loosening through
                                                                                                                   vibration or
                                                                                                                   chained assembly
                                                                                                                   sequence

U0128/7000EP        Manifold System  EP          99933722.3                                            Kim N. Vu   foreign filing
                    of Removable                                                                       et al.      for US#tbd;
                    Components For                                                                                 flanged modular
                    Distribution Of                                                                                substrates-k1s
                    Fluids                                                                                         ETC.;




                                     - 37 -

CONFIDENTIAL TREATMENT REQUESTED

                                                                                           
U0128/7000JP        Manifold System  Japan       2000-229369   1/16/2001                               Kim N. Vu   foreign filing
                    of Removable                                                                       et al.      for US#tbd;
                    Components For                                                                                 flanged modular
                    Distribution Of                                                                                substrates-k1s
                    Fluids                                                                                         ETC.;

U0128/7000KR        Manifold System  Korea       10-2001-      11/8/2001                               Kim N. Vu   foreign filing
                    of Removable                 700024                                                et al.      for US#tbd;
                    Components For                                                                                 flanged modular
                    Distribution Of                                                                                substrates-k1s
                    Fluids                                                                                         ETC.;

U0128/7000          Manifold System  USA         09/111,999    7/8/1998    GRANTED                     Eric J.     covers individual
                    of Removable                                                                       Redemann,   modular
                    Components For                                                                     Kim N. Vu,  substrates with
                    Distribution Of                                                                    and David   overlapping
                    Fluids                                                                             P. Sheriff  flange
                                                                                                                   interconnections;
                                                                                                                   Z-Cubes, K1S,
                                                                                                                   K1H, etc.

U0128/7000WO        Manifold System  WO          PCT/US99/     07/7/99                                 Kim N. Vu   foreign filing
UNI/001WO           of Removable                 15272         01/13/99                                et al.      for US#tbd;
                    Components For               09/229,722                                                        flanged modular
                    Distribution Of                                                                                substrates-K1S,
                    Fluids                                                                                         etc.;

U0128/7001          Manifold System  USA         09/229,722    1/13/1999                               Eric J.     covers individual
                    of Removable                                                                       Redemann,   modular
                    Components For                                                                     Kim N. Vu,  substrates with
                    Distribution Of                                                                    and David   tongue & pocket
                    Fluids                                                                             P. Sheriff  interconnections;
                                                                                                                   Z-Cubes, K1S,
                                                                                                                   K1H, etc.

U0128/7006EP        Gas Panel        EP          97913896.3    5/12/1999                               Eric J.     foreign filing
                                                                                                       Redemann,   for US#5,992,463;
                                                                                                       Kim N. Vu   panel of long
                                                                                                                   monolithic
                                                                                                                   substrates;

U0128/7006JP        Gas Panel        Japan       522,597/1998  10/29/1997                              Eric J.     foreign filing
                                                                                                       Redemann,   for US#5,992,463;
                                                                                                       Kim N. Vu   panel of long
                                                                                                                   monolithic
                                                                                                                   substrates;

U0128/7006TW        Gas Panel        Taiwan      86116147      10/30/1997  122,473       10/29/2000    Eric J.     foreign filing
                                                                                                       Redemann,   for US#5,992,463;
                                                                                                       Kim N. Vu   panel of long
                                                                                                                   monolithic
                                                                                                                   substrates





                                     - 38 -

CONFIDENTIAL TREATMENT REQUESTED

                                                                                           
U0128/7006KR        Gas Panel        Korea       7003781/19    10/29/1997                              Eric J.     foreign filing
                                                 99                                                    Redemann,   for US#5,992,463;
                                                                                                       Kim N. Vu   panel of long
                                                                                                                   monolithic
                                                                                                                   substrates;

U0128/7006          Gas Panel        USA         08/739,936    10/30/1996  5,992,463     11/30/1999    Redemann,   panel of long
                                                                                                       Kim N. Vu   monolithic
                                                                                                                   substrates;

U0128/7009          Gas Panel        USA         09/371,408    8/10/1999   6,192,938     2/27/2001     Eric J.     similar to
                                                                                                       Redemann,   US#5,992,463
                                                                                                       Kim N. Vu   individual gas
                                                                                                                   string  using
                                                                                                                   long substrate;
                                                                                                                   also covers super
                                                                                                                   component;

U0128/7010          Gas Panel        USA         09/371,655    8/10/1999   6,189,570     2/20/2001     Eric J.     similar to
                                                                                                       Redemann,   US#5,992,463
                                                                                                       Kim N. Vu   panel of multiple
                                                                                                                   long substrates;

U0128/7011          Gas Panel        USA         09/371,659    8/10/1999   6,142,539     11/7/2000     Eric J.     covers any
                                                                                                       Redemann,   modular component
                                                                                                       Kim N. Vu   base with
                                                                                                                   combination of
                                                                                                                   inlet & outlet
                                                                                                                   seals with keeper
                                                                                                                   and retained
                                                                                                                   screws;


U0128/7012CA        Gas Panel        Canada      2,307,663     10/28/1998                              Eric J.     foreign filing
                                                                                                       Redemann,   for
                                                                                                       Kim N. Vu   US#6,293,310B1;
                                                                                                                   "V" channel under
                                                                                                                   bridging
                                                                                                                   components;

U0128/7012CN        Gas Panel        China       98811585.9    5/26/2000                               Eric J.     foreign filing
                                                                                                       Redemann,   for
                                                                                                       Kim N. Vu   US#6,293,310B1;
                                                                                                                   "V" channel under
                                                                                                                   bridging
                                                                                                                   components;

U0128/7012EP        Gas Panel        EP          98,956,297    10/28/1998                              Eric J.     foreign filing
Murgitroyd & Co.                                                                                       Redemann,   for
File No. P26089                                                                                        Kim N. Vu   US#6,293,310B1;
                                                                                                                   "V" channel under
                                                                                                                   bridging
                                                                                                                   components;

U0128/7012EP        Gas Panel        EP/         1,102,387     10/28/1998                              Eric J.     foreign filing
Murgitroyd & Co.                     HONG KONG                                                         Redemann,   for
File No. P26089                                                                                        Kim N. Vu   US#6,293,310B1;
                                                                                                                   "V" channel under
                                                                                                                   bridging
                                                                                                                   components;




                                     - 39 -

CONFIDENTIAL TREATMENT REQUESTED

                                                                                           
U0128/7012JP        Gas Panel        Japan                                                             Eric J.     foreign filing
                                                                                                       Redemann,   for
                                                                                                       Kim N. Vu   US#6,293,310B1;
                                                                                                                   "V" channel under
                                                                                                                   bridging
                                                                                                                   components;

U0128/7012KR        Gas Panel        Korea       10-2000-      10/28/1998                              Eric J.     foreign filing
                                                 7004589                                               Redemann,   for
                                                                                                       Kim N. Vu   US#6,293,310B1;
                                                                                                                   "V" channel under
                                                                                                                   bridging
                                                                                                                   components;

U0128/7012MX        Gas Panel        Mexico      4,198         4/28/2000                               Eric J.     foreign filing
                                                                                                       Redemann,   for
                                                                                                       Kim N. Vu   US#6,293,310B1;
                                                                                                                   "V" channel under
                                                                                                                   bridging
                                                                                                                   components;

U0128/7012PCT       Gas Panel        PCT         PCT/US98/     10/28/1998                              Eric J.     foreign filing
                                                 22912                                                 Redemann,   for
                                                                                                       Kim N. Vu   US#6,293,310B1;
                                                                                                                   "V" channel under
                                                                                                                   bridging
                                                                                                                   components;

U0128/7012PCL       Gas Panel        HK          1102386.7                                             Eric J.     foreign filing
                                                                                                       Redemann,   for
                                                                                                       Kim N. Vu   US#6,293,310B1;
                                                                                                                   "V" channel under
                                                                                                                   bridging
                                                                                                                   components;

U0128/7012          Gas Panel        USA         08/960,464    10/29/1997  6,293,310     9/25/2001     Eric J.     covers small
                                                                                                       Redemann,   individual
                                                                                                       Kim N. Vu   modular
                                                                                                                   substrates having
                                                                                                                   "V" channel under
                                                                                                                   bridging
                                                                                                                   components;

U0128/7018          Gas Panel        USA         09/732,435    12/7/2000                               Eric J.     covers
                                                                                                       Redemann,   incorporating
                                                                                                       Kim N. Vu   moisture sensor
                                                                                                                   into gas  path
                                                                                                                   defined by
                                                                                                                   modular substrate
                                                                                                                   architecture;

U0128/7019          Gas Panel        USA         09/732,434    12/7/2000                               Eric J.     covers using
                                                                                                       Redemann,   prepackaged
                                                                                                       Kim N. Vu   components with
                                                                                                                   seals + keeper +
                                                                                                                   screws;




                                     - 40 -

CONFIDENTIAL TREATMENT REQUESTED

                                                                                           
U0128/7026          Fluid Flow       USA         60/291,430    Provisional                             Kim Ngoc    early approaches
                    System                                     Application                             Vu          to "super-
                                                               05/16/2001                                          component" shown
                                                                                                                   to  AMAT under
                                                                                                                   NDA;

U0128/7028          Gas Panel        USA         9939487       8/23/2001                               Redemann,   covers components
                                                                                                       Kim N. Vu   bridging between
                                                                                                                   substrates-
                                                                                                                   applicable to
                                                                                                                   both MFCs &
                                                                                                                   parts on K1S,
                                                                                                                   etc.;






                                     - 41 -


CONFIDENTIAL TREATMENT REQUESTED

CONFIDENTIAL INFORMATION:

           *

4. Confidential Information embodied in the software, databases and documents *.

COPYRIGHTS:

*


* Material has been omitted and filed separately with the Commission.



                                     - 42 -


CONFIDENTIAL TREATMENT REQUESTED

SCHEDULE 2.38

                            THIRD PARTY APPLICATIONS

           A.        Customized Applications

                     ORACLE
                     PDM
                     MM 3000
                     GPSI

           B.        Off-the-Shelf Applications

                     SMS
                     Interwise (LEAP training)
                     Reflection
                     Lotus Notes
                     Netscape Navigator
                     Microsoft Windows NT
                     Microsoft Office (no access)
                     McAfee VirusScan
                     BoKs

           C.        Netscape Plug Ins
                     Jinitiator (Oracle plug-in for LEAP)
                     Brio
                     Macromedia Shockwave author.exe
                     Macromedia Shockwave dir/flash.exe
                     Install from the Web
                     Real Player
                     WinZip
                     Adobe Acrobat Plug-in
                     MS Agent Plug-in

           D.        Additional (Non-Core Image) Applications

                     Autoview
                     Fastlook



                                     - 43 -


CONFIDENTIAL TREATMENT REQUESTED

                          SCHEDULE 3.5.1 -- DESIGN SOW

                                 DESIGN SERVICES

                                STATEMENT OF WORK

      This Design Services Statement of Work ("Design SOW") is entered into as
of ___________ ("Design SOW Effective Date") by and between Applied Materials,
Inc., a Delaware corporation having offices located in Santa Clara, CA
("Applied") and Kinetics Fluid Systems, Inc., a California corporation having
offices located in Santa Clara, CA ("Kinetics") (collectively the "Parties").

      This Design SOW is entered into by and between the Parties under and
pursuant to the Intellectual Property Agreement between the Parties with an
effective date of ______________, 2001 ("IPA").

      This Design SOW incorporates the terms of the IPA and of the Global Supply
Agreement between the Parties with an effective date of June 1, 2002 ("GSA").

      In the event (and to the extent) of conflict between this Design SOW and
the related Purchase Order, then this Design SOW shall take precedence over the
Purchase Order, except to the extent that this Design SOW expressly states that
the Purchase Order shall take precedence.

           [PARTIES TO INSERT A DESCRIPTION OF:

           (i)       THE SCOPE OF THE DESIGN SERVICES TO BE PROVIDED,
           (ii)      A SPECIFICATION FOR EACH DELIVERABLE,
           (iii)     ANY DELIVERY DUE DATES FOR EACH DELIVERABLE,
           (iv)      THE AMOUNT OR METHOD OF CALCULATION OF ANY FEES PAYABLE,
                     AND
           (v)       PAYMENT DUE DATES.]


      Each of the parties hereto has caused this Agreement to be executed by its
duly authorized officer or representative as of the Design SOW Effective Date
set forth above.

APPLIED MATERIALS, INC.                   KINETICS FLUID SYSTEMS, INC.



By:                                       By:

Signature:                                Signature:
          --------------------------               ----------------------------
Printed Name:                             Printed Name:
             -----------------------                   ------------------------
Title:                                    Title:
      ------------------------------            -------------------------------
Date:                                     Date:
     -------------------------------           --------------------------------



                                     - 44 -


CONFIDENTIAL TREATMENT REQUESTED

                                  SCHEDULE 4.4

                            KINETICS EMPLOYEE JOINDER

      I am an employee, agent, contractor or representative of Kinetics Fluid
Systems, Inc. ("KINETICS").

      Kinetics has entered into agreements with Applied Materials, Inc.
("APPLIED") under which Kinetics will manufacture fluid delivery systems for
Applied.

      As part of that relationship, Applied will disclose its Confidential
Information (defined below) to Kinetics, and Kinetics will disclose the
Confidential Information to those Kinetics employees, agents, contractors and
representatives who must receive the information to perform under the
agreements.

      Applied and Kinetics have agreed to protect the confidentiality of each
other's Confidential Information and, as part of this agreement, have agreed to
have those employees, agents, contractors and representatives that receive
Confidential Information review and agree to the following undertakings
regarding the Confidential Information:

      1 DEFINITION. Confidential Information means all non-public, proprietary
information of, or disclosed by, Applied that, from time-to-time, may be
acquired by Kinetics from Applied and that is related to the fluid delivery
systems being manufactured by Kinetics for Applied pursuant to the Global Supply
Agreement between Applied and Kinetics. The Confidential Information may be in
any form, medium, state or condition, inclusive of information that is embodied
in a product or tangible item or that is intangible, whether disclosed in oral,
written, graphic, machine recognizable (including computer programs, algorithms
or databases), model or sample form or any derivation thereof. Notwithstanding
the above, Confidential Information does not include information:

            (i) of which Kinetics was rightfully in possession prior to
disclosure, as evidenced by appropriate documentation;

            (ii) that was independently developed by employees or agents of
Kinetics without use of Confidential Information provided by Applied hereunder;

            (iii) that Kinetics rightfully receives from a third party not owing
a duty of confidentiality to Applied;

            (iv) that becomes publicly available without fault of Kinetics; or

            (v) whose disclosure is required by order of a court or government
authority, provided that Applied shall have been given timely notice of such
requirement and that Kinetics shall cooperate with Applied to limit the scope
and effect of such order.

      2 CONFIDENTIALITY OBLIGATIONS. I will hold Applied's Confidential
Information in strictest confidence for five (5) years after receipt, using such
measures as Kinetics uses to protect the confidentiality of its own Confidential
Information of like importance, but in no event using less than reasonable care.
I will not disclose any Confidential Information, other than to other Kinetics
employees, consultants, agents and representatives who have a need to know the
Confidential Information in order to perform the agreements between Kinetics and
Applied. I


                                     - 45 -


CONFIDENTIAL TREATMENT REQUESTED

will not disclose any Confidential Information to any Kinetics Group company
other than Kinetics Fluid Systems, Inc., unless I am specifically advised by
Kinetics that such disclosure has been permitted by Applied. I will use the
Confidential Information solely to perform the activities contemplated by the
agreements between Kinetics and Applied.

      3 IDENTIFICATION AS CONFIDENTIAL. Unless such information is disclosed
orally, Confidential Information shall be designated as such by an appropriate
legend, such as "Kinetics Confidential" or "Applied Confidential". Confidential
Information that is disclosed orally shall be identified as confidential before
or at the time of disclosure, and shall be confirmed as confidential in a
written notice given within thirty (30) days after such oral disclosure. Such
notice must contain a reasonable summary of the orally disclosed Confidential
Information and a statement to the effect that such information is Confidential
Information.

      4 REMEDIES. I acknowledge and agree that money damages above will not be
an adequate remedy for any breach of the obligations set forth herein.
Accordingly, I agree that Applied may be irreparably harmed and shall be
entitled to seek injunctive relief, including a temporary or preliminary
injunction or a permanent injunction, or to any other appropriate relief to
restrain or redress any breach or threatened breach of confidentiality, in
addition to any other remedies Applied may have in law or equity.

      5 VISUAL INFORMATION. I acknowledge that, in order for Kinetics to perform
its obligations related to the manufacture of fluid delivery systems for
Applied, I may access to Applied Confidential Information stored within and
presented by Applied's computer system or as a result of access to and presence
on Applied facilities ("VISUAL INFORMATION"). The Visual Information will
include both gas panel and non-gas panel Confidential Information. I will only
access, use or disclose any Visual Information as necessary to manufacture Fluid
Delivery Systems pursuant to the Global Supply Agreement between Applied and
Kinetics.

      I have read, and I understand and agree to be bound by, the
confidentiality terms set forth above.




- -------------------------
(Signature)


- -------------------------
(Printed name)


- -------------------------
(Date)



                                     - 46 -


CONFIDENTIAL TREATMENT REQUESTED

                            APPLIED EMPLOYEE JOINDER

      I am an employee, agent, contractor or representative of Applied
Materials, Inc. ("APPLIED").

      Applied has entered into agreements with Kinetics Fluid Systems, Inc.
("KINETICS") under which Kinetics will manufacture fluid delivery systems for
Applied.

      As part of that relationship, Kinetics will disclose its Confidential
Information (defined below) to Applied, and Applied will disclose the
Confidential Information to those Applied employees, agents, contractors and
representatives who must receive the information to perform under the
agreements.

      Applied and Kinetics have agreed to protect the confidentiality of each
other's Confidential Information and, as part of this agreement, have agreed to
have those employees, agents, contractors and representatives that receive
Confidential Information review and agree to the following undertakings
regarding the Confidential Information:

      1 DEFINITION. Confidential Information means all non-public, proprietary
information of, or disclosed by, Kinetics that, from time-to-time, may be
acquired by Applied from Kinetics and that is related to the fluid delivery
systems being manufactured by Kinetics for Applied pursuant to the Global Supply
Agreement between Applied and Kinetics. The Confidential Information may be in
any form, medium, state or condition, inclusive of information that is embodied
in a product or tangible item or that is intangible, whether disclosed in oral,
written, graphic, machine recognizable (including computer programs, algorithms
or databases), model or sample form or any derivation thereof. Notwithstanding
the above, Confidential Information does not include information:

            (i) of which Applied was rightfully in possession prior to
disclosure, as evidenced by appropriate documentation;

            (ii) that was independently developed by employees or agents of
Applied without use of Confidential Information provided by Kinetics hereunder;

            (iii) that Applied rightfully receives from a third party not owing
a duty of confidentiality to Kinetics;

            (iv) that becomes publicly available without fault of Applied; or

            (v) whose disclosure is required by order of a court or government
authority, provided that Kinetics shall have been given timely notice of such
requirement and that Applied shall cooperate with Kinetics to limit the scope
and effect of such order.

      2 CONFIDENTIALITY OBLIGATIONS. I will hold the Kinetics' Confidential
Information in strictest confidence for five (5) years after receipt, using such
measures as Applied uses to protect the confidentiality of its own Confidential
Information of like importance, but in no event using less than reasonable care.
I will not disclose any Confidential Information, other than to other Applied
employees, consultants, agents and representatives who have a need to know the
Confidential Information in order to perform the agreements between Kinetics and
Applied. I


                                     - 47 -


CONFIDENTIAL TREATMENT REQUESTED

will use the Confidential Information solely to perform the activities
contemplated by the agreements between Kinetics and Applied.

      3 IDENTIFICATION AS CONFIDENTIAL. Unless such information is disclosed
orally, Confidential Information shall be designated as such by an appropriate
legend, such as "Kinetics Confidential" or "Applied Confidential". Confidential
Information that is disclosed orally shall be identified as confidential before
or at the time of disclosure, and shall be confirmed as confidential in a
written notice given within thirty (30) days after such oral disclosure. Such
notice must contain a reasonable summary of the orally disclosed Confidential
Information and a statement to the effect that such information is Confidential
Information.

      4 REMEDIES. I acknowledge and agree that money damages above will not be
an adequate remedy for any breach of the obligations set forth herein.
Accordingly, I agree that Kinetics may be irreparably harmed and shall be
entitled to seek injunctive relief, including a temporary or preliminary
injunction or a permanent injunction, or to any other appropriate relief to
restrain or redress any breach or threatened breach of confidentiality, in
addition to any other remedies Kinetics may have in law or equity.

      I have read, and I understand and agree to be bound by, the
confidentiality terms set forth above.

- -------------------------
(Signature)


- -------------------------
(Printed name)


- -------------------------
(Date)



                                     - 48 -

EX-10.17

                                                                   EXHIBIT 10.17



                                                                  EXECUTION COPY



- --------------------------------------------------------------------------------

                            STOCK PURCHASE AGREEMENT


                          Dated as of February 28, 2001

                                  By and Among

                     KINETICS ELECTRONICS MANAGEMENT, INC.,

                               MAGNOLIA TREE, LLC

                                       and


                         JAMES E. HAWTHORNE, AS TRUSTEE
                 OF THE JAMES AND ROBERTA HAWTHORNE FAMILY TRUST
                           U/T/A DATED AUGUST 31, 1999


                              --------------------


                   FOR THE PURCHASE OF ALL OF THE OUTSTANDING
                    CAPITAL STOCK OF MARCHI ASSOCIATES, INC.

- --------------------------------------------------------------------------------



                                       1


                                Table of Contents

                                                                                      
ARTICLE 1         DEFINITIONS...............................................................1

        Section 1.        Definitions.......................................................1

ARTICLE 2         SALE OF STOCK.............................................................8

        Section 2.1       Sale of Stock.....................................................8

        Section 2.2       Closing Payment...................................................8

        Section 2.3       Determination of Purchase Price...................................9

        Section 2.4       Closing..........................................................10

ARTICLE 3         REPRESENTATIONS OF THE SELLERS...........................................10

        Section 3.1       Existence and Good Standing......................................10

        Section 3.2       Capital Stock; Subsidiaries......................................10

        Section 3.3       Financial Statements.............................................11

        Section 3.4       Section 3.4......................................................11

        Section 3.5       Personal Property................................................11

        Section 3.6       Leases and Owned Real Property...................................11

        Section 3.7       Material Contracts...............................................13

        Section 3.8       Consents and Approvals; No Violations............................14

        Section 3.9       Litigation.......................................................14

        Section 3.10      Taxes............................................................14

        Section 3.11      Liabilities......................................................16

        Section 3.12      Insurance........................................................16

        Section 3.13      Intellectual Properties..........................................17

        Section 3.14      Accounts Receivable..............................................18

        Section 3.15      Employment Relations.............................................18

        Section 3.16      Employee Benefit Plans...........................................19

        Section 3.17      Permits..........................................................22

        Section 3.18      Interests in Clients.............................................23

        Section 3.19      Bank Accounts Powers of Attorney and Compensation of Employees...23

        Section 3.20      No Changes.......................................................23

        Section 3.21      Compliance with Laws.............................................24

        Section 3.22      Broker's or Finder's Fees, etc...................................24





                                       2


                                                                                      
        Section 3.23      Environmental Laws and Regulations...............................24

        Section 3.24      Customers........................................................25

        Section 3.25      Disclosure.......................................................25

        Section 3.26      Copies of Documents..............................................25

        Section 3.27      Inventory........................................................25

        Section 3.28      No Other Representations or Warranties...........................26

        Section 3.29      Disclosed Matters................................................26

ARTICLE 4         REPRESENTATIONS OF MAGNOLIA..............................................26

        Section 4.        Representations of Magnolia......................................26

        Section 4.1       Power and Authority..............................................26

        Section 4.2       Ownership of Stock...............................................26

        Section 4.3       Broker's or Finder's Fees, etc...................................27

        Section 4.4       Consents and Approvals; No Violations............................27

ARTICLE 5         REPRESENTATIONS OF HAWTHORNE TRUST.......................................27

        Section 5.        Representations of Hawthorne Trust...............................27

        Section 5.1       Power and Authority..............................................27

        Section 5.2       Ownership of Stock...............................................28

        Section 5.3       Broker's or Finder's Fees, etc...................................28

        Section 5.4       Consents and Approvals: No Violations............................28

ARTICLE 6         REPRESENTATIONS OF THE PURCHASER.........................................28

        Section 6.        Representations of the Purchaser.................................28

        Section 6.1       Existence and Good Standing: Power and Authority.................29

        Section 6.2       No Conflicts.....................................................29

        Section 6.3       Litigation.......................................................29

        Section 6.4       Broker's or Finder's Fees, etc...................................30

        Section 6.5       Operation of Business............................................30

        Section 6.6       No Other Representations or Warranties...........................30

ARTICLE 7         CONDUCT OF BUSINESS; EXCLUSIVE DEALING: REVIEW; OTHER AGREEMENTS.........30

        Section 7.1       Access to Information Concerning Properties and Records..........30

        Section 7.2       Conduct of Business of the Company...............................30

        Section 7.3       Commercially Reasonable Efforts..................................32





                                       3


                                                                                      
        Section 7.4       Exclusive Dealing................................................32

        Section 7.5       Purchase of Kinetics Common Stock................................32

ARTICLE 8         TAX MATTERS..............................................................33

        Section 8.1       Tax Returns......................................................33

        Section 8.2       Payment of Taxes.................................................33

        Section 8.3       Amended Returns..................................................34

        Section 8.4       Prior Tax Agreements.............................................34

        Section 8.5       Non-foreign Person Affidavit.....................................34

        Section 8.6       Post-Closing Access and Cooperation..............................34

        Section 8.7       Tax Indemnification..............................................34

        Section 8.8       Tax Controversies................................................35

ARTICLE 9         CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER...........................35

        Section 9.1       Conditions to the Purchaser's Obligations........................35

        Section 9.2       Truth of Representations and Warranties..........................35

        Section 9.3       Performance of Agreements........................................36

        Section 9.4       No Material Adverse Change.......................................36

        Section 9.5       No Litigation Threatened.........................................36

        Section 9.6       Good Standing and Other Certificates.............................36

        Section 9.7       Approvals and Consents...........................................36

        Section 9.8       Resignation of Directors.........................................36

        Section 9.9       Opinion of the Sellers' Counsel..................................36

        Section 9.10      Statutes.........................................................37

        Section 9.11      Transaction Documents............................................37

        Section 9.12      Seller Non-Compete Agreement.....................................37

ARTICLE 10        CONDITIONS TO THE OBLIGATIONS OF THE SELLERS.............................37

        Section 10.1      Conditions to the Obligations of the Sellers.....................37

        Section 10.2      Truth of Representations and Warranties..........................37

        Section 10.3      Performance of Agreements........................................37

        Section 10.4      Approvals and Consents...........................................37

        Section 10.5      Opinion of the Purchaser's Counsel...............................37

ARTICLE 11        SURVIVAL OF REPRESENTATIONS: INDEMNIFICATION.............................37

        Section 11.1      Survival of Representations......................................37

        Section 11.2      General Indemnification..........................................38





                                       4


                                                                                      
        Section 11.3      Indemnification Procedure........................................39

        Section 11.4      Third Party Claims...............................................40

ARTICLE 12        TERMINATION AND ABANDONMENT..............................................41

        Section 12.1      Termination......................................................41

        Section 12.2      Effect of Termination............................................42

ARTICLE 13        MISCELLANEOUS............................................................42

        Section 13.1      Expenses.........................................................42

        Section 13.2      Governing Law....................................................42

        Section 13.3      Captions.........................................................42

        Section 13.4      Publicity........................................................42

        Section 13.5      Notices..........................................................43

        Section 13.6      Parties in Interest..............................................44

        Section 13.7      Counterparts.....................................................44

        Section 13.8      Entire Agreement.................................................45

        Section 13.9      Amendments.......................................................45

        Section 13.10     Severability.....................................................45

        Section 13.11     Third Party Beneficiaries........................................45

        Section 13.12     Submission to Jurisdiction; Waiver of Jury Trial.................45

        Section 13.13     Schedules........................................................45

        Section 13.14     Gender...........................................................45

        Section 13.15     Attorneys' Fees..................................................45





                                       5


                            STOCK PURCHASE AGREEMENT

        This STOCK PURCHASE AGREEMENT, dated as of February 28, 2001 (this
"Agreement"), is by and among Kinetics Electronics Management, Inc., a
California corporation (the "Purchaser"), Magnolia Tree, LLC, a Delaware limited
liability company ("Magnolia"), and James E. Hawthorne, as Trustee of The James
and Roberta Hawthorne Family Trust U/T/A dated August 31, 1999 ("Hawthorne
Trust", and together with Magnolia, the "Sellers" and each, a "Seller").

                              W I T N E S S E T H:

        WHEREAS, Magnolia owns 750,000 shares of common stock of Marchi
Associates, Inc. (d/b/a Marchi Systems, Inc.), a California corporation (the
"Company"), and Hawthorne Trust owns 250,000 shares of common stock of the
Company, all of such shares of common stock representing in the aggregate 100%
of the capital stock of the Company; and

        WHEREAS, the Sellers desire to sell the Stock (as defined below), and
the Purchaser desires to purchase the Stock pursuant to this Agreement:

        NOW, THEREFORE, for and in consideration of the premises and of the
mutual representations, warranties, covenants and agreements contained herein,
and of other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, and upon the terms and subject to the conditions
hereinafter set forth, the parties do hereby agree as follows:

                                    ARTICLE 1

                                   DEFINITIONS

        Section 1. Definitions. When used in this Agreement, the following
terms shall have the respective meanings specified therefor below (such meanings
to be equally applicable to both the singular and plural fortes of the terms
defined).

        "Affiliate" of any Person shall mean any Person directly or indirectly
controlling, controlled by, or under common control with, such Person; provided
that, for the purposes of this definition, "control" (including, with
correlative meanings, the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting securities,
by contract or otherwise and provided, further, that, with respect to Sections
3.7(a)(xii), 3.18, 3.20(n), 3.20(o) and 7.2(m), an Affiliate of any Person shall
also include (w) any Person that directly or indirectly owns more than five
percent (5%) of any class of capital stock or other interest of such Person, (x)
any officer, director, trustee or beneficiary of such Person, (y) any spouse,
parent, sibling or descendant of any Person described in clauses (w) or (x)
above, and (z) any trust for the benefit of any Person described in clauses (w)
through (y) above or for any spouse, issue or lineal descendant of any Person
described in clauses (w) through (y) above.

        "Agreed Claims" shall have the meaning assigned to such term in Section
11.3(c).



                                       1


        "Agreement" shall have the meaning assigned to such term in the preamble
to this Agreement.

        "Arbitrator" shall have the meaning assigned to such term in Section
2.3(b)(ii).

        "Business day" shall mean any day, other than a Saturday, Sunday or a
day recognized in the State of California as a "bank holiday" on which banks
shall be authorized or required by law to close.

        "Certificate" shall have the meaning assigned to such term in Section
113(a).

        "Closing" shall have the meaning assigned to such term in Section 2.4.

        "Closing Date" shall have the meaning assigned to such term in Section
2.4.

        "Closing Date Working Capital" shall have the meaning assigned to such
term in Section 2.3(a).

        "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and the regulations promulgated and the rulings issued thereunder.

        "Company" shall have the meaning set forth in the first recital of this
Agreement.

        "Company Property" shall mean any real property and improvements at any
time owned (directly, indirectly or beneficially), leased, used, operated or
occupied by the Company.

        "Contingent Obligation" shall mean, as to any Person, any obligation of
such Person guaranteeing or intended to guarantee any Indebtedness, leases,
dividends or other obligations (the "primary obligations") of any other Person
(the "primary obligor") in any manner, whether directly or indirectly,
including, without limitation, any obligation of such Person, whether or not
contingent, (i) to purchase any such primary obligation or any property
constituting direct or indirect security therefore, (ii) to advance or supply
funds (x) for the purchase or payment of any such primary obligation or (y) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency of the primary obligor, (iii) to purchase
property, securities or services primarily for the purpose of assuring the owner
of any such primary obligation of the ability of the primary obligor to make
payment of such primary obligation or (iv) otherwise to assure or hold harmless
the holder of such primary obligation against loss in respect thereof; provided,
however, that the term Contingent Obligation shall not include endorsements of
instruments for deposit or collection in the ordinary course of business.

        The amount of any Contingent Obligation shall be deemed to be an amount
equal to the stated or determinable amount of the primary obligation in respect
of which such Contingent Obligation is made or, if not stated or determinable,
the maximum reasonable anticipated liability in respect thereof (assuming such
Person is required to perform thereunder) as determined by such Person in good
faith.

        "Current Assets," with respect to any Person, shall include, without
limitation, accounts receivable, cash, prepaid expenses and other prepaid items,
inventory and other current assets



                                       2


except deferred tax assets) of such Person and shall be determined in accordance
with GAAP consistent with the past practice of such Person.

        "Current Liabilities", with respect to any Person, shall include,
without limitation. accounts payable and other current liabilities (excluding
Tax liabilities) of such Person, and shall be determined in accordance with GAAP
consistent with the past practice of such Person.

        "Due Inquiry" shall mean James E. Hawthorne's interview of the
executives and management of the Company relating to the subject matter in
question and review of any material agreements or documents readily available
and accessible regarding the same.

        "Employee Benefit Plan" shall have the meaning assigned to such term in
Section 3.16(a).

        "Environmental Claims" shall mean any and all administrative, regulatory
or judicial actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigations or proceedings relating in any way to
any Environmental Law or any permit issued under any such Environmental Law (for
purposes of this definition, "Claims") including, without limitation (i) any and
all Claims by governmental or regulatory authorities for enforcement, cleanup,
removal, response, remedial or other actions or damages pursuant to any
applicable Environmental Law and (ii) any and all Claims by any third party
seeking damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from Hazardous Materials or arising from alleged
injury or threat of injury to health, safety or the environment.

        "Environmental Law" shall mean any federal, state, foreign or local
statute, law, rule, regulation, ordinance, code, guideline, policy or rule of
common law in effect and in each case as amended as of the date hereof and the
Closing Date, and any judicial or administrative interpretation thereof as of
the date hereof and the Closing Date, including any judicial or administrative
order, consent decree or judgment, relating to the environment, health, safety
or Hazardous Materials, including without limitation the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended, 42
U.S.C. Section 9601 et seq.; the Resource Conservation and Recovery Act, as
amended, 42 U.S.C. Section 6901 et seq.; the Federal Water Pollution Control
Act, as amended, 33 U.S.C. Section 1251 et seq.; the Toxic Substances Control
Act, 15 U.S.C. Section 2601 et seq.; the Clean Air Act, 42 U.S.C. Section 7401
et seq.; the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq.; the Oil
Pollution Act of 1990, 33 U.S.C. et seq. Section 2701 and their state and local
counterparts and equivalents.

        "ERISA" shall have the meaning assigned to such term in Section 3.16(a).

        "Escrow Agent" shall have the meaning assigned to such term in Section
2.2(b).

        "Escrow Agreement" shall mean the escrow agreement, dated as of the date
hereof by and among the Sellers. the Purchaser and the Escrow Agent attached
hereto as Exhibit A.

        "Escrow Amount" shall mean Three Million Two Hundred Thousand Dollars
($3,200,000).



                                       3


        "Escrow Shares" shall mean collectively, the Hawthorne Indemnity Escrow
Shares. the Hawthorne Working Capital Escrow Shares, the Magnolia Indemnity
Escrow Shares, and the Magnolia Working Capital Escrow Shares.

        "Estimated Working Capital" shall have the meaning assigned to such term
in Section 2.2(a).

        "Financial Statements" shall have the meaning assigned to such term in
Section 3.5.

        "GAAP" shall mean generally accepted accounting principles in the United
States of America applied on a consistent basis.

        "Hawthorne Closing Payment" shall mean Six Million Seven Hundred and
Fifty Thousand Dollars ($6,750,000), minus twenty-five percent (25%) of the
amount, if any, by which the Minimum Working Capital exceeds the amount of the
Estimated Working Capital.

        "Hawthorne Indemnity Escrow Shares" shall mean 22,500 shares of Kinetics
Class A Common Stock and 202,500 shares of Kinetics Class B Common Stock owned
by Hawthorne Trust, which constitutes $675,000 of the Escrow Amount.

        "Hawthorne Purchase Price" shall mean the sum of the Hawthorne Closing
Payment, as adjusted pursuant to Section 2.3(c) and (ii) the Earnout Payment (as
such term is defined in the Stock Repurchase and Earnout Agreement), if any.

        "Hawthorne Trust" shall have the meaning assigned to such term in the
preamble to this Agreement.

        "Hawthorne Working Capital Escrow Shares" shall mean 4,167 shares of
Kinetics Class A Common Stock and 37,500 shares of Kinetics Class B Common Stock
owned by Hawthorne Trust, which constitutes $125,000 of the Escrow Amount.

        "Hazardous Materials" shall mean (i) any petroleum or petroleum
products, radioactive materials, asbestos in any form that is or could become
friable, urea formaldehyde foam insulation, transformers or other equipment that
contain dielectric fluid containing levels of polychlorinated biphenyls, and
radon gas; (ii) any chemicals. materials or substances defined as or included in
the definition of "hazardous substances," "hazardous wastes," "hazardous
materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic
substances," "toxic pollutants," or words of similar import, under any
applicable Environmental Law: and (iii) any other chemical, material or
substance, exposure to which is prohibited, limited or regulated by any
governmental authority.

        "Indebtedness" shall mean, as to any Person, without duplication, (i)
all indebtedness (including principal, interest, fees and charges) of such
Person for borrowed money or for the deferred purchase price of property or
services other than trade payables and accrued expenses arising in the ordinary
course of business in accordance with customary trade terms, (ii) the maximum
amount available to be drawn under all letters of credit issued for the account
of such person and all unpaid drawings in respect of such letters of credit,
(iii) all Indebtedness of the types described in clause (i), (ii), (iv), (v),
(vi), (vii) and (viii) of this definition secured by any



                                       4


Lien on any property owned by such Person, whether or not such Indebtedness has
been assumed by such Person (and, if such Indebtedness is non-recourse except to
such property, only to the extent of the fair market value of the property),
(iv) all capitalized lease obligations of such person, (v) all obligations of
such Person to pay a specified purchase price for goods or services. whether or
not delivered or accepted, i.e., take-or-pay and similar obligations, (vi) all
Contingent Obligations of such Person, (vii) all obligations of such Person
under any interest rate protection agreements, currency protection agreements,
interest rate swaps, control disbursement accounts, repurchase agreements,
reverse repurchase agreements, caps, collars, derivatives, currency hedge
agreements or other similar types of agreements and (viii) the greater of (x)
any premiums and other amounts payable to any third party pursuant to any
mandatory prepayment obligations under the terms of any Indebtedness as a result
of the consummation of the transactions contemplated hereby and (y) any premiums
and other amounts payable to any third party pursuant to any voluntary
prepayment provision under the terms of any Indebtedness, assuming the Closing
Date occurs on or before February 28, 2001 and notice of any such voluntary
prepayment is given by such Person on or before the Closing Date.

        "Indemnified Party" shall have the meaning assigned to such term in
Section 11.4(a).

        "Indemnifying Party" shall have the meaning assigned to such term in
Section 11.4(a).

        "Intellectual Property" shall mean all domestic and foreign patents,
patent applications, trademarks, service marks and other indicia of origin,
trademark and service mark registrations and applications for registrations
thereof, copyrights, copyright registrations and applications for registration
thereof. Internet domain names and universal resource locators ("URLs"), trade
secrets, inventions (whether or not patentable), invention disclosures, moral
and economic rights of authors and inventors (however denominated), technical
data, customer lists, corporate and Company names, trade names, trade dress,
brand names, know-how, formulae, methods (whether or not patentable), designs,
processes, procedures, technology, source codes, object codes, computer software
programs, databases, data collectors and other proprietary information or
material of any type, whether written or unwritten (and all good will associated
with, and all derivatives, improvements and refinements of, any of the
foregoing).

        "KHC" shall mean Kinetics Holdings Corporation, a Delaware corporation.

        "Kinetics Class A Common Stock" shall mean the shares of voting Class A
Common stock, par value $0.01 per share, of KHC, which, for purposes of this
Agreement, shall be valued at Three Dollars ($3.00) per share.

        "Kinetics Class B Common Stock" shall mean the shares of nonvoting Class
B Common Stock, par value $0.01 per share, of KHC, which, for purposes of this
Agreement, shall be valued at Three Dollars ($3.00) per share.

        "Leased Property" shall have the meaning assigned to such term in
Section 3.6.

        "Leases" shall have the meaning assigned to such term in Section 3.6.

        "Liens" shall mean liens, security interests, options, rights of first
refusal, easements. mortgages, charges, indentures, deeds of trust, rights of
way, restrictions on the use of real



                                       5


property, encroachments, licenses to third parties, leases to third parties,
security agreements, or any other encumbrances and other restrictions or
limitations on use of real or personal property or irregularities in title
thereto.

        "Listed Intellectual Property" shall have the meaning assigned to such
term in Section 131a).

        "Loss" shall have the meaning assigned to such term in Section 11.2(a).

        "Magnolia" shall have the meaning assigned to such term in the preamble
to this Agreement.

        "Magnolia Closing Payment" shall mean Twenty Million Two Hundred and
Fifty Thousand Dollars ($20,250,000), minus seventy-five percent (75%) of the
amount, if any, by which the Minimum Working Capital exceeds the amount of the
Estimated Working Capital.

        "Magnolia Indemnity Escrow Shares" shall mean 67,500 shares of Kinetics
Class A Common Stock and 607,500 shares of Kinetics Class B Common Stock owned
by Magnolia. which constitutes $2,025,000 of the Escrow Amount.

        "Magnolia Purchase Price" shall mean the Magnolia Closing Payment. as
adjusted pursuant to Section 2.3(c).

        "Magnolia Working Capital Escrow Shares" shall mean 12,500 shares of
Kinetics Class A Common Stock and 112,500 shares of Kinetics Class B Common
Stock owned by Magnolia. which constitutes $375,000 of the Escrow Amount.

        "Minimum Working Capital" shall mean Three Million One Hundred and
Thirty Thousand Dollars ($3,130,000).

        "Notice of Objection" shall have the meaning assigned to such term in
Section 2.3(b)(i).

        "Overlap Period" shall mean taxable periods beginning before the Closing
Date and ending after the Closing Date.

        "Permits" shall have the meaning assigned to such term in Section 3.17.

        "Permitted Liens" shall mean (i) Liens reflected on the Financial
Statements, (ii) Liens arising by operation of law, (iii) Liens for current
taxes, assessments or governmental charges or levies on property not yet due and
delinquent, and (iv) Liens for purchase money security interests in equipment
valued at less than $25,000 in the aggregate.

        "Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a limited liability company, a limited liability
partnership, a trust, an incorporated organization and a government or other
department or agency thereof.

        "Pre-Closing Periods" shall have the meaning assigned to such term in
Section 3.10(b).



                                       6


        "Purchase Price" shall mean the aggregate of the Magnolia Purchase Price
and the Hawthorne Purchase Price.

        "Purchaser" shall have the meaning assigned to such term in the preamble
to this Agreement.

        "Purchaser Indemnitee" shall have the meaning assigned to such term in
Section 11.2(a).

        "Redwood City Lease" shall mean that certain lease agreement dated July
1, 2000 by and between the Company and Oakbrook Properties, LLC regarding the
real property located at 670 Price Avenue, Redwood City, California.

        "Release" shall mean the active or passive disposing, discharging,
injecting, spilling, leaking, leaching, dumping, emitting, escaping, emptying,
seeping, placing and the like, into or upon any land or water or air, or
otherwise entering into the environment.

        "Remedy Percentage" shall mean, with respect to Magnolia, seventy five
percent (75%) and, with respect to Hawthorne Trust, twenty five percent (25%).

        "Returns" shall have the meaning assigned to such term in Section
3.10(a).

        "Seller" shall have the meaning assigned to such term in the preamble to
this Agreement.

        "Seller Indemnitee" shall have the meaning assigned to such term in
Section 11.2(b).

        "Seller Non-Compete Agreement" shall mean the non-competition agreement,
dated as of the date hereof, by and between James E. Hawthorne, an individual
residing in the State of California, and the Purchaser attached hereto as
Exhibit B.

        "Stock" shall have the meaning assigned to such term in Section 2.1.

        "Stock Repurchase and Earnout Agreement" shall mean the stock repurchase
and earnout agreement, dated as of the date hereof, by and between Hawthorne
Trust and the Purchaser attached hereto as Exhibit C.

        "Subsidiary" shall mean, with respect to any Person, (i) any corporation
more than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is owned by such Person directly or indirectly
through one or more Subsidiaries of such Person and (ii) any partnership,
association, joint venture or other entity in which such Person directly or
indirectly through one or more Subsidiaries of such Person has more than a 50%
voting equity interest.

        "Tax" or "Taxes" shall mean all taxes, assessments, charges, duties,
fees, levies or other governmental charges including, without limitation, all
Federal, state, local, foreign and other income, franchise, profits, capital
gains, capital stock, transfer, sales, use, occupation, property, excise,
severance, windfall profits, stamp, license, payroll, withholding and other
taxes,



                                       7


assessments, charges, duties, fees, levies or other governmental charges of any
kind whatsoever (whether payable directly or by withholding and whether or not
requiring the filing of a Return), all estimated taxes, deficiency assessments,
additions to tax, penalties and interest and shall include any liability for any
such amounts as a result either of being a member of a combined, consolidated,
unitary or affiliated group or of a contractual obligation to indemnify any
Person or other entity.

        "Tax Matter" shall have the meaning assigned to such term in Section
8.8.

        "Transaction Documents" shall mean, collectively, this Agreement, the
Escrow Agreement, the Seller Non-Compete Agreement, and the Stock Repurchase and
Earnout Agreement.

        "VEBAs" shall have the meaning assigned to such term in Section 3.16(a).

        "WARN" shall have the meaning assigned to such term in Section 3.15(j).

        "Working Capital" shall mean, with respect to any Person, the Current
Assets of such Person less the Current Liabilities of such Person.

        "Working Capital Escrow Shares" shall mean collectively, the Magnolia
Working Capital Escrow Shares and the Hawthorne Working Capital Escrow Shares.

                                    ARTICLE 2

                                  SALE OF STOCK

        Section 2.1 Sale of Stock. Upon the terms and subject to the conditions
set forth in this Agreement, (i) Magnolia shall sell, assign, transfer and
deliver to the Purchaser at the Closing, and the Purchaser shall purchase at the
Closing, 750,000 shares of common stock of the Company and (ii) Hawthorne Trust
shall sell, assign, transfer and deliver to the Purchaser at the Closing, and
the Purchaser shall purchase at the Closing, 250,000 shares of common stock of
the Company (such shares, collectively, the "Stock"). The certificates
representing the Stock shall be duly endorsed in blank, or accompanied by stock
powers duly executed in blank, by the sellers, with all necessary transfer tax
and other revenue stamps, acquired at the Sellers' expense affixed and canceled.
The Sellers agree to cure any deficiencies with respect to the endorsement of
the certificates representing the Stock owned by the Sellers or with respect to
the stock powers accompanying any such certificates.

        Section 2.2   Closing Payment.

               (a) At least two (2) but no more than seven (7) business days
prior to the Closing Date, the Sellers shall cause the Company to prepare and
deliver to the Purchaser an estimate of the Working Capital of the Company (the
"Estimated Working Capital") as of the Closing Date, which shall quantify in
reasonable detail the items constituting such Working Capital. The statement of
Estimated Working Capital shall be prepared in accordance with GAAP and
consistent with past practices of the Company.



                                       8


               (b) On the Closing Date, the Purchaser shall pay to (i) Magnolia
the Magnolia Closing Payment and (ii) Hawthorne Trust the Hawthorne Closing
Payment; provided that each of Magnolia and Hawthorne Trust shall deliver to
Chase Manhattan Trust Company, N.A. (the "Escrow Agreement") the Escrow Shares
to be held in an escrow account pursuant to the provisions of the Escrow
Agreement.

        Section 2.3   Determination of Purchase Price.

               (a) Promptly after the Closing Date, but in any event not later
than sixty (60) days following the Closing Date, the Purchaser shall cause the
company to prepare and deliver to the Sellers a statement of the Working Capital
of the Company (the "Closing Date Working Capital") as of the Closing Date. The
Closing Date Working Capital shall be prepared in accordance with GAAP and in
the same method and manner as the determination of the Estimated Working
Capital. If the Purchaser fails to deliver to the Sellers the statement of
Closing Date Working Capital within such sixty (60) day period, the Escrow Agent
shall automatically and without further instructions deliver to the Sellers the
Working Capital Escrow Shares.

               (b) (i) In the event that a Seller does not object to the
determination by the Purchaser of the Closing Date Working Capital by written
notice of objection (the "Notice of Objection") delivered to the Purchaser
within ten (10) business days after such Seller's proposed adjustments to the
proposed Closing Date Working Capital, the proposed Closing Date Working Capital
amount shall be deemed final and binding; (ii) If either Seller delivers a
Notice of Objection to the Purchaser, then any dispute shall be resolved as
follows:

               (x) The Sellers and the Purchaser shall promptly endeavor to
        agree upon the calculation of the Closing Date Working Capital. In the
        event that a written agreement determining the amount of the Closing
        Date Working Capital has not been reached within ten (10) business days
        after the date of receipt by the Purchaser from such Seller of such
        Seller's Notice of Objection thereto, then such Seller and the Purchaser
        shall submit its respective determination of the Closing Date Working
        Capital to Arthur Andersen (the "Arbitrator").

               (y) Within thirty (30) days after a party submits to the
        Arbitrator any dispute concerning the determination of the Closing Date
        Working Capital, the Arbitrator shall render a decision in accordance
        with this Section 2.3 along with a statement of reasons therefor. The
        decision of the Arbitrator shall be final and binding upon each party
        hereto and shall constitute an arbitral award upon which a judgment may
        be entered by a court of competent jurisdiction.

               (z) In the event a Seller and the Purchaser submit a Notice of
        Objection to the Arbitrator for resolution, the Sellers, on the one
        hand, and the Purchaser, on the other hand, will equally share the fees
        and expenses of the Arbitrator.

               (c) (i) If Closing Date Working Capital is less than the amount
of the Estimated Working Capital, then the Sellers shall pay to the Purchaser
the amount of any such



                                       9


deficiency within five (5) business days after the determination of Closing Date
Working Capital by return to the Purchaser of the number of shares of Working
Capital Escrow Shares equal in value to such deficiency in accordance with the
terms of the Escrow Agreement and, to the extent the value of the Working
Capital Escrow Shares is less than such deficiency, thereafter by check or wire
transfer (as requested) of immediately available funds to the account designated
in writing by the Purchaser. If Closing Date Working Capital exceeds the amount
of the Estimated Working Capital, then the Purchaser shall pay to the Sellers
the amount of any such excess up to the amount by which the Minimum Working
Capital exceeds the Estimated Working Capital, if any, within five (5) business
days after the determination of Closing Date Working Capital by check or wire
transfer (as requested) of immediately available funds to the account designated
in writing by the Sellers; (ii) The parties hereto acknowledge and agree that
the Working Capital Escrow Shares secure the obligations, if any, of the Sellers
pursuant to Section 2.3(c)(i).

        Section 2.4 Closing. The sale referred to in Section 2.1 (the "Closing")
shall take place at 10:00 a.m., at the offices of Doty Sundheim & Gilmore, 260
Sheridan Avenue, Suite 200, Palo Alto, CA, 94306-2009 on the date hereof, or at
such other time and date as the parties hereto shall mutually agree, which shall
in no event be prior to February 1, 2001. Such date is herein referred to as the
"Closing Date".

                                    ARTICLE 3

                         REPRESENTATIONS OF THE SELLERS

        Section 3. Representations of the Sellers.The Sellers represent and
warrant, severally, to the purchaser as follows (for purposes of this Article
III, "actual knowledge" shall mean (i) with respect to Magnolia, the actual
knowledge of David Shimmon and (ii) with respect to Hawthorne Trust, the actual
knowledge of James E. Hawthorne):

        Section 3.1 Existence and Good Standing. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California. The Company has the requisite corporate power and authority
to own, lease, operate its properties and to carry on its business as now being
conducted. The Company is duly qualified or licensed to do business and is in
good standing in each jurisdiction in which the character or location of the
properties owned, leased or operated by the Company or the nature of the
business conducted by the Company makes such qualification or license necessary,
except where the failure to be so duly qualified or licensed or in good
standing, could not reasonably be expected to have a material adverse effect on
the financial condition or results of operations of the Company.

        Section 3.2 Capital Stock; Subsidiaries. The Company has an authorized
capitalization consisting of 2,000,000 shares of common stock, no par value, of
which 1,000,000 shares are issued and outstanding. All issued and outstanding
shares of capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, and are not subject to, nor were
issued in violation of, any preemptive rights. No shares of capital stock of the
Company are reserved for issuance and there are no outstanding or authorized
options, warrants, rights, subscriptions, claims of any character, agreements,
obligations, convertible or exchangeable securities, or other commitments,
contingent or otherwise, relating to the capital stock of the Company, or
pursuant to which the Company is or may become



                                       10


obligated to issue shares of its capital stock or any securities convertible
into, exchangeable for, or evidencing the right to subscribe for any shares of
the capital stock of the Company. The Company does not have authorized or
outstanding bonds, debentures, notes or other indebtedness the holders of which
have the right to vote (or convertible or exchangeable into or exercisable for
securities having the right to vote) with the stockholders of the Company on any
matter. Except as set forth on Schedule 3.2, the Company does not own, directly
or indirectly, any capital stock or other equity, ownership or proprietary
interest in any Person. There are no restrictions of any kind which prevent or
restrict the payment of dividends by the Company.

        Section 3.3 Financial Statements. The Sellers have heretofore furnished
the Purchaser with the audited balance sheets of the Company as of September 30,
1997, September 30, 1998, September 30, 1999 and September 30, 2000 and the
related statements of income, equity and cash flows for the fiscal years then
ended (collectively, the "Financial Statements"). The Financial Statements,
including the footnotes thereto, have been prepared in accordance with GAAP
consistently followed throughout the period indicated, and fairly present in all
material respects the financial position of the Company at its date thereof, and
the results of operations and cash flows of the Company for the periods
indicated.

        Section 3.4 Books and Records. The minute books of the Company as
previously made available to the Purchaser and its representatives contain
accurate records of all meetings of, and corporate actions taken by (including
action taken by written consent), the shareholders and the Board of Directors of
the Company. The Company does not have any of its records, systems, controls,
data or information recorded, stored, maintained, operated or otherwise wholly
or partly dependent upon or held by any means (including any electronic,
mechanical or photographic process, whether computerized or not) which
(including all means of access thereto and therefrom) are not under the
exclusive ownership and direct control of the Company except for any records or
data maintained by the Company's accountants and payroll company.

        Section 3.5 Personal Property. Except for properties and assets
reflected in the Financial Statements, or acquired since September 30, 2000, in
each case which have been sold or otherwise disposed of in the ordinary course
of business, the Company owns (a) all of its personal properties and assets
(tangible and intangible), including, without limitation, all of the personal
properties and assets reflected in the Financial Statements, and (b) all of the
personal properties and assets (tangible or intangible) purchased by the Company
since September 30, 2000, in each case free and clear of all Liens, except for
Permitted Liens. All such personal properties and assets are in good operating
condition and in a state of good maintenance and repair, ordinary wear and tear
excepted, and are adequate and suitable for the purposes for which they are
presently being used.

        Section 3.6   Leases and Owned Real Property.

               (a) Schedule 3.6 attached hereto contains an accurate and
complete list of all (a) real property leased (directly or indirectly,
beneficially, or otherwise), to or from the Company ("Leased Property") and (b)
leases ("Leases") (including, without limitation, any amendments or
modifications thereto) to which the Company is a party (as lessee, sublessee,
sublessor or lessor), and a reference to any title policies and surveys relating
thereto which are in the possession of the Company. The term "Leases" includes,
without limitation, occupancy and



                                       11


similar agreements. Each Lease set forth on Schedule 3.6 (or required to be set
forth on Schedule 3.6) is in full force and effect and is valid and binding and
is enforceable against the Company and, to either Seller's actual knowledge
(after Due Inquiry, with respect to the Redwood City Lease only), the other
parties thereto, except to the extent that such enforcement may be affected by
applicable bankruptcy, reorganization, insolvency and similar laws affecting
creditors' rights generally and by general equitable principles (regardless of
whether enforcement is sought at law or in equity); all rents and additional
rents due to date on each such Lease have been paid and no rent has been paid
minor a than one (1) month in advance, and all other obligations of the lessees
thereunder required to have been performed to date have been performed by the
Company and, to either Seller's actual knowledge, the other parties thereto in
accordance with the provisions of the applicable Lease; in each case, with
respect to Leases where the Company is the lessee, such entity has been in
peaceable possession since it became the lessee under such Lease and is not in
default thereunder, and there are no uncured notices of default under any of
such Leases, and no waiver, indulgence or postponement of the lessee's
obligations thereunder has been granted by the lessor; and there exists no (and
neither of the execution of the Transaction Documents or the purchase of the
Stock hereunder or will give rise to any) event of default or event, occurrence,
condition or act which, with the giving of notice, the lapse of time or the
happening of any further event or condition, would become a default or give
rise, whether by the exercise by the holder of the landlord interest in the
Lease or by express provision of the Lease without exercise by such holder, to
so-called "recapture", termination or cancellation of, or have a material
adverse effect on, any Lease set forth on Schedule (or required to be set forth
on Schedule 3.6). Except as set forth on Schedule 3.6, neither the Company nor,
to either Seller's actual knowledge, any other Person who is a party to any
lease has violated any of the terms or conditions under any such lease in any
material respect. and all of the covenants to be performed by the Company or, to
either Seller's actual knowledge, by any other party under any such Lease have
been fully performed. Each Leased Property and all other property leased by the
Company is in good operating condition and in a state of good maintenance and
repair, ordinary wear and tear excepted, and is adequate and suitable for the
purposes for which it is presently being used. The Company has good clear record
and marketable leasehold interest in all Leased Property described in such
Leases, free and clear of any and all Liens, except for Permitted Liens. Except
as set forth on Schedule 3.6, the company has not assigned, transferred,
conveyed, mortgaged or encumbered any interest in any lease or in any Leased
Property subject thereto (or any portion thereof). Except as set forth on
Schedule 3.6, the Company has not been a party to a Lease with respect to which
it has or may have any continuing liability thereunder, notwithstanding that a
third party has assumed, guaranteed or otherwise agreed to pay and perform the
obligations of the Company. Except as set forth on Schedule 3.6, the Company is
not currently negotiating with respect to a Lease nor is it a party to a Lease
with respect to Leased Property with respect to which the term has not
commenced. The Company has not granted, nor has the benefit of, any options to
enter into any Leases or acquire any leasehold interest. No Leased Property
(including buildings, structures, improvements or appurtenances or any
equipment), nor the construction, operation or maintenance thereof, violates in
any material respect any provision of any federal, state or local law,
ordinance, rule or regulation, and the Company has valid certificates of
occupancy with respect to the Leased Property. To either Seller's actual
knowledge after Due Inquiry, each Leased Property is served by water, sewer,
sanitary sewer, storm drain facilities and other utilities adequate to serve
such Leased Property for its intended use. All public utilities necessary for
the intended use and enjoyment of each



                                       12


Leased Property are located in the public right-of-way or in private recorded
easements or rights of way abutting such Leased Property. The Sellers have
delivered to the Purchaser true and complete copies of each Lease including, in
each case, all exhibits and schedules thereto.

               (b) The Company owns no real property.

        Section 3.7   Material Contracts.

               (a) Except as set forth on Schedule 3.7 attached hereto or as
contemplated by any of the Transaction Documents, the Company is not a party to,
and is not bound by:

                      (i) any agreement, contract or commitment relating to the
employment of any Person by the Company, or any bonus, deferred compensation,
pension, profit sharing, stock option, employee stock purchase, retirement or
other employee benefit plan;

                      (ii) any agreement, indenture or other instrument which
contains restrictions with respect to payment of dividends or any other
distribution in respect of its capital stock;

                      (iii) any agreement, contract or commitment relating to an
outstanding obligation to make capital expenditures;

                      (iv) any loan (other than accounts receivable from trade
debtors arising in the ordinary course of business) or advance to (other than
travel or entertainment advances to employees made in the ordinary course of
business), or investment in, any Person or any agreement, contract or commitment
relating to the making of any such loan, advance or investment;

                      (v) any agreement relating to Indebtedness;

                      (vi) any guarantee or other contingent liability in
respect of any Indebtedness or obligation of any other Person (other than the
endorsement of negotiable instruments for collection in the ordinary course of
business);

                      (vii) any management service, consulting, financial
advisory or any other similar type of contract including, without limitation,
any contract with any investment or commercial bank;

                      (viii) any agreement, contract or commitment limiting the
ability of the Company to engage in any line of business or to compete with any
Person;

                      (ix) any agreement, contract or commitment which involves
$50,000 or more and is not cancelable without penalty within thirty (30) days;

                      (x) any other material agreement, contract or commitment;



                                       13


                      (xi) any collective bargaining agreement, labor contract
or other written arrangement with any labor union or any employee organization;
or

                      (xii) any agreement, contract or commitment with any
Affiliate.

               (b) Each contract or agreement set forth on Schedule 3.7 (or
required to be set forth on Schedule 3.7) is in full force and effect and there
exists no material default or event of default by the Company or, to either
Seller's actual knowledge after Due Inquiry, any other Person party to such
contract or agreement or event, occurrence, condition or act (including the
consummation of the transactions contemplated hereby) which, with the giving of
notice, the lapse of time or the happening of and other event or condition,
would become a material default or event of default by the company or, to either
Seller's actual knowledge after Due Inquiry, any other Person party thereto.

        Section 3.8 Consents and Approvals; No Violations. Other than as set
forth on Schedule 3.8 attached hereto, the execution and delivery of the
Transaction Documents by each Seller which is a party thereto and the
consummation by either Seller of the transactions contemplated thereby will not:
(1) violate any provision of the certificate of incorporation or bylaw's (or
other organizational document) of the Company; (2) violate any statute,
ordinance, rule, regulation, order or decree of any court or of any governmental
or regulatory body, agency or authority applicable to the Company or by which
any of its properties or assets may be bound; (3) require any Person to make or
obtain any filing with or permit, consent or approval or give any notice to, any
governmental or regulatory body, agency or authority; or (4) result in a
violation or breach of conflict with, constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
cancellation, payment or acceleration) under, or result in the creation of any
Lien upon any of the properties or assets of the Company under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, license,
Franchise, permit, agreement, lease, franchise agreement, collective bargaining
agreement or other agreement, instrument or obligation to which the Company is a
party, or by which the Company or any of its properties or assets are bound.

        Section 3.9   Litigation.

               (a) Except as set forth on Schedule 3.9, there is no action,
suit, proceeding at law or in equity, arbitration or administrative or other
proceeding by or before or, to either Seller's actual knowledge after Due
Inquiry, any investigation by, any governmental or other instrumentality or
agency, pending, or, to either Seller's actual knowledge after Due Inquiry
threatened against or affecting the Company or any of its respective properties
or rights. and neither Seller knows of any valid basis for any such action,
proceeding or investigation.

               (b) The Company is not subject to any judgment, order or decree
entered in any lawsuit or proceeding.

        Section 3.10  Taxes.

               (a) Tax Returns. The Company has, after taking into consideration
applicable extensions, timely filed or caused to be timely filed with the
appropriate taxing authorities all returns, statements, forms and reports for
Taxes ("Returns") that are required by



                                       14


law to be filed by, or with respect to, the Company on or prior to the Closing
Date. The Returns accurately reflect and will accurately reflect all material
liability for Taxes of the Company for the periods covered thereby and all other
information set forth on the Returns is complete and accurate in all material
respects.

               (b) Payment of Taxes. (i) All Taxes and Tax liabilities of the
Company for all taxable years or periods that end on or before the Closing Date
have been timely paid in full on or prior to the Closing Date and (ii) with
respect to any taxable year or period beginning before and ending after the
Closing Date, all Taxes and Tax liabilities with respect to the portion of such
taxable year or period ending on and including the Closing Date (all taxable
periods or portions thereof described in clause (i) and clause (ii) referred to
as "Pre-Closing periods") have been timely paid in full on or prior to the
Closing Date or are fully set forth on Schedule 3.10(b).

               (c) Other Tax Matters.

                      (i) The Company has not been the subject of an audit or
other examination of Taxes by any taxing authority and, except as set forth on
Schedule 3.10(c)(i), the Company has not received any notices from any taxing
authority relating to any issue which could affect the Tax liability of the
Company.

                      (ii) Except as set forth on Schedule 3.10(c)(ii) attached
hereto, none of the Sellers or the Company, as of the Closing Date, (A) has
entered into an agreement or waiver or been requested to enter into an agreement
or waiver extending any statute of limitations relating to the payment or
collection of Taxes of the Company, (B) has applied for and/or received a ruling
or determination from a taxing authority regarding a past or prospective
transaction of the Company, or (C) is presently contesting the Tax liability of
the Company before any court, tribunal or agency.

                      (iii) Except as set forth on Schedule 3.10(c)(iii)
attached hereto, the Company has not been included in any "consolidated",
"unitary" or "combined" Return provided for under the law of the United States,
any foreign jurisdiction or any state or locality with respect to Taxes for any
taxable period for which the statute of limitations has not expired.

                      (iv) The Company has not applied for, been granted, or
agreed to any accounting method change for which it will be required to take
into account any adjustment under Section 481 of the Code or any similar
provision of the Code or the corresponding tax laws of any nation, state or
locality, and the Company will not be required to include any item in income
after the Closing Date for Tax purposes which has economically accrued prior to
the Closing Date.

                      (v) No election under Section 341(f) of the Code has been
made or shall be made prior to the Closing Date to treat the Company as a
consenting corporation, as defined in Section 341 of the Code.

                      (vi) All Taxes which the Company is or was required by law
to withhold or collect have been duly withheld or collected, and have been
timely paid over to the proper authorities to the extent due and payable.



                                       15


                      (vii) The Company is not a "United States real property
holding corporation" within the meaning of Section 897(c)(2) of the Code.

                      (viii) Except as set forth on Schedule 3.10(c)(viii)
attached hereto, there are no tax sharing, allocation, indemnification or
similar agreements in effect as between the Company or any predecessors or
Affiliates thereof and any other party (including the Sellers or the Company or
any predecessors or Affiliates thereof) under which the Purchaser or the Company
could be liable for any Taxes or other claims of any party.

                      (ix) No indebtedness of the Company consists of "corporate
acquisition indebtedness" within the meaning of Section 279 of the Code or
otherwise bears interest that is not deductible for Federal income tax purposes.

                      (x) The Company has not received a written claim from any
taxing authority in a jurisdiction where the Company does not file Tax Returns
that the Company is or may be subject to taxation by that jurisdiction.

                      (xi) The Company is not a party to any agreement that
would require the Company or any of its Subsidiaries or any Affiliate thereof to
make any payment that would constitute an "excess parachute payment" for
purposes of Sections 2806 and 4999 of the Code.

                      (xii) None of the transactions contemplated by this
Agreement will result in the realization of any deferred income or gain that
will be recognized by the Company after the Closing Date.

                      (xiii) The Company has made a valid S election under
Section 1361 of the Code. With respect to the Company, such election was
initially made on September 1, 1993. The Sellers previously disclosed to the
Purchaser that the Company made an S election under the Code, withdrew it on
September 21, 1999, and subsequently had the S election reinstated on October 5,
1999. The Company has also made all such elections required under any analogous
provisions of state or local law. The Company will continue to be a valid S
corporation through the day immediately preceding the Closing Date.

        Section 3.11 Liabilities. Except as set forth on Schedule 3.11 attached
hereto, the Company has no outstanding claims or liabilities, contingent or
otherwise, except as set forth on the Financial Statements or referred to in the
footnotes thereto or incurred subsequent to September 30, 2000 in the ordinary
course of business consistent with past practices not involving borrowings by
the Company. The Company does not have any outstanding Indebtedness.

        Section 3.12 Insurance. Set forth on Schedule 3.12 attached hereto is a
complete list of insurance policies which the Company maintains with respect to
its businesses, properties or employees. Such policies are in full force and
effect (and will, after consummation of the transactions contemplated by the
Transaction Documents, remain in full force and effect unless terminated at the
election of the Purchaser), and all premiums due have been paid in full and are
free from any right of termination on the part of the insurance carriers. Such
policies, with respect to their amounts and types of coverage, are, to either
Seller's actual knowledge after Due



                                       16


Inquiry adequate to insure fully against risks that, to either Seller's actual
knowledge after Due Inquiry, should be insured against and, based on discussions
with the insurance broker of the Company. Such policies are adequate to insure
fully against risks customarily insured against and in amounts customarily
covered by companies which are similarly situated to the Company. Since
September 30, 2000, there has not been any material adverse change in the
relationship of the Company with their respective insurers or in the premiums
payable pursuant to such policies.

        Section 3.13  Intellectual Properties.

               (a) Schedule 3.13 attached hereto contains an accurate and
complete list of all material Intellectual Property owned by, licensed to or
used by the Company (other than "shrink-wrap" licenses related to
"off-the-shelf" software) (collectively, the "Listed Intellectual Property").
The patents, registered copyrights, registered trademarks and service marks, and
domain names included in the Listed Intellectual Property have been duly
registered in, filed in or issued by the United States Patent and Trademark
Office, United States Copyright Office or a duly accredited and appropriate
domain name registrar. the appropriate offices in the various states of the
United States and the appropriate offices of other jurisdictions, and each such
registration, filing and issuance remains in full force and effect as of the
Closing Date. Except as set forth on Schedule 3.13, true and complete copies of
all license agreements to which reference is therein made have been delivered by
the Sellers to the Purchaser.

               (b) Except as set forth on Schedule 3.13, the Company is not a
party to any material license or agreement, whether as licensor, licensee, or
otherwise with respect to any of the Intellectual Property. To the extent any
Intellectual Property is used under license by the company, no notice of a
material default has been sent or received by either Seller under any such
license which remains uncured and the execution, delivery and performance of
each Sellers' obligations hereunder will not result in such a default. Each such
material license agreement is a legal, valid and binding obligation of the
Company and, to either Seller's actual knowledge after Due Inquiry, the other
Persons party thereto, enforceable in accordance with the terms thereof except
as may be limited by applicable bankruptcy, reorganization, insolvency and
similar laws affecting creditors' rights generally and by general equitable
principles (regardless of whether enforcement is sought at law or in equity).

               (c) Except as set forth on Schedule 3.13, the Company owns or is
licensed to use, all of the Listed Intellectual Property, free and clear of any
Liens, without obligation to pay any royalty or any other fees with respect
thereto and the operation of its businesses requires no rights under
Intellectual Property other than the Listed Intellectual Property. The operation
of the Company's business and the Company's use of any Intellectual Property
does not infringe, misuse, or misappropriate any Intellectual Property rights of
any third party. No Listed Intellectual Property has been canceled, abandoned or
otherwise terminated and all renewal and maintenance fees in respect thereof
have been duly paid.

               (d) Except as set forth on Schedule 3.13, since February 28,
1998, the Company has riot received any written notice from any third parry
challenging the right of the Company to use any Intellectual Property. The
Listed Intellectual Property constitutes ail the intellectual Property necessary
to operate the business of the Company as of the Closing Date in the manner in
which it was operated prior to the Closing Date. Immediately after the Closing



                                       17


Date, the purchaser will have all Intellectual Property rights necessary to
operate the business of the Company in the manner in which it was operated prior
to the Closing Date.

               (e) Except as set forth on Schedule 3.13, since February 28,
1998, the Company has not made any claim in writing of a violation,
infringement, misuse or misappropriation by any person of any of its rights to,
or in connection with, any Intellectual Property, which claim is still pending.

               (f) Except as set forth on Schedule 3.13, there are no pending
or, to either Seller's actual knowledge after Due Inquiry, threatened claims of
a violation, infringement, misuse or misappropriation by the Company of any
Intellectual Property, or of the invalidity of any patent or of the registration
of a copyright, trademark, service mark, domain name, or trade name included in
the Listed Intellectual Property.

               (g) Except as set forth on Schedule 3.13, there are no
interferences or other contested proceedings either pending or, to either
Seller's actual knowledge after Due Inquiry, threatened, in the United States
Copyright Office, the United States Patent and Trademark Office, or any
governmental authority relating to any pending application with respect to the
Listed Intellectual Property.

        Section 3.14 Accounts Receivable. The amount of all accounts receivable,
unbilled invoices and other debts due or recorded in the respective records and
books of account of the Company as being due to it as at the Closing Date (less
the amount of any provision or reserve therefor made in accordance with GAAP
consistent with past practice in the respective records and books of account of
the Company) has been properly recorded and represents bona fide sales made in
the ordinary course of business; to either Seller's actual knowledge after Due
Inquiry. none of such accounts receivable or other debts are subject to any
counterclaim or set-off except to the extent of any such provision or reserve.
The reserve for doubtful accounts reflected in the Financial Statements has been
established in accordance with GAAP consistent with past practice. Except as set
forth on Schedule 3.14, there have been no material write-offs and no material
adverse change since September 30, 2000 in the condition of accounts receivable
or other debts due to the Company or the allowances with respect thereto from
that reflected in the Financial Statements.

        Section 3.15 Employment Relations. Except as set forth on Schedule 3.15
attached hereto:

               (a) the Company is in substantial compliance with all federal,
state or other domestic applicable laws, respecting employment and employment
practices, terms and conditions of employment and wages and hours, and has not
and is not engaged in any unfair labor practice;

               (b) no unfair labor practice complaint against the Company, is
pending or, to either Sellers actual knowledge after Due Inquiry, threatened
before the National Labor Relations Board;



                                       18


               (c) there is no labor strike, dispute, slowdown or stoppage
actually pending or, to ether Seller's actual knowledge after Due Inquiry,
threatened against or involving the Company;

               (d) to either Seller's actual knowledge after Due Inquiry, no
collective bargaining or union representation question exists respecting the
employees of the Company;

               (e) no material grievance which might have an adverse effect upon
the Company or the conduct of its business, and no arbitration proceeding
arising out of or under any collective bargaining agreement with respect to
employees of the Company is pending and no claim therefor has been asserted;

               (f) no collective bargaining agreement is currently applicable to
the Company or is being negotiated by the Company with respect to employees of
any such entity;

               (g) none of the Company or either Seller has received any notice
of the termination of employment from any employee of the Company nor any
notification of intent to leave by any employee of the Company, in each case who
receives total compensation (including salary and bonus) from the Company in
excess of $50,000 per year;

               (h) there exists no written or oral employment, consulting,
severance or indemnification agreements with respect to employees of the Company
or any agreement that would give am Person the right to receive any payment from
the Company as a result of this Agreement; and

               (i) the Company is in compliance with the requirements of the
Federal Workers' Employment and Retraining Notification Act (hereinafter
referred to as "WARN") and the Company, has no liabilities pursuant to WARN.

        Section 3.16  Employee Benefit Plans.

               (a) List of Plans. Set forth on Schedule 3.16(a) attached hereto
is an accurate and complete list of all domestic and foreign (i) "employee
benefit plans," within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended, and the rules and regulations
thereunder ("ERISA"); (ii) bonus, stock option, stock purchase, restricted
stock, incentive fringe benefit, "voluntary employees' beneficiary associations"
("VEBAs") under Section 501(c)(9) of the Code, profit-sharing, pension or
retirement, deferred compensation, medical, life insurance, disability,
accident, salary continuation, severance, accrued leave, vacation, sick leave,
supplemental retirement and unemployment benefit plans, programs, arrangements,
commitments and/or practices (whether or not insured); and (iii) employment,
consulting, termination, and severance contracts or agreements; in each case for
active, retired or former employees or directors, whether or not any such plans,
programs, arrangements, commitments, contracts, agreements and/or practices
(referred to in (i), (ii) or (iii) above) are in writing or are otherwise exempt
from the provisions of ERISA; that have been established, maintained or
contributed to (or with respect to which an obligation to contribute has been
undertaken) or with respect to which any potential liability is borne by the
Company (including, for this purpose and for the purpose of all of the
representations in this Section 3.16, any predecessors to the Company and all
employers (whether or not incorporated) that would be



                                       19


treated together with the Company and/or the Sellers as a single employer (1)
within the meaning of Section 414 of the Code, or (2) as a result of the Company
and/or the Sellers being or having been a general partner of any such employer),
since January 1, 1993 ("Employee Benefit Plans").

               (b) Status of Plans. Each Employee Benefit Plan (including any
related trust) complies in form with the requirements of all applicable laws,
including, without limitation. ERISA and the Code, and has at all times been
maintained and operated in substantial compliance with its terms and the
requirements of all applicable laws, including, without limitation, ERISA and
the Code. No complete or partial termination of any Employee Benefit Plan has
occurred or is expected to occur. The Company has no commitment, intention or
understanding to create, modify or terminate any Employee Benefit Plan. Except
as required to maintain the tax-qualified status of any Employee Benefit Plan
intended to qualify under Section 401 (a) of the Code, no condition or
circumstance exists that would prevent the amendment or termination of an
Employee Benefit Plan. No event has occurred and no condition or circumstance
has existed that could result in a material increase in the benefits under or
the expense of maintaining any Employee Benefit Plan from the level of benefits
or expense incurred for the most recent fiscal year ended thereof.

               (c) No Pension Plans. No Employee Benefit Plan is an "employee
pension benefit Plan" (within the meaning of Section 3(2) of ERISA) subject to
Section 412 of the Code or Section 302 or Title IV of ERISA. Neither the Company
nor any of its Subsidiaries has ever maintained or contributed to, or had any
obligation to contribute to (or borne any liability with respect to) any
"multiple employer plan" (within the meaning of the Code or ERISA) or any
"multi-employer plan" (as defined in Section 4001(a)(3) of ERISA).

               (d) Liabilities. The Company does not maintain any Employee
Benefit Plan which is a "group health plan" (as such term is defined in Section
607(1) of ERISA or Section 5000(b)(1) of the Code) that has not been
administered and operated in all respects in compliance with the applicable
requirements of Part 6 of Subtitle B of Title I of ERISA and Section 4980B of
the Code and the Company is not subject to any material liability, including,
without limitation, additional contributions, fines, taxes, penalties or loss of
tax deduction as a result of such administration and operation. No Employee
Benefit Plan which is such a group health plan is a "multiple employer welfare
arrangement," within the meaning of Section 3(40) of ERISA. Each Employee
Benefit Plan that is intended to meet the requirements of Section 125 of the
Code meets such requirements, and each program of benefits for which employee
contributions are Provided pursuant to elections under any Employee Benefit Plan
meets the requirements of the Code applicable thereto. The Company does not
maintain any Employee Benefit Plan which is an employee welfare benefit plan"
(as such term is defined in Section 3(1) of ERISA) that has provided any
"disqualified benefit" (as such term is defined in Section 4976(b) of the Code)
with respect to which an excise tax could be imposed.

        The Company does not maintain any Employee Benefit Plan (whether
qualified or nonqualified under Section 401(a) of the Code) providing for
post-employment or retiree health, life insurance and/or other welfare benefits
and having unfunded liabilities, and the Company does not have any obligation to
provide any such benefits to any retired or former employees or active employees
following such employees' retirement or termination of service. The Company does
not have any unfunded liabilities pursuant to any Employee Benefit Plan that is
not



                                       20


intended to be qualified under Section 401(a) of the Code. No Employee Benefit
Plan holds as an asset any interest in any annuity contract, guaranteed
investment contract or any other investment or insurance contract, policy or
instrument issued by an insurance company that, to either Seller's actual
knowledge after Due Inquiry, is or may be the subject of bankruptcy,
conservatorship, insolvency, liquidation, rehabilitation or similar proceedings.

        The Company has not incurred any liability for any tax or excise tax
arising under Chapter 43 of the Code, and no event has occurred and no condition
or circumstance has existed that could give rise to any such liability.

        There are no actions, suits, claims or disputes pending, or, to either
Seller's actual knowledge after Due Inquiry, threatened, anticipated or expected
to be asserted against or with respect to any Employee Benefit Plan or the
assets of any such plan (other than routine claims for benefits and appeals of
denied routine claims). No civil or criminal action brought pursuant to the
provisions of Title I, Subtitle B, Part 5 of ERISA is pending, or, to either
Seller's actual knowledge after Due Inquiry, threatened, anticipated, or
expected to be asserted against the Company or any fiduciary of any Employee
Benefit Plan, in any case with respect to any Employee Benefit Plan. To either
Seller's actual knowledge after Due Inquiry, no Employee Benefit Plan or any
fiduciary thereof has been the direct or indirect subject of an audit,
investigation or examination by any governmental or quasi-governmental agency.

               (e) Contributions. Full payment has been timely made of all
amounts which the Company is required, under applicable law or under any
Employee Benefit Plan or any agreement relating to any Employee Benefit Plan, to
have paid as contributions or premiums thereto as of the last day of the most
recent fiscal year of such Employee Benefit Plan ended prior to the date hereof.
All such contributions and/or premiums have been fully deducted for income tax
purposes and no such deduction has been challenged or disallowed by any
governmental entity, and to either Seller's actual knowledge after Due Inquiry,
no event has occurred and no condition or circumstance has existed that could
give rise to any such challenge or disallowance. The Company has made adequate
provision for reserves to meet contributions and premiums and any other
liabilities that have not been paid or satisfied because they are not yet due
under the terms of any Employee Benefit Plan, applicable law or related
agreements. Benefits under all Employee Benefit Plans are as represented and
have not been increased subsequent to the date as of which documents have been
provided.

               (f) Tax Qualification. Each Employee Benefit Plan intended to be
qualified under Section 401(a) of the Code has, as currently in effect, been
determined to be so qualified by the Internal Revenue Service. Each trust
established in connection with any Employee Benefit Plan which is intended to be
exempt from Federal income taxation under Section 501(a) of the Code has, as
currently in effect, been determined to be so exempt by the Internal Revenue
Service. Each VEBA has been determined by the Internal Revenue Service to be
exempt from Federal income tax under Section 501(c)(9) of the Code. Since the
date of each most recent determination referred to in this paragraph (f), no
event has occurred and no condition or circumstance has existed that resulted or
is likely to result in the revocation of any such determination or that could
adversely affect the qualified status of any such Employee Benefit Plan or the
exempt status of any such trust or VEBA.



                                       21


               (g) Transactions. Neither the Company nor any of its directors,
officers, employees or, to either Sellers actual knowledge after Due Inquiry,
other persons who participate in the operation of any Employee Benefit Plan or
related trust, or funding vehicle, has engaged in any transaction with respect
to any Employee Benefit Plan or breached any applicable fiduciary
responsibilities or obligations under Title I of ERISA that would subject any of
them to a tax, penalty, or liability for prohibited transactions or breach of
any obligations under ERISA or the Code or would result in any claim being made
under, by or on behalf of any such Employee Benefit Plan by any party with
standing to make such claim.

               (h) Triggering Events. The execution of this Agreement and the
consummation of the transactions contemplated hereby, do not constitute a
triggering event under any Employee Benefit Plan, policy, arrangement,
statement, commitment or agreement, whether or not legally enforceable, which
(either alone or upon the occurrence of any additional or subsequent event) will
or may result in any payment (whether of severance pay or otherwise), "parachute
payment" (as such term is defined in Section 2806 of the Code), acceleration,
vesting or increase in benefits to any employee or former employee or director
of the Company. No Employee Benefit Plan provides for the payment of severance,
termination, change in control or similar type payments or benefits.

               (i) Documents. The Sellers have delivered or caused to be
delivered to the Purchaser and its counsel true and complete copies of all
material documents in connection with each Employee Benefit Plan including,
without limitation (where applicable): (i) all Employee Benefit Plans as in
effect on the date hereof, together with all amendments thereto, including in
the case of any Employee Benefit Plan not set forth in writing, a written
description thereof; (ii) all current summary plan descriptions, summaries of
material modifications, and material communications; (iii) all current trust
agreements, declarations of trust and other documents establishing other funding
arrangements (and all amendments thereto and the latest financial statements
thereof); (iv) the most recent Internal Revenue Service determination letter
obtained Code with respect to each Employee Benefit Plan intended to be
qualified under Section 401(a) of the Code or exempt under Section 501(a) or
501(c)(9) of the Code; (v) the annual report on Internal Service Form
5500-series or 990 for each of the last three years for each Employee Benefit
Plan required to file such form; (vi) the most recently prepared financial
statements for each Employee Benefit Plan for which such statements are
required; and (vii) all contracts and agreements relating to each Employee
Benefit Plan, including, without limitation, service provider agreements,
insurance contracts, annuity contracts, investment management agreements,
subscription agreements, participation agreements, and recordkeeping agreements
and collective bargaining agreements.

        Section 3.17 Permits. The Company has obtained and possesses all
governmental licenses, permits, franchises and other authorizations
(collectively, "Permits") of and has made all required registrations or filings
with, any federal, state, local or foreign governmental authority related to the
ownership of its properties or the operation of its assets and business as
currently conducted all such Permits are in full force and effect. No
proceedings against the Company are pending or, to either Seller's actual
knowledge after Due Inquiry, threatened, seeking the revocation or the
limitation of any Permits. Any applications for the renewal of any such Permits
which were due prior to the Closing Date have been or will be timely filed prior
to the Closing Date.



                                       22


        Section 3.18 Interests in Clients. Suppliers etc. Except as set forth on
Schedule 3.18 attached hereto, none of the Company nor any of its Affiliates,
directors, officers, or employees possesses, directly or indirectly, any
financial interest in, or is a director, officer or employee of, any Person
which is a client, supplier, customer, lessor, lessee, or competitor or
potential competitor of the Company. Ownership of two percent (2%) or less of
any class of securities of a company whose securities are registered under the
Securities Exchange Act of 1934, as amended, shall not be deemed to be a
financial interest for purposes of this Section 3.18.

        Section 3.19 Bank Accounts Powers of Attorney and Compensation of
Employees. Set forth on Schedule 3.19 attached hereto is an accurate and
complete list showing (a) the name and address of each bank in which the Company
has an account or safe deposit box, the number of any such account or any such
box and the names of all Persons authorized to draw thereon or to have access
thereto, (b) the names of all Persons, if any, holding powers of attorney from
the Company and (c) the names of all persons whose total compensation (including
salary and bonus) from the Company for the fiscal year ended on September 30,
2000 exceeded an annualized rate of $100,000, together with a statement of the
full amount paid or payable to each such person for services rendered during
such fiscal year.

        Section 3.20 No Changes. Since September 30, 2000, except as set forth
on Schedule 3.20 attached hereto, the Company has not:

               (a) incurred any liability or obligation of any nature (whether
accrued, absolute, contingent or otherwise), except in the ordinary course of
business consistent with past practice:

               (b) permitted any of its assets to be subjected to any Lien
(other than Permitted Liens);

               (c) sold, transferred or otherwise disposed of any assets except
inventory in the ordinary course of business consistent with past practice;

               (d) made any capital expenditure or commitment therefor in an
amount exceeding $40,000 in any single instance or $120,000 in the aggregate;

               (e) redeemed, purchased or otherwise acquired any shares of its
capital stock;

               (f) issued any capital stock or granted or issued any options,
warrants, rights, subscriptions, claims of any character, obligations,
convertible or exchangeable securities, or other commitments, contingent or
otherwise, relating to any of its capital stock;

               (g) made any bonus, pension, retirement or profit sharing
distribution or payment of and kind except in the ordinary course of business
consistent with past practice;

               (h) incurred any Indebtedness or made any loan to any Person;

               (i) written off as uncollectible any notes or accounts
receivable, except write-offs in the ordinary course of business charged to
applicable reserves;



                                       23


               (j) granted any increase in the rate of wages, salaries, bonuses
or other remuneration of any executive or other employee, except in the ordinary
course of business consistent with past practice;

               (k) canceled or waived any claims or rights of substantial value;

               (l) made any change in any method of accounting or auditing
practice;

               (m) otherwise conducted its business or entered into any
transaction, except in the usual and ordinary manner and in the ordinary course
of business consistent with past practice;

               (n) made any payments to any Affiliate, except payments made in
the ordinary course of business;

               (o) entered into any agreement with any Affiliate;

               (p) done anything which would be restricted by Section 7.2;

               (q) failed to maintain its corporate books and records in the
ordinary course of business consistent with past practice; or

               (r) agreed, whether or not in writing, to do any of the
foregoing.

        No fact or condition exists or is contemplated or threatened which might
cause any change described in clauses (a)-(r) hereof in the future.

        Section 3.21 Compliance with Laws. The Company is in compliance with all
material laws, regulations, orders, judgments and decrees applicable to such
entity.

        Section 3.22 Broker's or Finder's Fees, etc. No agent, broker, person or
firm acting on behalf of the Company is, or will be, entitled to any commission
or broker's or finder's fees from any of the parties hereto, or from any
Affiliate of any of the parties hereto, in connection with any of the
transactions contemplated by this Agreement. All engagement letters from all
professionals (including, without limitation, accountants, financial advisors
and attorneys) utilized by the Company in connection with the transactions
contemplated hereby provide that such Persons shall look only to the Company or
the Sellers for payment of their fees and expenses; provided, that the Company
shall bear no liability for such fees and expenses as of the Closing Date, and
the Sellers will be solely responsible for the payment of all such fees and
expenses on and after the Closing Date.

        Section 3.23 Environmental Laws and Regulations. Except as set forth on
Schedule 3.23:

               (a) During the period in which the Company has been in possession
of Company Property, Hazardous Materials have not at any time been generated,
used, treated or stored on, or transported to or from, or Released on, any
Company Property or, to either Seller's



                                       24


actual knowledge after Due Inquiry, any property adjoining, adjacent to or in
the vicinity of any Company Property:

               (b) The Company is in compliance with all Environmental Laws and
the requirements of any permits issued under such Environmental Laws with
respect to any Company Property;

               (c) There are no past, pending or threatened Environmental Claims
against the Company or any Company Property;

               (d) There are no facts, circumstances. conditions or occurrences
regarding the Company or any Company Proper, or, to either Seller's actual
knowledge after Due Inquiry, any property adjoining or in the vicinity of any
Company Property that could reasonably be anticipated (i) to form the basis of a
Environmental Claim against the Company or any Company Property, or assets or
(ii) to cause such Company Property or assets to be subject to any material and
non-customary restrictions on its conducting business, occupancy, use or
transferability under any Environmental Law.

        During the period in which the Company has been in possession of Company
Property, there have been no underground storage tanks located on any Company
Property, or to either Seller's actual knowledge after Due Inquiry, on any
property adjoining or adjacent to any Company Property.

        Section 3.24 Customers. None of the customers of the Company set forth
on Schedule 3.24 has expressly informed (orally or in writing) either Seller or
the Company that it intends to cease to do business with the Company, or
materially alter the amount of business presently done with the Company. The
Sellers make no representation and express no opinion regarding the effect an
industry or general economic slowdown or recession might have on any customer's
relationship with the Company.

        Section 3.25 Disclosure. None of this Agreement, any Schedule, Exhibit
or certificate attached hereto or delivered pursuant to this Agreement or any
other document or statement in which has been supplied by or on behalf of the
Sellers or by directors or officers of the Company in connection with the
transactions contemplated by this Agreement contains any untrue statement of a
material fact, or omits any statement of a material fact necessary in order to
make the statements contained herein or therein not misleading.

        Section 3.26 Copies of Documents. The Sellers have caused to be made
available for inspection and copying by the Purchaser and their advisers, true,
complete and correct copies of all documents referred to in this Article III or
in any Schedule to this Agreement.

        Section 3.27 Inventory. The inventory of the Company consists of items
which are good and merchantable, and are of a quality and quantity presently
usable or salable in the ordinary course of business, except for items reserved
against as obsolete or below standard quality in accordance with GAAP consistent
with past practice. The value of all inventory items reflected on the books and
records of the Company, including materials and supplies and work-in-process,
have been recorded at the lower of cost or fair market value consistent with the
accounting policies and practices of the Company. Since the September 30, 2000
Financial



                                       25


Statements, the Company has not changed the method of valuing its inventory or
computing the provisions for items that are obsolete or below standard quality.
The Company has the type and quantities of inventories appropriate to conduct
the operations of the Company as they have heretofore been conducted. No
consignor has any rights or claims to any assets of the Company.

        Section 3.28 No Other Representations or Warranties. Except as expressly
provided in this Agreement, the Sellers hereby disclaim the making of any
representations or warranties. express or implied, regarding the Company.
Purchaser acknowledges that, except as otherwise expressly provided in this
...Agreement: (i) the Sellers shall not incur any cost or liability with respect
to the content or accuracy of any report, opinion or conclusion of any Person
who has examined the Company: (ii) Purchaser is a Person experienced in
acquisition transactions of the type contemplated in this Agreement and has
entered into this Agreement with the intention of making and relying upon its
own investigation of the physical, environmental and economic condition of the
Company: and (iii) Purchaser is not relying upon any representations or
warranties made by the Sellers or anyone acting or claiming to act on the
Sellers' behalf concerning the Company, except as provided in this Agreement.
Purchaser further acknowledges that it has not received from the Sellers any
accounting, tax, legal or other advice with respect to this transaction and is
relying solely upon the advice of its own accounting, tax, legal and other
advisors.

        Section 3.29 Disclosed Matters. If, prior to Closing, a material breach
of the Sellers' representations and warranties pursuant to Article III is
disclosed to the Purchaser by Sellers in writing, then Purchaser's sole and
exclusive right under this Agreement, at its election, is either to (i) proceed
with the Closing, the effect of which is to waive such breach of the
representations and warranties and any right or claim arising therefrom; or (ii)
terminate this Agreement.

                                    ARTICLE 4

                           REPRESENTATIONS OF MAGNOLIA

        Section 4. Representations of Magnolia. Magnolia represents and
warrants to the Purchaser as follows:

        Section 4.1 Power and Authority. Magnolia has all limited liability
company power and authority to enter into the Transaction Documents to which it
is a party, and to consummate the transactions contemplated thereby. Each of the
Transaction Documents to which Magnolia is a party has been duly executed and
delivered by Magnolia and, assuming due execution of such Transaction Document
by the other parties thereto, constitutes the valid and binding obligation of
Magnolia, enforceable against Magnolia in accordance with its terms, except to
the extent that its enforceability may be limited by applicable bankruptcy,
insolvency, reorganization moratorium or other similar laws affecting creditors'
rights generally and by general equitable principles (regardless of whether the
issue of enforceability is considered in a proceeding in equity or at law).

        Section 4.2 Ownership of Stock. Magnolia is the lawful owner,
beneficially and of record, of the Stock opposite its name on Schedule 4.2
attached hereto, free and clear of all liens. Magnolia has full legal right,
power and authority to enter into this Agreement and to sell,



                                       26

assign, transfer and convey the Stock owned by Magnolia pursuant to this
Agreement, and the delivery to Purchaser of the Stock owned by Magnolia pursuant
to the provisions of this Agreement will transfer to Purchaser good and
marketable title thereto, free and clear of all Liens.

        Section 4.3 Broker's or Finder's Fees, etc. No agent, broker, person or
firm acting on behalf of Magnolia is, or will be, entitled to any commission or
broker's or finder's fees from any of the parties hereto, or from any Affiliate
of any of the parties hereto, in connection with any of the transactions
contemplated by this Agreement. All engagement letters from all professionals
(including without limitation, accountants, financial advisors and attorneys)
utilized by Magnolia in connection with the transactions contemplated hereby
provide that such persons shall look only to Magnolia for payment of their fees
and expenses.

        Section 4.4. Consents and Approvals; No Violations. Other than as set
forth on Schedule 4.4 attached hereto, the execution and delivery of the
Transaction Documents to which it is a party by Magnolia and the consummation by
Magnolia of the transactions contemplated thereby will not: (1) violate any
provision of the certificate of formation or limited liability Company's
operating agreement (or other organizational document) of Magnolia; (2) violate
any statute, ordinance, rule, regulation, order or decree of any court or of any
governmental or regulatory body, agency or authority applicable to Magnolia or
by which any of its properties or assets may be bound; (3) require any Person to
make or obtain any filing with or any permit, consent or approval or give any
notice to, any governmental or regulatory body, agency or authority; or (4)
result in a violation or breach of, conflict with, constitute (with or without
due notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation, payment or acceleration) under, or result in the
creation of any Lien upon any of the properties or assets of Magnolia under, any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
license, franchise, permit, agreement, lease, franchise agreement, collective
bargaining agreement or other agreement, instrument or obligation to which
Magnolia is a party, or by which Magnolia or any of its properties or assets are
bound.

                                    ARTICLE 5

                       REPRESENTATIONS OF HAWTHORNE TRUST

        Section 5. Representations of Hawthorne Trust. Hawthorne Trust
represents and Warrants to the Purchaser as follows:

        Section 5.1 Power and Authority. Hawthorne Trust has full legal right,
power and authority to enter into the Transaction Documents to which it is a
party, and to consummate the transactions contemplated thereby. Each of the
Transaction Documents signed by Hawthorne Trust has been duly executed and
delivered by Hawthorne Trust and, assuming due execution of such Transaction
Document by the other parties thereto, constitutes the valid and binding
obligation of Hawthorne Trust, enforceable against Hawthorne Trust in accordance
with its terms, except to the extent that its enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally and by general equitable principles
(regardless of whether the issue of enforceability is considered in a proceeding
in equity or at law). James E. Hawthorne is the duly appointed and



                                       27

presently acting trustee of Hawthorne Trust. Hawthorne Trust places no
restrictions upon the trustee of said trust from entering into this transaction.
Pursuant to the terms of Hawthorne Trust and all applicable laws, the trustee of
Hawthorne Trust has all requisite power and authority to enter into this
Agreement on behalf of such trust and to do any and all acts necessary to
consummate the transactions contemplated hereby.

        Section 5.2 Ownership of Stock. Hawthorne Trust is the lawful owner;
beneficially and of record of the Stock opposite its name on Schedule 5.2
attached hereto, free and clear of all Liens. Hawthorne Trust has full legal
right, power and authority to enter into this Agreement and to sell, assign,
transfer and convey the Stock owned by Hawthorne Trust pursuant to this
Agreement, and the delivery to Purchaser of the Stock owned by Hawthorne Trust
pursuant to the provisions of this Agreement will transfer to Purchaser good and
marketable title thereto, free and clear of all Liens.

        Section 5.3 Broker's or Finder's Fees, etc. No agent, broker, person or
firm acting on behalf of Hawthorne Trust is, or will be, entitled to any
commission or broker's or finder's fees from any of the parties hereto, or from
any Affiliate of any of the parties hereto, in connection with any of the
transactions contemplated by this Agreement. All engagement letters from all
professionals (including, without limitation, accountants, financial advisors
and attorneys) utilized by Hawthorne Trust in connection with the transactions
contemplated hereby provide that such Persons shall look only to Hawthorne Trust
for payment of their fees and expenses.

        Section 5.4 Consents and Approvals: No Violations. Other than as set
forth on Schedule 5.4 attached hereto, the execution and delivery of the
Transaction Documents to which it is a party by Hawthorne Trust and the
consummation by Hawthorne Trust of the transactions contemplated thereby will
not: (1) violate or conflict with the terms of Hawthorne Trust; (2) require any
approval (judicial or otherwise) other than that of the trustee of Hawthorne
Trust, (3) violate any statute, ordinance, rule, regulation, order or decree of
any court or of any governmental or regulatory body, agency or authority
applicable to Hawthorne Trust or by which any of its properties or assets may be
bound; (4) require any Person to make or obtain any filing with or any permit,
consent or approval or give any notice to, any governmental or regulatory body,
agency or authority; or (5) result in a violation or breach of, conflict with,
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation, payment or acceleration)
under, or result in the creation of any Lien upon any of the properties or
assets of Hawthorne Trust under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, license, franchise, permit, agreement,
lease, franchise agreement, collective bargaining agreement or other agreement,
instrument or obligation to which Hawthorne Trust is a party, or by which
Hawthorne Trust or any of its properties or assets are bound.

                                    ARTICLE 6

                        REPRESENTATIONS OF THE PURCHASER

        Section 6. Representations of the Purchaser. The Purchaser represents
and warrants to the Sellers as follows:



                                       28

        Section 6.1 Existence and Good Standing: Power and Authority.

               (a) The Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the State of California. The
Purchaser has the requisite corporate power and authority to own, lease, operate
its properties and to carry on its business as now being conducted. The
Purchaser is duly qualified or licensed to do business and is in good standing
in each jurisdiction in which the character or location of the properties owned,
leased or operated or the nature of the business conducted by it makes such
qualification or license necessary except where the failure to be so duly
qualified or licensed or in good standing could not reasonably be expected to
have a material adverse effect on the financial condition or results of
operations of the Purchaser.

               (b) The Purchaser has all requisite corporate power and authority
to enter into the Transaction Documents to which it is a party and to consummate
the transactions contemplated thereby. The execution, delivery and performance
by the Purchaser of the Transaction Documents to which it is a party and the
consummation by the Purchaser of the transactions contemplated thereby have been
duly authorized by all necessary corporate action on the part of the Purchaser
and no other action on the part of the Purchaser is necessary. Each Transaction
Document to which the Purchaser is a party has been duly executed and delivered
by the Purchaser and, assuming due execution of each Transaction Document by the
other parties thereto, constitutes the valid and binding obligation of the
Purchaser and enforceable against the Purchaser in accordance with its terms,
except as the enforceability hereof may be limited by applicable bankruptcy,
insolvency, reorganization or other similar laws affecting creditors' rights
generally and by general equitable principles (regardless of whether the issue
of enforceability is considered in a proceeding in equity or at law).

        Section 6.2 No Conflicts. Except as set forth on Schedule 6.2, the
execution and delivery by the Purchaser of the Transaction Documents to which it
is a party and the consummation by the Purchaser of the transactions
contemplated thereby will not (a) violate any provision of the articles of
incorporation or the bylaws of the Purchaser; (b) violate any statute,
ordinance, rule, regulation, order or decree of any court or of any governmental
or regulatory body, agency or authority applicable to the Purchaser or by which
its properties or assets may be bound; (c) require the Purchaser to make or
obtain any filing with, or permit, consent or approval of, or give any notice to
any governmental or regulatory body, agency or authority; or (d) result in a
violation or breach of, conflict with, constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
cancellation, payment or acceleration) under or result in the creation of any
Lien upon any of the properties or assets of the Purchaser under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, license,
franchise, permit, agreement, lease, franchise agreement or other instrument or
obligation to which the Purchaser is a party or by which the Purchaser or its
properties or assets are bound.

        Section 6.3 Litigation. There is no action, suit, proceeding at law or
in equity, arbitration or administrative or other proceeding by or before or, to
the best knowledge of the Purchaser, any investigation by any governmental or
other instrumentality or agency, pending, or, to the best knowledge of the
Purchaser, threatened against or affecting the Purchaser or any of its
subsidiaries or any of their respective properties or rights which could
reasonably be expected to prohibit or render illegal the transactions
contemplated by this Agreement.



                                       29


        Section 6.4 Broker's or Finder's Fees, etc. No agent, broker, person or
firm acting on behalf of the Purchaser or any of its Subsidiaries is, or will
be, entitled to any commission or broker's or finder's fees from any of the
parties hereto, or from any Person controlling, controlled by or under common
control with any of the parties hereto, in connection with any of the
transactions contemplated by this Agreement.

        Section 6.5 Operation of Business. After the Closing and until the
determination of the Closing Date Working Capital, the Purchaser shall conduct
the Company's business in accordance with past practices, and follow the
accounting practices and policies followed by the Company prior to the Closing
in order to insure an accurate comparison of Estimated Working Capital to
Closing Date Working Capital.

        Section 6.6 No Other Representations or Warranties. Except as expressly
provided in this Agreement, the Purchaser hereby disclaims the making of any
other representations or warranties, express or implied. Each Seller
acknowledges that such Seller has not received from the Purchaser any
accounting, tax, legal or other advice with respect to this transaction and is
relying solely upon the advice of its own accounting, tax, legal and other
advisors.

                                    ARTICLE 7

                 CONDUCT OF BUSINESS; EXCLUSIVE DEALING: REVIEW;
                                OTHER AGREEMENTS

        Section 7.1 Access to Information Concerning Properties and Records.
During the period commencing on the date hereof and ending on the Closing Date,
the Sellers shall, and shall cause the Company to, upon reasonable notice,
afford the Purchaser, its financing sources, and their respective counsel,
accountants, consultants and other authorized representatives, reasonable access
during normal business hours to the officers, employees, properties, books and
records of the Company in order that they may have the opportunity to make such
reasonable investigations as they shall desire of the affairs of such entity and
all other information concerning its business, properties and personnel as the
Purchaser may reasonably request. Such review shall not, however, affect the
representations and warranties made by the Sellers in this Agreement or the
remedies of the Purchaser for breaches of those representations and warranties.
The Sellers agree to cause the Company and its respective officers, employees,
counsel, accountants, consultants and other representatives to furnish such
additional financial and operating data and other information and respond to
such inquiries as the Purchaser, its financing sources, and their respective
counsel, accountants, consultants and other authorized representatives, shall
from time to time reasonably request.

        Section 7.2 Conduct of Business of the Company. Except as required or
specifically contemplated by this Agreement, during the period from the date of
this Agreement until the Closing, the Sellers shall cause the Company to conduct
its operations according to its ordinary course of business, consistent with
past practice and will cause the Company to use its commercially reasonable
efforts to: (i) preserve intact its business organization; (ii) maintain its
material rights; (iii) keep available the services of its officers and
employees; and (iv) maintain satisfactory relationships with suppliers,
distributors, customers, landlords, agents and others having business
relationships with it. Without limiting the generality of and in addition to the



                                       30


foregoing, and except as otherwise required or specifically contemplated by this
Agreement, prior to the time specified in the preceding sentence, the Sellers
shall cause the Company, without the prior written consent of the Purchaser
(which consent shall not be unreasonably withheld), to not:

               (a) amend its certificate of incorporation or bylaws or other
organizational documents in any way;

               (b) authorize for issuance, issue, sell, deliver or agree or
commit to issue, sell or deliver (whether through the issuance or granting of
options or otherwise) any stock of any class or any other securities;

               (c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution or return any
equity capital (in each case whether in cash, stock or property or any
combination thereof) in respect of its capital stock or redeem, retire,
purchase, or otherwise acquire for consideration, any of its securities;

               (d) (x) pledge or otherwise encumber shares of its capital stock;
(y) (A) incur, assume or prepay any Indebtedness; (B) assume, guarantee, endorse
or otherwise become liable or responsible (whether directly, contingently or
otherwise) for any obligations of any other Person except its wholly owned
subsidiaries or (C) make any loans, advances or capital contributions to, or
investments in, any other Person; or (z) mortgage or pledge any of its assets or
create or permit to exist any Lien thereupon that secures any Indebtedness;

               (e) enter into, adopt or amend any bonus, profit sharing,
compensation, severance, termination, stock option, stock appreciation right,
restricted stock, performance unit, pension, retirement, deferred compensation,
employment, severance or other employee benefit agreements, trusts, plans, funds
or other arrangements of or for the benefit or welfare of any of its employees,
or (except for normal increases in the ordinary course of business that are
consistent with past practices) increase in any manner the compensation or
fringe benefits of any such employee or pay any benefit not required by any
existing plan and arrangement (including, without limitation, the granting of
stock options, stock appreciation rights, shares of restricted stock or
performance units);

               (f) transfer, sell, lease, license or dispose of any of its lines
of business, divisions, operating units or facilities or enter into any material
commitment or transaction:

               (g) acquire or agree to acquire, by merging or consolidating
with, by purchasing an equity interest in or a portion of the assets of, or by
any, other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or agree
to acquire any assets of any other Person (other than the purchase of assets in
the ordinary course of business and consistent with past practice);

               (h) take any action to terminate or materially amend any of its
pension plans or retiree medical plans with respect to or for the benefit of any
of its employees;



                                       31


               (i) modify, amend or terminate any contract identified or which
should have been identified on Schedules 3.6 or 3.7 or waive any of its material
rights or claims;

               (j) effect any change in any of its methods of accounting, except
as may be required by law or GAAP;

               (k) take any action, engage in any transaction or enter into any
agreement which would cause any of the representations or warranties set forth
in Article III hereof to be untrue in any material respect as of the Closing
Date;

               (l) execute any new lease or sublease for real property, or
cancel, modify, terminate or amend any Lease;

               (m) enter into any agreement with any Affiliate; or

               (n) enter into a legally binding commitment with respect to, or
any agreement to take, any of the foregoing actions.

        Section 7.3 Commercially Reasonable Efforts. Subject to the terms and
conditions provided herein, the Sellers and the Purchaser shall. and the Sellers
shall cause the Company to cooperate and use their respective commercially
reasonable efforts to take, or cause to be taken, all appropriate action, and to
make, or cause to be made, all filings necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation,
their respective commercially reasonable efforts to obtain, prior to the Closing
Date, all licenses, permits, consents, approvals, authorizations, qualifications
and orders of governmental authorities and parties to contracts with the Company
(including, without limitation, landlords) as are necessary for consummation of
the transactions contemplated by this Agreement and to fulfill the conditions to
consummation of the transactions contemplated hereby set forth in Articles IX
and X hereof.

        Section 7.4 Exclusive Dealing. During the period commencing on the date
of this Agreement and concluding on the earlier of (a) the Closing Date and (b)
the date this Agreement is terminated in accordance with its terms, the Sellers
shall not take (and the Sellers shall not authorize or permit the Company or its
Affiliates, officers, directors, employees, agents, representatives,
consultants, financial advisors, attorneys, accountants, or other agents to so
take) any action to, directly or indirectly, encourage, solicit, initiate or
engage in discussions or negotiations with, or provide any information to, any
Person, other than the Purchaser (and its Affiliates and representatives),
concerning any acquisition of the Company or any purchase of all or any part of
the capital stock of the Company or any merger, sale of substantial assets or
similar transaction involving the Company.

        Section 7.5 Purchase of Kinetics Common Stock.

               (a) Hawthorne Trust shall purchase, simultaneously with the
Closing, from DB Capital Investors, L.P., a Delaware limited partnership,
133,333 shares of Kinetics Class A Common Stock and 1,200,000 shares of Kinetics
Class B Common Stock for an aggregate purchase price of Four Million Dollars
($4,000,000).



                                       32


               (b) Magnolia shall purchase, simultaneously with the Closing,
from DB Capital Investors, L.P., a Delaware limited partnership, 400,000 shares
of Kinetics Class A Common Stock and 3,600,000 shares of Kinetics Class B Common
Stock for an aggregate purchase price of Twelve Million Dollars ($12,000,000).

                                    ARTICLE 8

                                   TAX MATTERS

        Section 8.1 Tax Returns.

               (a) The Sellers shall have the exclusive authority and obligation
to prepare, execute on behalf of the Company and timely file, or cause to be
prepared, executed and timely filed, all Returns of the Company that are due
solely with respect to any Pre-Closing Period. Such authority shall include, but
not be limited to, the determination of the manner in which any items of income,
gain, deduction, loss or credit arising out of the income, properties and
operations of the Company shall be reported or disclosed in such Returns;
provided, however, that such Returns shall be prepared by treating items thereon
in a manner consistent with the past practices of the Company with respect to
such items; and provided further, that (i) the Sellers shall provide the
Purchaser with draft income tax returns for the Company at least twenty (20)
days prior to the due date for filing such Returns, (ii) at least ten (10) days
prior to the due date for the filing of such Returns the Purchaser shall notify
the Sellers of the existence of any objection the Purchaser may have to any
items set forth on such draft Returns, and (iii) if, after consulting in good
faith, the Purchaser and the Sellers are unable to resolve such objection(s),
such objection(s) shall be resolved by treating items on such Returns in a
manner consistent with the past practices of the Company with respect to such
items unless otherwise required by law.

               (b) Except as provided in Section 8.1 (a) above, the Purchaser
shall have the exclusive authority and obligation to prepare and timely file, or
cause to be prepared and timely filed, all Returns of the Company relating to
periods on or after the Closing Date. Such authority shall include, but not be
limited to, the determination of the manner in which any items of income, gain,
deduction, loss or credit arising out of the income, properties and operations
of the Company shall be reported or disclosed on such Returns.

        Section 8.2 Payment of Taxes.

               (a) The Sellers shall be responsible and liable for the timely
payment of any and all Taxes imposed on or with respect to the properties,
income and operations of the Company for all Pre-Closing Periods.

               (b) All Taxes and Tax liabilities with respect to the income,
property or operations of the Company that relate to the Overlap Period shall be
apportioned between Pre-Closing Periods and periods after the Closing Date as
follows: (i) in the case of Taxes other than income, sales and use and
withholding Taxes, on a per diem basis, and (ii) in the case of income, sales
and use and withholding Taxes, as determined from the books and records of the
Company as though the taxable year of the Company terminated at the close of
business on the Closing



                                       33


Date. The Purchaser and the Sellers agree to the extent permitted by applicable
law to elect with the relevant taxing authority to treat for all purposes the
Closing Date as the last day of a taxable period of the Company.

               (c) All transfer, sales and use, value added, registration,
documentary, stamp and similar Taxes imposed in connection with the sale of the
Stock or any other transaction that occurs pursuant to this Agreement shall be
borne solely by the Sellers.

        Section 8.3 Amended Returns. Neither the Sellers nor the Company shall
file or cause to be filed any amended Return or claims for refund without the
prior written consent of the Purchaser, which consent shall not be unreasonably
withheld or delayed.

        Section 8.4 Prior Tax Agreements. The Company shall terminate or cause
to be terminated any and all of the tax sharing, allocation, indemnification or
similar agreements, arrangements or undertakings in effect, written or
unwritten, on the Closing Date as between the Sellers or any predecessor or
Affiliate thereof, on the one hand, and the Company, on the other hand, for all
Taxes imposed by any government or taxing authority, regardless of the period in
which such Taxes are imposed, and there shall be no continuing obligation to
make any payments under any such agreements, arrangements or undertakings.

        Section 8.5 Non-foreign Person Affidavit. The Sellers shall furnish to
the Purchaser on or before the Closing Date a non-foreign person affidavit as
required by Section 1445 of the Code.

        Section 8.6 Post-Closing Access and Cooperation. From and after the
Closing Date, the Sellers agree and the Purchaser agrees to cause the Company,
to afford the Purchaser (or the Purchaser's representative) or the Sellers, as
the case may be, and upon reasonable notice and without undue interruption to
the business of the Sellers or the Company, as the case may be. access during
normal business hours to the books and records of the Sellers and the Company
relating to the Company prior to the Closing Date for a period of seven (7)
years following the Closing Date in connection with (i) preparation of the
Returns specified in Section 8.1 above, (ii) evaluation of any claim for
indemnification under Section 8.7 below, and (iii) investigation or contest of
any inquiry, claim, assessment, audit or similar event. The Purchaser shall,
from and after the Closing Date, preserve all books and records of the Company
relaxing to the Company prior to the Closing Date for such seven (7) year
period, and, thereafter, not destroy or dispose of or allow the destruction or
disposition of such books and records without first having offered to deliver
such books and records to the Sellers at the Sellers' expense. If the Sellers
fail to request such books and records within ninety (90) days after receipt of
the notice described in the preceding sentence, the Purchaser may dispose of
such books and records.

        Section 8.7 Tax Indemnification. Notwithstanding any provision to the
contrary contained in this Agreement, the Sellers, severally, agree to
indemnify, defend and hold harmless each Purchaser Indemnitee and its successors
on an after-tax basis against (i) all Taxes, losses, claims and expenses
resulting from, arising out of, or incurred with respect to, any claims that may
be asserted by any party based upon, attributable to, or resulting from the
failure of any representation or warranty made pursuant to Section 3.10 of this
Agreement to be true and correct as of the Closing Date; (ii) all Taxes imposed
on the Company, or for which the



                                       34


Company may be liable, as a result of any transaction contemplated by this
Agreement; (iii) all taxes imposed for the Overlap Period for which the Sellers
are liable pursuant to Section 8.2(b) hereof; (iv) all Taxes imposed on the
Sellers or any Person (other than the Company) in which any of the Sellers or
any of their respective Affiliates has or had at any time a direct or indirect
majority equity interest for any taxable year or other taxable period; and (v)
all Taxes imposed on or asserted against the properties, income or operations of
the Company, or for which the Company may otherwise be liable, for all
Pre-Closing Periods; it being understood that, with respect to any obligation of
the Sellers pursuant to this Section 8.7, such obligation with respect to each
Seller shall be limited to such Seller's Remedy Percentage. A Purchaser
Indemnitee shall promptly give the Sellers written notice of all Taxes, losses,
claims and expenses which such Purchaser Indemnitee has reasonably determined
may give rise to a right of indemnification under this Section 8.7, including a
computation of the amount of the claimed indemnification with sufficient detail
and particularity to enable the Sellers to reasonably determine the amount of
such required indemnification.

        Section 8.8 Tax Controversies. Notwithstanding any other provision of
this Agreement regarding third party claims to the contrary, this Section 8.8
shall solely control the procedures with respect to inquiries, claims,
assessments, audits or similar events with respect to Taxes of the Company (a
"Tax Matter"). The Purchaser shall promptly notify the Sellers upon receipt by
the Purchaser of written notice of any Tax Matter relating to Pre-Closing
Periods for which the Sellers may be liable under this Agreement. The Purchaser
shall have the authority to represent the interests of the Company with respect
to any Tax Matter before the Internal Revenue Service, any other taxing
authority, any other governmental agency or authority or any court and shall
have the sole right to control the defense, compromise or other resolution of
any Tax Matter, including responding to inquiries, filing Returns and
contesting, defending against and resolving any assessment for additional Taxes
or notices of Tax deficiency or other adjustment of Taxes of, or relating to, a
Tax Matter; provided, however, that the Purchaser shall not enter into any
settlement or otherwise compromise any Tax Matter that affects the Tax liability
of the Sellers or the Company for any taxable period ending prior to or ending
on and including the Closing Date without the prior written consent of the
Sellers, which consent shall not be unreasonably withheld or delayed. The
Purchaser shall keep the Sellers fully and timely informed with respect to the
commencement, status and nature of any Tax Matter.

                                    ARTICLE 9

                 CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER

        Section 9. Conditions to the Purchaser's Obligations. The obligations of
the Purchaser to purchase the Stock on the Closing Date is subject to the
satisfaction, at or prior to the Closing, of the following conditions:

        Section 9.1 Truth of Representations and Warranties. The representations
and warranties of the Sellers contained in this Agreement and on the Schedules
shall be true and correct in all material respects on and as of the Closing Date
with the same effect as though such representations and warranties had been made
on and as of such date, and the Purchaser shall have received a certificate
signed by each Seller, dated the Closing Date, to such effect.



                                       35


        Section 9.2 Performance of Agreements. All of the agreements of the
Sellers to be performed prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed in all material respects, and the
Purchaser shall have received a certificate signed by each Seller, dated the
Closing Date, to such effect.

        Section 9.3 No Material Adverse Change. Since September 30, 2000, there
shall have been no material adverse change in the business, properties, assets,
liabilities, results of operations, condition (financial or otherwise),
prospects, customer relationships or supplier relation ships of the Company and
the Purchaser shall have received a certificate duly executed by each Seller,
dated the Closing Date, to such effect.

        Section 9.4 No Litigation Threatened. No action or proceedings shall
have been instituted or threatened before a court or other government body or by
any public authority to restrain or prohibit any of the transactions
contemplated hereby, and the Purchaser shall have received a certificate signed
by each Seller, dated the Closing Date, to such effect.

        Section 9.5 Good Standing and Other Certificates. The Sellers shall have
delivered to the Purchaser (a) copies of the certificate of incorporation or
other organizational documents of the Company, including all amendments thereto,
in each case certified by the Secretary of State or other appropriate official
of the jurisdiction of organization, (b) certificates from the Secretary of
State or other appropriate official of the relevant jurisdiction of organization
of the Company to the effect that such entity, is in good standing or subsisting
in such jurisdiction and listing all charter documents on file, (c) certificates
from the Secretary of State or other appropriate official in each jurisdiction
in which the character or location of the properties owned or leased by the
Company or the nature of its business makes qualification to do business
necessary, to the effect that the Company is in good standing in such
jurisdictions, (d) a certificate as to the tax status of the Company from the
appropriate officials in the jurisdiction of incorporation of such entity, and
(e) a copy of the By-Laws of the Company, certified by the Secretary of such
entity as being true and correct and in effect on the Closing Date.

        Section 9.6 Approvals and Consents. All other governmental and
third-party consents, waivers and approvals, if any, disclosed on any Schedule
or necessary to permit the consummation of the transactions contemplated by this
Agreement shall have been received without the incurrence of any obligation or
any payment by the Company in connection with obtaining such consent, waiver or
approval.

        Section 9.7 Resignation of Directors. Each of David Shimmon, James E.
Hawthorne, and Carter Wicks shall have resigned from his position as a director
of the Company effective on the Closing Date.

        Section 9.8 Opinion of the Sellers' Counsel. Magnolia shall have
furnished the Purchaser with an opinion of Doty Sundheim & Gilmore, a
professional corporation, and Hawthorne Trust shall have furnished the Purchaser
with an opinion of Farella, Braun & Martel, LLP and Ahrens & DeAngeli, p.l.l.c.,
with respect to the transactions contemplated hereby, dated the Closing Date,
substantially in the form attached hereto as Exhibit D.



                                       36


        Section 9.9 Statutes. No statute, rule, regulation, executive order,
decree or order of any kind shall have been enacted, entered, promulgated or
enforced by any court or governmental authority which prohibits the consummation
of the transactions contemplated by this Agreement or has the effect of making
them illegal.

        Section 9.10 Transaction Documents. Each Transaction Document shall have
been duly executed and delivered by the Sellers party thereto.

        Section 9.11 Seller Non-Compete Agreement. The Seller Non-Compete
Agreement shall have been duly executed and delivered by James E. Hawthorne.

                                   ARTICLE 10

                  CONDITIONS TO THE OBLIGATIONS OF THE SELLERS

        Section 10. Conditions to the Obligations of the Sellers. The obligation
of the Sellers to sell the Stock on the Closing Date is subject to satisfaction,
at or prior to such date, of the following conditions:

        Section 10.1 Truth of Representations and Warranties. The
representations and warranties of the Purchaser contained in this Agreement
shall be true and correct in all material respects on and as of the Closing Date
with the same effect as though such representations and warranties had been made
on and as of such date, and the Sellers shall have received a certificate signed
by an executive officer of the Purchaser, dated the Closing Date, to such
effect.

        Section 10.2 Performance of Agreements. All of the agreements of the
Purchaser to be performed prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed in all material respects, and the
Sellers shall have received a certificate signed by an executive officer of the
Purchaser, dated the Closing Date, to such effect.

        Section 10.3 Approvals and Consents. All other governmental and
third-party consents, waivers and approvals, if any, necessary to permit the
consummation of the transactions contemplated by this Agreement shall have been
received without the incurrence of any obligation or any payment by the Company
in connection with obtaining such consent, waiver or approval.

        Section 10.4 Opinion of the Purchaser's Counsel. The Purchaser shall
have furnished the Sellers with an opinion of White & Case LLP with respect to
the transactions contemplated hereby, dated the Closing Date, substantially in
the form attached hereto as Exhibit E.

                                   ARTICLE 11

                  SURVIVAL OF REPRESENTATIONS: INDEMNIFICATION

        Section 11.1 Survival of Representations.

               (a) Except as set forth in paragraph (b) below, the
representations and warranties of the Sellers and the Purchaser contained in
this Agreement, the Schedules hereto or



                                       37


in any certificate delivered pursuant hereto shall survive the purchase and sale
of the Stock pursuant to this Agreement for a period of twelve (12) months after
the Closing Date, Covenants shall survive in accordance with their respective
terms.

               (b) The representations and warranties contained in Sections 3.1,
3.2, 3.22, 4.1, 4.2, 4.3, 5.1, 5.2, 5.3, 6.1 and 6.4 shall survive indefinitely.
The representations and warranties contained in Sections 3.10, 3.16 and 3.23
shall survive until sixty (60) days after the expiration of the applicable
statute of limitations period (after giving effect to any waivers and extensions
thereof).

        Section 11.2 General Indemnification.

               (a) Subject to the limitations contained in Section 11.2(c) the
Sellers, severally, agree to indemnify, defend and hold the Purchaser, its
Affiliates and their respective Subsidiaries, officers, directors, employees,
and agents (each, a "Purchaser Indemnitee" and, collectively, the "Purchaser
Indemnitees") harmless on an after-tax basis from any damages, losses,
liabilities, obligations, claims of any kind, interest or expenses (including,
without limitation, reasonable attorneys' fees and expenses) (collectively,
"Losses") suffered, incurred or paid as a result of (i) any breach by any of the
Sellers of any of their covenants or agreements contained in this Agreement,
(ii) the failure of any representation or warranty (other than a breach of
Section 3.10 with respect to Taxes which shall be governed by Section 8.7) made
by any of the Sellers in this Agreement to be true and correct in all respects
as of the Closing Date, or (iii) the payment of any and all stay bonuses to any
employee of the Company (including, without limitation, to David Hannigan, Mike
Bower, Roger Chase and Sandra Lembke) granted on or prior to the Closing Date:
it being understood that, with respect to any obligation of the Sellers pursuant
to this Section 11.2 (other than with respect to any representation or warranty
contained in Article IV with respect to Magnolia or Article V with respect to
Hawthorne Trust, or any agreement or covenant which relates to one Seller only),
such obligation with respect to each Seller shall be limited to such Seller's
Remedy Percentage.

               (b) Purchaser will indemnify, defend and hold the Sellers and
their respective affiliates. Subsidiaries. officers, directors, employees, and
agents (each, a "Seller Indemnitee" and collectively, the "Seller Indemnitees")
harmless on an after-tax basis from any Losses suffered, incurred or paid as a
result of (i) any breach by Purchaser of any of its covenants or agreements
contained in this Agreement or (ii) the failure of any representation or
warranty made by the Purchaser in this Agreement to be true and correct in all
respects as of the Closing Date.

               (c) Notwithstanding the provisions contained in Section 11.2(a),
(i) the Sellers shall be required to indemnify, defend and hold harmless each
Purchaser Indemnitee under Section 11.2(a)(ii) only if the aggregate amount of
all Losses for which all Purchaser Indemnitees are otherwise entitled to seek
indemnification under Section 11.E(a)(11) exceeds One Hundred Thousand Dollars
($100,000) (the "Basket Amount"), whereupon such Losses shall be indemnified
pursuant to Section 11.2(a)(ii), including, for greater certainty, the Basket
Amount, and (ii) the maximum aggregate indemnification liability of the Sellers
to all Purchaser Indemnitees under Section 11.2(a)(ii) shall not exceed Two
Million Seven Hundred Thousand Dollars ($2,700,000); provided, however, that the
limitation on indemnification contained in this



                                       38


Section 11.2(c) shall not apply to Losses which arise from (A) a breach of
representations or warranties contained in Sections 3.1. 3.2, 3.10, 3.16, 3.22,
3.23, 4.1, 4.2, 4.3, 5.1, 5.2, 5.3 and the last sentence of Section 3.11 and (B)
the occurrence of any events referenced in Section 11.2(a)(iii).

               (d) The obligations to indemnify and hold harmless pursuant to
Section 11.2(a) shall survive the consummation of the transactions contemplated
hereby for the relevant periods set forth in Section 11.1, except for claims for
indemnification asserted prior to the end of such periods, which claims and the
corresponding indemnity obligations shall survive until final resolution
thereof.

        Section 11.3  Indemnification Procedure.

               (a) Within a reasonable period of time after the incurrence of
any Losses by any Person entitled to indemnification pursuant to Section 11.2
hereof (an "Indemnified Party"), including, without limitation, any claim by a
third party described in Section 11.5, which might give rise to indemnification
hereunder, the Indemnified Party shall deliver to the party from which
indemnification is sought (the "Indemnifying Party") a certificate in the form
of Exhibit F (the "Certificate"), which Certificate shall:

                      (i) state that the Indemnified Party has paid or properly
accrued Losses or anticipates that it will incur liability for Losses for which
such Indemnified Party is entitled to indemnification pursuant to this
Agreement;

                      (ii) specify in reasonable detail each individual item of
Loss included in the amount so stated, the date such item was paid or properly
accrued, the basis for any anticipated liability and the nature of the
misrepresentation, breach of warranty, breach of covenant or claim to which each
such item is related and the computation of the amount to which such Indemnified
Party claims to be entitled hereunder, and

                      (iii) be delivered to the Indemnified Party and, if
applicable, the Escrow Agent.

               (b) In the event that the Indemnifying Party shall object to the
indemnification of an Indemnified Party in respect of any claim or claims
specified in any Certificate, the Indemnifying Party shall, within ten (10) days
after receipt by the Indemnifying Pam, of such Certificate, deliver to the
Indemnified Party a notice to such effect and the Indemnifying Party and the
Indemnified Party shall, within the thirty (30) day period beginning on the date
of receipt of such notice (determined in accordance with Section 13.5), attempt
in good faith to agree upon the rights of the respective parties with respect to
each of such claims to which the Indemnifying Party shall have so objected. If
the Indemnified Party and the Indemnifying Party shall succeed in reaching
agreement on their respective rights with respect to any of such claims, the
indemnified Party and the Indemnifying Party shall promptly prepare and sign a
memorandum setting forth such agreement. Should the Indemnified Party and the
Indemnifying Party be unable to agree as to any particular item or items or
amount or amounts, then the Indemnified Party and the Indemnifying Party shall
submit such dispute to a court of competent jurisdiction; provided, that the
parties shall first submit such dispute to a mutually



                                       39


agreed upon mediation service for a period of no longer than sixty (60) days.
Should such dispute eventually be submitted to a court of competent
jurisdiction, the party which receives a final judgment in such dispute shall be
indemnified and held harmless for all reasonable attorney and consultant's fees
or expenses by the other party.

               (c) Claims for Losses specified in any Certificate to which an
Indemnifying Party shall not object in writing within ten (10) days after
receipt of such Certificate, claims for Losses covered by a memorandum of
agreement of the nature described in paragraph (b), claims for Losses the
validity and amount of which have been the subject of judicial determination as
described in paragraph (b) and claims for Losses the validity and amount of
which shall have been the subject of a final judicial determination, or shall
have been settled with the consent of the Indemnifying Party, as described in
Section 11.5, are hereinafter referred to, collectively, as "Agreed Claims".
Within ten (10) days of the determination of the amount of any Agreed Claims,
the Indemnifying Party shall pay to the Indemnified Party (except in the case
where a payment has been already effected pursuant to the Escrow Agreement for
such Agreed Claims) an amount equal to the Agreed Claim by wire transfer in
immediately available funds to the bank account or accounts designated by the
Indemnified Party in a notice to the Indemnifying Party not less than two (2)
business days prior to such payment.

        Section 11.4 Third Party Claims. If a claim by a third party is made
against an Indemnified Party, and if such party intends to seek indemnity with
respect thereto under this Article IX, such Indemnified Party shall promptly
notify the Indemnifying Party and, if applicable, the Escrow Agent of such
claims; provided that the failure to so notify shall not relieve the
Indemnifying Party of its obligations hereunder, except to the extent that the
Indemnifying Party is actually and materially prejudiced thereby. The
Indemnifying Party shall have thirty (30) days after receipt of such notice to
assume the conduct and control, through counsel reasonably acceptable to the
Indemnified Party at the expense of the Indemnifying Party, of the settlement or
defense thereof, and the Indemnified Party shall cooperate with it in connection
therewith; provided that the Indemnifying Party shall not be entitled to assume
control of such defense and shall pay the fees and expenses of counsel retained
by the Indemnified Party if (i) the parties agree, reasonably and in good faith,
that such third party claim would give rise to Losses which are more than twice
the amount indemnifiable by such Indemnifying Party pursuant to this Article XI;
(ii) the claim for indemnification relates to or arises in connection with any
criminal proceeding, action, indictment, allegation or investigation: (iii) the
claim seeks an injunction or equitable relief against the Indemnified Party;
(iv) the Indemnified Party has been advised in writing by counsel that a
reasonable likelihood exists of a conflict of interest between the Indemnifying
Party and the Indemnified Party; or (v) upon petition by the Indemnified Party,
the appropriate court rules that the Indemnifying Party failed or is failing to
vigorously prosecute or defend such claim. Any Indemnified Party shall have the
right to employ separate counsel in any such action o: claim and to participate
in the defense thereof, but the fees and expenses of such counsel shall not be
at the expense of the Indemnifying Party unless (x) the Indemnifying Party shall
have failed, within a reasonable time after having been notified by the
Indemnified Party of the existence of such claim as provided in the preceding
sentence, to assume the defense of such claim, (y) the employment of such
counsel has been specifically authorized in writing by the Indemnifying Party,
which authorization shall not be unreasonably withheld, or (z) the named parties
to any such action (including any impleaded parties) include both such
Indemnified Party and the Indemnifying Party and such Indemnified



                                       40


Party shall have been advised in writing by such counsel that there may be one
or more legal defenses available to the Indemnified Party which are not
available to the Indemnifying Party, or available to the Indemnifying Party the
assertion of which would be adverse to the interests of the Indemnified Party.
So long as the Indemnifying Party is reasonably contesting any such claim in
good faith, the Indemnified Party shall not pay or settle any such claim.
Notwithstanding the foregoing, but subject to Section 8.3 hereof, the
Indemnified Party shall have the right to pay or settle any such claim, provided
that in such event it shall waive any right to indemnity therefor by the
Indemnifying Party for such claim unless the Indemnifying Party shall have
consented to such payment or settlement. If the Indemnifying Party does not
notify the Indemnified Party within thirty (30) days after the receipt of the
Indemnified Party's notice of a claim of indemnity hereunder that it elects to
undertake the defense thereof, the Indemnified Party shall have the right to
contest, settle or compromise the claim but shall not thereby waive any right to
indemnity therefor pursuant to this Agreement. The Indemnifying Party shall not,
except with the consent of the Indemnified Party, enter into any settlement that
is not entirely indemnifiable by the Indemnifying Party pursuant to this Article
XI and does not include as an unconditional term thereof the giving by the
Person or Persons asserting such claim to all Indemnified Parties of an
unconditional release from all liability with respect to such claim or consent
to entry of any judgment. Notwithstanding any of the foregoing, in the event
that the Indemnified Party is a Purchaser Indemnitee and it is reasonably
foreseeable that the amount of any Loss to be incurred by the Indemnified Party
with respect to any third party claim is more than twice the amount
indemnifiable by any Indemnifying Party, the Indemnified Party shall be entitled
to conduct and control the defense and/or settlement of any such claim without
the consent of the Indemnifying Party. The Indemnifying Party and the
Indemnified Party shall cooperate with each other in all reasonable respects in
connection with the defense of any claim including making available records
relating to such claim and furnishing, without expense to the Indemnifying Party
and/or its counsel, such employees of the Indemnified Party as may be reasonably
necessary for the preparation of the defense of any such claim or for testimony
as witnesses in any proceeding relating to such claim.

                                   ARTICLE 12

                           TERMINATION AND ABANDONMENT

        Section 12.1 Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing:

               (a) by mutual consent of the Sellers and the Purchaser;

               (b) by the Sellers or by the Purchaser if the Closing shall not
have occurred by March 31, 2001; provided that the right to terminate this
Agreement under this Section 12.1(b) shall not be available to any party whose
failure to fulfill any covenant, obligation or agreement under this Agreement
shall be the cause of the failure of the Closing to occur on or before such
date;

               (c) (i) by the Sellers, if there has been a material breach of
any covenant or a material breach of any representation or warranty on the part
of the Purchaser or (ii) by the Purchaser, if there has been a material breach
of any covenant or a material breach of



                                       41


any representation or warranty on the part of either Seller, provided that any
such breach of a covenant or representation or warranty has not been cured
within ten (10) business days following receipt by the breaching party of
written notice of such breach; and

               (d) by the Sellers or by the Purchaser, if any law or regulation
of any competent authority shall be enacted that renders illegal or otherwise
permanently prohibits consummation of the transactions contemplated hereby or,
if any judgment, injunction, order or decree of any competent authority that
renders illegal or otherwise permanently prohibits the transactions contemplated
hereby is entered and such judgment, injunction, order or decree shall become
final and nonappealable.

               (e) If any party becomes aware of facts or circumstances that
would entitle such party to terminate this Agreement pursuant to this Section
12.1, such party shall immediately notify the other parties of such facts and
circumstances. Notwithstanding any other provisions of this Agreement, if
rectifiable, such notified party shall have five (5) business days in which to
rectify such facts or circumstances and the notifying party shall not be
entitled to terminate this Agreement if such facts or circumstances are so
rectified.

        Section 12.2 Effect of Termination. In the event of the termination of
this Agreement pursuant to Section 12.1 by the Purchaser, on the one hand, or
the Sellers, on the other hand, Written notice thereof shall forthwith be given
to the other party specifying the provision hereof pursuant to which such
termination is made, and this Agreement shall be terminated and, subject to the
immediately succeeding sentence, there shall be no liability hereunder on the
part of the Purchaser or either Seller, except that the provisions of Sections
13.1, 13.2, 13.4, 13.5, 13.12 and 13.13 shall survive any termination of this
Agreement. Nothing in this Section 12.2 shall relieve any party of liability for
breach of this Agreement; provided, however, that neither the Purchaser nor any
of the Sellers shall be entitled to claim, and each hereby expressly waives any
right to, any consequential, punitive or other special damages.

                                   ARTICLE 13

                                  MISCELLANEOUS

        Section 13.1 Expenses. The parties hereto shall pay all of their own
expenses relating to the transactions contemplated by this Agreement, including,
without limitation, the fees and expenses of their respective counsel and
financial advisors; provided that the Company may pay all the fees and expenses
of Sellers' counsel and financial advisors, but only in the event that all
liabilities with respect to such fees and expenses are paid in full prior to the
Closing Date.

        Section 13.2 Governing Law. This Agreement, and the legal relations
between the parties hereto, shall be governed by and construed in accordance
with the laws of the State of California applicable to agreements executed and
to be performed solely within such State.

        Section 13.3 Captions. The Article and Section captions used herein are
for reference purposes only, and shall not in any way affect the meaning or
interpretation of this Agreement.

        Section 13.4 Publicity. None of the parties hereto shall, and the
Sellers shall not authorize or permit the Company to, issue any press releases
nor (except for such disclosure to



                                       42


such party's parent, as applicable, or officers, attorneys, consultants,
accountants and other agents who are involved in the transactions contemplated
hereby) otherwise disclose any details of the transactions contemplated hereby
without all of the other parties' prior written consent, except as may be
required by law. Except as set forth in the immediately preceding sentence, none
of the parties will notify its employees (except to the extent reasonably
necessary to enable those employees to assist the parties in the performance of
their obligations hereunder) or the media prior to the joint approval of a press
release on a mutually agreed upon date of any details of this contemplated
transaction. To the extent that any such disclosure is required by law, the
disclosing party will provide the other party with written notice of such
required disclosure no less than three (3) business days prior to such
disclosure and the other party will review and approve the proposed disclosure,
which approval will not be unreasonably withheld.

        Section 13.5 Notices. All notices and other communications under this
Agreement shall be in writing and shall be deemed given (i) when delivered by
hand, (ii) when transmitted by telecopier (with confirmation), provided that a
copy is sent at about the same time by registered mail, return receipt
requested, (iii) one business day after mailed, if sent by Express Mail, Fed Ex,
or other nationally recognized express delivery service, or (iv) three days
after mailed, if sent by registered or certified mail, return receipt requested,
to the addressee at the following addresses or telecopier numbers (or to such
other address or telecopier number as a party may specify by notice given to the
other party pursuant to this provision):

        If to the Purchaser, to:

                      Kinetics Electronics Management, Inc.
                      2805 Mission College Blvd.
                      Santa Clara, CA 95054
                      Fax: (408) 567-0196
                      Attention: General Counsel

        with copies to (which shall not constitute notice):

                      DB Capital Partners, Inc.
                      One Market Plaza
                      Steuart Tower, Suite 2400
                      San Francisco, CA 94105
                      Fax: (415) 217-4288
                      Attention: Jeff Ott
                                 Steven Dollinger

                      and

                      Behrman Capital
                      Four Embarcadero Center, Suite 3640
                      San Francisco, CA 94111
                      Fax: (415) 434-7310
                      Attention: Greg Chiate



                                       43


        if to Magnolia, to:
                      Magnolia Tree, LLC
                      13463 Mandoli Drive
                      Los Altos Hills, CA 94022
                      Attention: David Shimmon

        with a copy to (which shall not constitute notice):

                      Doty Sundheim & Gilmore
                      260 Sheridan Avenue, Suite 200
                      Palo Alto, CA 94306
                      Fax: (650) 327-0101
                      Attention: Rodney C. Gilmore, Esq.

        if to Hawthorne Trust, to

                      James E. Hawthorne, as Trustee of the
                      James and Roberta Hawthorne Family
                      Trust U/T/A dated August 31, 1999
                      620 Price Avenue
                      Redwood City, CA 94063
                      Fax: (650) 364-4138

        with a copy to (which shall not constitute notice):

                      Farella Braun & Martel
                      Russ Building, 30th Floor
                      235 Montgomery Street
                      San Francisco, CA 94104
                      Fax: (415) 954-4480
                      Attention: Matthew Lewis, Esq.

        or to such other Person as shall be designated in writing by any such
        party.

        Section 13.6 Parties in Interest. This Agreement may not be transferred,
assigned, pledged or hypothecated by any party hereto, other than by operation
of law, provided that the Purchaser may, at any time, assign its rights under
this Agreement to any of its Affiliates, and am such Affiliate shall thereupon
assume all of the Purchaser's obligations hereunder, so long as the Purchaser
remains primarily liable for its obligations hereunder and, provided, further,
that the Purchaser may, at any time, and without the prior consent of any other
party hereto, assign its rights under this Agreement to its and its
Subsidiaries' financing sources by way of security, to any Person appointed to
enforce such security or any Person in connection with such enforcement. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective heirs, executors, administrators, successors and
permitted assigns.

        Section 13.7 Counterparts. This Agreement may be executed in two or more
counterparts. all of which taken together shall constitute one instrument.



                                       44


        Section 13.8 Entire Agreement. This Agreement, including the other
documents entered into in connection herewith and all Schedules attached hereto,
contains the entire understanding of the parties hereto with respect to the
subject matter contained herein and therein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.

        Section 13.9 Amendments. This Agreement may not be changed, amended,
waived, or modified orally, but only by an agreement in writing signed by the
Purchaser and the Sellers.

        Section 13.10 Severability. In case any provision in this Agreement
shall be held invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions hereof will not in any way be
affected or impaired thereby.

        Section 13.11 Third Party Beneficiaries. Except as expressly provided in
Section 11.2, each party hereto intends that this Agreement shall not benefit or
create any right or cause of action in or on behalf of any Person other than the
parties hereto.

        Section 13.12 Submission to Jurisdiction; Waiver of Jury Trial. The
Sellers and the Purchaser hereby submit to the jurisdiction of the State and
Federal courts located within the State of California for purposes of all legal
proceedings which may arise hereunder or under any of the other documents
entered into in connection herewith. The Sellers and the Purchaser irrevocably
waive, to the fullest extent permitted by law, any objection which he/it may
have or hereafter have to the laying of the venue of any such proceeding brought
in such a court and any claim that any such proceeding brought in such a court
has been brought in an inconvenient forum. THE SELLERS AND THE PURCHASER HEREBY
KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER DOCUMENTS ENTERED INTO
IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR
STATEMENTS (WHETHER VERBAL OR WRITTEN), OF THE PURCHASER OR ANY SELLER.

        Section 13.13 Schedules. Any cross-reference in a Schedule attached
hereto to another Schedule attached hereto shall be deemed to incorporate any
matter set forth in such other Schedule to the extent such matter relates on its
face to such cross-referenced matter.

        Section 13.14 Gender. All pronouns and all variations thereof shall be
deemed to refer to the masculine, feminine, or neuter, singular or plural, as
the context so requires.

        Section 13.15 Attorneys' Fees. If any litigation, arbitration or other
proceeding be commenced between the parties concerning the rights or obligations
of the parties under this Agreement, the party prevailing in such proceeding
shall be entitled, in addition to such other relief as may be granted, to a
reasonable sum as and for its attorneys' fees in such proceeding. This amount
shall be determined by the court, arbitrator or other applicable person in such
proceeding or in a separate action brought for that purpose.



                                       45


        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and near first above written.


                                        KINETICS ELECTRONICS MANAGEMENT, INC.


                                        By:   /s/ John Ferron
                                           -------------------------------------
                                                Name:  John Ferron
                                                Title:  Chief Financial Officer

                                        MAGNOLIA TREE, LLC


                                        By:   /s/ David J. Shimmon
                                           -------------------------------------
                                                Name: David J. Shimmon
                                                Title:  Manager


                                        JAMES E. HAWTHORNE, AS TRUSTEE OF THE
                                        JAMES AND ROBERTA HAWTHORNE FAMILY TRUST
                                        U/T/A DATED AUGUST 31, 1999


                                        By:   /s/ James E. Hawthorne
                                           -------------------------------------
                                                Name:  James E. Hawthorne
                                                Title:  Trustee



                                       1


                                    EXHIBITS

Exhibit A      Escrow Agreement
Exhibit B      Seller Non-Compete Agreement
Exhibit C      Stock Repurchase and Earnout Agreement
Exhibit D      Opinion Letters of Sellers' Counsel
Exhibit E      Opinion Letter of Purchaser's Counsel
Exhibit F      Certificate


                                    SCHEDULES

Schedule 3.2               Ownership Interests in Other Persons
Schedule 3.6               Leases and Owned Real Property
Schedule 3.7               Material Contracts
Schedule 3.8               Consents and Approvals; Violations
Schedule 3.9               Litigation
Schedule 3.10(b)           Payment of Taxes
Schedule 3.10(c)(i)        Audits/Examinations
Schedule 3.10(c)(ii)       Other Tax Matters
Schedule 3.10(c)(iii)      Consolidated, Unitary or Combined Returns
Schedule 3.10(c)(viii)     Tax Sharing, Allocation, Indemnification or Similar
                              Agreements
Schedule 3.11              Liabilities
Schedule 3.12              Insurance
Schedule 3.13              Intellectual Properties
Schedule 3.14              Accounts Receivable, Material Write-offs/Material
                              Adverse Change
Schedule 3.15              Employment Relations
Schedule 3.16(a)           Employee Benefit Plans
Schedule 3.18              Interests in Clients/Suppliers
Schedule 3.19              Bank Accounts, Powers of Attorney and Compensation of
                              Employees
Schedule 3.20              Changes
Schedule 3.23              Environmental Laws and Regulations
Schedule 3.24              Customers
Schedule 4.2               Ownership of Stock
Schedule 4.4               Violations
Schedule 5.2               Ownership of Stock
Schedule 5.4               Violations
Schedule 6.2               Conflicts



                                       1



                                    Exhibit A

        See Escrow Agreement Attached

                                ESCROW AGREEMENT



        This ESCROW AGREEMENT is dated as of February 28, 2001 (this
"AGREEMENT"), by and among Kinetics Electronics Management, Inc., a California
corporation (the "PURCHASER"), Magnolia Tree, LLC, a Delaware limited liability
company ("MAGNOLIA"), James E. Hawthorne, as trustee of The James and Roberta
Hawthorne Family Trust U/T/A dated August 31, 1999, ("HAWTHORNE TRUST" and,
collectively and together with Magnolia, the "SELLERS" and each, a "SELLER") and
Chase Manhattan Trust Company, National Association (the "ESCROW AGENT").

                              W I T N E S S E T H:

        WHEREAS, as of the date hereof, the Purchaser has acquired control of
Marchi Associates, Inc. (d/b/a Marchi Systems, Inc.), a California corporation,
pursuant to a Stock Purchase Agreement, dated as of the date hereof, by and
among the Purchaser, Magnolia and Hawthorne Trust (the "STOCK PURCHASE
AGREEMENT");

        WHEREAS, the Stock Purchase Agreement contains (i) certain
representations, warranties, covenants and agreements on the part of the Sellers
and certain rights on the part of the Purchaser to be indemnified with respect
to a breach thereof, and (ii) a purchase price adjustment mechanism;

        WHEREAS, the Stock Purchase Agreement provides that the Sellers shall
deposit into escrow with the Escrow Agent an amount equal to the Escrow Amount,
to (i) secure the obligations of the Sellers to indemnify and hold the Purchaser
harmless from and against certain Taxes described in Section 8.7 and certain
Losses described in Section 11.2 of the Stock Purchase Agreement with respect to
any breach by either Seller of any of their respective covenants or agreements
or the failure of any representation or warranty of either Seller contained in
the Stock Purchase Agreement, and (ii) satisfy the obligations of the Sellers,
if any, which may arise upon determination of the Closing Date Working Capital
pursuant to Section 2.3(c)(i) of the Stock Purchase Agreement; and

        WHEREAS, the parties hereto have agreed upon and wish to set forth
herein the terms and conditions of this Agreement with respect to the Escrow
Fund (as defined herein) to be held by the Escrow Agent.

        NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Purchaser, each Seller, and the Escrow Agent hereby covenant
and agree as follows:

        1. Definitions. Capitalized terms used and not otherwise defined herein
shall have the meanings set forth in the Stock Purchase Agreement.



                                       1


        2. Escrow Agent. The Purchaser and the Sellers hereby designate and
appoint the Escrow Agent to serve in accordance with the terms, conditions and
provisions of this Agreement. The Escrow Agent hereby agrees to act as escrow
agent in accordance with the terms, conditions and provisions of this Agreement.

        3. Escrow Fund. Pursuant to Section 2.2(b) of the Stock Purchase
Agreement, the Sellers hereby deposit into escrow with the Escrow Agent the
Escrow Shares (such shares, collectively and together with any distributions
thereon, the "ESCROW FUND"). Upon such deposit, all certificates representing
such shares of Kinetics Class A Common Stock and Kinetics Class B Common Stock
shall be accompanied by stock powers duly executed in blank by the appropriate
Seller. For all purposes of determining the value of all or any portion of the
Escrow Fund, each share of Kinetics Class A Common Stock and Kinetics Class B
Common Stock shall be valued at $3.00. All shares of Kinetics Class A Common
Stock and Kinetics Class B Common Stock held by the Escrow Agent pursuant to
this Agreement shall constitute trust property for the purposes for which they
are held.

        4. Liabilities Secured by Escrow Fund. The Escrow Fund shall, subject to
the terms and conditions of this Agreement, be held as security for the
obligations of the Sellers (i) to indemnify and hold the Purchaser harmless
against and in respect of which the Purchaser is indemnified under the
provisions of Section 8.7 or, as the case may be, 11.2 of the Stock Purchase
Agreement and (ii) which may arise upon determination of the Closing Date
Working Capital pursuant to Section 2.3(c)(i) of the Stock Purchase Agreement.

        5. Claims.

        (a) If (i) at any time or from time to time prior to the Termination
Date (as defined in Section 7 hereof) the Purchaser determines that it has a
claim for Taxes or Losses against the Escrow Fund in respect of the
indemnification obligations of either Seller set forth in Section 8.7 or, as the
case may be, 11.2 of the Stock Purchase Agreement with respect to the breach by
either Seller of any of their respective covenants or agreements or the failure
of any representation or warranty of either Seller contained in the Stock
Purchase Agreement, or (ii) pursuant to Section 2.3(c)(i) of the Stock Purchase
Agreement, the Closing Date Working Capital is less than the amount of the
Estimated Working Capital, the Purchaser shall deliver to the Escrow Agent a
certificate (the "CERTIFICATE"), which Certificate shall:

                      (x) in the case of Section 5(a)(i) above, be the
               Certificate described in Section 11.3 of the Stock Purchase
               Agreement; or

                      (y) in the case of Section 5(a)(ii) above, (A) state the
               amount by which the Closing Date Working Capital amount is less
               than the Estimated Working Capital amount and be substantially in
               the form attached hereto as Schedule 1, and (B) include the
               statement of Closing Date Working Capital or, as the case may be,
               the documentation reflecting the final decision of the Arbitrator
               pursuant to Section 2.3(b)(ii)(y) of the Stock Purchase
               Agreement;

and shall be sent by certified mail, postage prepaid, with a copy of such
certificate to both Sellers and shall state the date on which it was sent to
each Seller.



                                       2


        (b) If, within ten (10) business days after receiving the applicable
certificate described in either of clause (x) or clause (y) of Section 5(a)
above (such certificate being referred to, for purposes of this Section 5(b) and
Section 5(c), as the "CLAIM CERTIFICATE"), the Purchaser and the Escrow Agent
shall not have received from the Sellers a written statement denying the
existence of all or any part of the Taxes, Losses or, as the case may be, the
amount described in such Claim Certificate (such amount, the "CLAIMED AMOUNT"),
then the Purchaser may instruct the Escrow Agent in writing to deliver to the
Purchaser so much of the Escrow Fund as may be available and as may be necessary
in order to pay the Claimed Amount in full, and the Escrow Agent shall promptly
follow such instructions. If within ten (10) business days after the sending of
the Claim Certificate, the Purchaser and the Escrow Agent shall have received
from either Seller a written statement denying all or a portion of the Claimed
Amount, then the Purchaser may order the Escrow Agent in writing to deliver to
the Purchaser so much of the Escrow Fund as may be available and as may be
necessary to pay any portion of the Claimed Amount that is not disputed, and the
Escrow Agent shall promptly follow such instructions.

        (c) If the Purchaser has not delivered to the Escrow Agent a Claim
Certificate (and no Claim Certificates are pending) on or prior to the
Termination Date (as defined below), then the Escrow Agent shall automatically
and without further instructions from the Sellers or the Purchaser promptly
release the remaining Escrow Shares to the Sellers.

        6. Resolution of Losses and Contribution Claims in Dispute. In the event
that a Seller denies all or a portion of (i) any Taxes or Losses described in
Section 8.7 or, as the case may be, 11.2 of the Stock Purchase Agreement within
the time and in the manner specified in Section 5 hereof, the portion of such
Taxes or, as the case may be, Losses in dispute shall be resolved as provided in
Section 11.3(b) of the Stock Purchase Agreement or (ii) the amount by which the
Estimated Working Capital exceeds the Closing Date Working Capital, the amount
in dispute shall be resolved as provided in Section 2.3(b) of the Stock Purchase
Agreement. If the Purchaser and the Sellers reach agreement on the disputed
portion of the Taxes, losses or, as the case may be, Claimed Amount, the
Purchaser and the Sellers shall jointly notify the Escrow Agent thereof and
instruct the Escrow Agent in writing to deliver to the Purchaser so much of the
Escrow Fund as may be available and as may be necessary to pay the amount of
such Taxes, Losses or, as the case may be, Claimed Amount or portion thereof
that the Purchaser and the Sellers agreed to be justified, and the Escrow Agent
shall promptly follow such instructions. If, in the case of clause (i) of this
Section 6, a court determines by final, non-appealable judgment or
non-appealable order that all or a portion of such Taxes or, as the case may be,
Losses are payable to the Purchaser pursuant to the terms of the Stock Purchase
Agreement, the Purchaser may notify the Escrow Agent thereof, with a certified
copy of such judgment or order and a certificate from the Purchaser that such
judgment or order is final and non-appealable, and may instruct the Escrow Agent
in writing to deliver to the Purchaser so much of the Escrow Fund as may be
available and as may be necessary to pay the amount of such Taxes or, as the
case may be, Losses or portion thereof that such court decided to be justified
and the Escrow Agent shall promptly follow such instructions.

        7. Release of Escrow Amount: Termination.

        (a) On the date upon which the Sellers satisfy their obligations, if
any, pursuant to Section 2.3(c)(i) of the Stock Purchase Agreement (such date
being, the "INITIAL



                                       3

ESCROW FUND RELEASE DATE"), the Escrow Agent shall release the remaining Working
Capital Escrow Shares to the Sellers as follows:

                      (i) the remaining Magnolia Working Capital Escrow Shares
               to Magnolia; and

                      (ii) the remaining Hawthorne Working Capital Escrow Shares
               to Hawthorne Trust.

        (b) Following the Initial Escrow Fund Release Date and upon the earlier
to occur of (i) the date that is twelve (12) months after the date hereof (the
"TERMINATION DATE") and (ii) termination of this Agreement pursuant to Section
10 hereof, the Escrow Agent shall transfer, assign, deliver and pay over to
Magnolia and Hawthorne Trust the remaining Magnolia Indemnity Escrow Shares and
Hawthorne Indemnity Escrow Shares, respectively, remaining in the Escrow Fund.
In the event that, on the Termination Date, there are claims for Taxes or, as
the case may be, Losses outstanding which have not been satisfied in full during
such period because such claims for Taxes or, as the case may be, Losses are in
dispute pursuant to Sections 5 or, as the case may be, 6 hereof, then the Escrow
Agent shall retain an amount sufficient to satisfy any such Taxes or, as the
case may be, Losses in full and shall transfer the balance of the Escrow Fund to
the Sellers.

        8. Fees and Expenses. Each of the Purchaser and the Sellers agree to pay
the Escrow Agent 50% of the fees set forth on Schedule 2 hereto (incorporated
herein by reference). Each of the Purchaser and the Sellers further agree to
reimburse the Escrow Agent an amount equal to 50% of any expenses, including
reasonable counsel fees and expenses which it may incur in acting hereunder, and
the Escrow Agent's claim therefor shall constitute a first lien against the
Escrow Fund.

        9. Responsibilities of the Escrow Agent. The acceptance by the Escrow
Agent of its duties under this Agreement is subject to the following terms and
conditions, which the parties to this Agreement hereby agree shall govern and
control with respect to such Escrow Agent's rights, duties, liabilities and
immunities:

        (a) The Escrow Agent shall act hereunder as depository only, and it
shall not be responsible or liable in any manner whatsoever for the sufficiency
of any amount deposited with it. The duties and responsibilities of the Escrow
Agent hereunder shall be determined solely by the express provisions of this
Agreement, and no further duties or responsibilities shall be implied. Except
for the defined terms in the Stock Purchase Agreement, the Escrow Agent shall
have not have any liability under, nor duty to inquire into the terms and
provisions of any agreements or instructions, other than outlined in this
Agreement.

        (b) The Escrow Agent shall be protected in acting upon any written
notice, request, waiver, consent, receipt or other paper or document furnished
to it, not only as to its due execution and the validity and effectiveness of
its provisions but also as to the truth and acceptability of any information
therein contained, which it in good faith believes to be genuine and what it
purports to be.



                                       4


        (c) The Escrow Agent shall not be liable for any error of judgment, or
for any act done or step taken or omitted by it, or for any mistake of fact or
law or for anything which it may do or refrain from doing in connection
herewith, except for fraud, gross negligence, willful misconduct or for any
action taken or omitted in bad faith that a court of competent jurisdiction
determines was the primary cause of a loss to the Purchaser or the Sellers. The
Escrow Agent shall not incur any liability for following the instructions herein
contained or expressly provided for, or written instructions given by both
parties hereto. The Purchaser and the Sellers, jointly and severally, covenant
and agree to indemnify and hold the Escrow Agent and its directors, officers,
agents and employees (collectively, the "INDEMNITEES") harmless from and against
any and all liabilities, losses, damages, fines, suits, actions, demands,
penalties, costs and expenses, including out-of-pocket, incidental expenses,
legal fees and expenses, the allocated costs and expenses of in-house counsel
and legal staff and the costs and expenses of defending or preparing to defend
against any claim ("DAMAGES") that may be imposed on, incurred by, or asserted
against, the Indemnitees or any of them for following any instruction or
direction upon which the Escrow Agent is authorized to rely pursuant to the
terms of this Agreement. In addition to and not in limitation of the immediately
preceding sentence, the Purchaser and the Sellers, jointly and severally, also
covenant and agree to indemnify and hold the Indemnitees and each of them
harmless from and against any Damages that may be imposed on, incurred by, or
asserted against the Indemnitees or any of them in connection with or arising
out of the Escrow Agent's performance under this Agreement, provided the Escrow
Agent has not acted with fraud, gross negligence or bad faith or engaged in
willful misconduct. The provisions of this Section 9(c) shall survive the
termination of this Agreement and the resignation or removal of the Escrow Agent
for any reason. Anything in this Agreement to the contrary notwithstanding, in
no event shall the Escrow Agent be liable for special, indirect or consequential
loss or damage of any kind whatsoever (including but not limited to lost
profits), even if the Escrow Agent has been advised of such loss or damage and
regardless of the form of action.

        (d) In the administration of this Agreement and the Escrow Fund
hereunder, the Escrow Agent may consult with counsel or accountants to be
selected and retained by it. The Escrow Agent shall not be liable for anything
done, suffered or omitted in good faith by it in accordance with the advice or
opinion of any such counsel or accountant.

        (e) The Escrow Agent shall have no duties except those which are
expressly set forth herein, and it shall not be bound by any notice of a claim,
or demand with respect thereto, or any waiver, modification, amendment,
termination or rescission of this Agreement, unless in writing received by it.

        (f) The Escrow Agent may resign at any time by giving written notice
thereof to the Purchaser and the Sellers, but such resignation shall not become
effective until a successor Escrow Agent mutually agreed to by the Purchaser and
the Sellers shall have been appointed and shall have accepted such appointment
in writing. If an instrument of acceptance by a successor Escrow Agent shall not
have been delivered to the Escrow Agent within thirty (30) days after the giving
of such notice of resignation, the resigning Escrow Agent may, at the joint and
several expense of the Purchaser and the Sellers, petition any court of
competent jurisdiction for the appointment of a successor Escrow Agent. The
Escrow Agent shall have the right to withhold an amount from the Escrow Fund
equal to the amount due and owing to the Escrow Agent, plus any costs and
expenses the Escrow Agent shall reasonably believe may be incurred by the Escrow



                                       5


Agent in connection with the appointment of a successor Escrow Agent. Any
corporation or association into which the Escrow Agent in its individual
capacity may be merged or converted or with which it may be consolidated, or any
corporation or association resulting from any merger, conversion or
consolidation to which the Escrow Agent in its individual capacity shall be a
party, or any corporation or association to which all or substantially all of
the corporate trust business of the Escrow Agent in its individual capacity may
be sold or otherwise transferred, shall be the Escrow Agent under this Agreement
without further act.

        10. Amendment and Termination. This Agreement may be amended or
terminated by and upon written notice to the Escrow Agent at any time given
jointly by Purchaser and the Sellers, but the duties or responsibilities of the
Escrow Agent may not be amended or modified without its consent.

        11. Notices. All notices and other communications under this Agreement
shall be in writing and shall be deemed given (1) when delivered by hand, (ii)
when transmitted by telecopier (with confirmation), provided that a copy is sent
at about the same time by registered mail, return receipt requested. (iii) one
business day after mailed, if sent by Express Mail, Fed Ex. or other nationally
recognized express delivery service, or (iv) three days after mailed, if sent by
registered or certified mail, return receipt requested. to the addressee at the
following addresses or telecopier numbers (or to such other address or
telecopier number as a party may specify by notice given to the other party
pursuant to this provision):

        if to the Purchaser, to:

               Kinetics Electronics Management, Inc.
               2805 Mission College Blvd.
               Santa Clara, CA 95054
               Fax: (408) 567-0196
               Attention: General Counsel

        with copies to (which shall not constitute notice):

               DB Capital Partners, Inc.
               One Market Plaza
               Steuart Tower, Suite 2400
               San Francisco, CA 94105
               Fax: (415) 217-4288
               Attention: Jeff Ott
                          Steve Dollinger

        and

               Behrman Capital
               Four Embarcadero Center, Suite 3640
               San Francisco, CA 94111
               Fax: (415) 434-7310
               Attention: Greg Chiate

        if to Magnolia, to:



                                       6


               Magnolia Tree, LLC
               13463 Mandoli Drive
               Los Altos, CA 94022
               Fax: N/A
               Attention: David J. Shimmon

        with a copy to (which shall not constitute notice):

               Doty Sundheim & Gilmore
               260 Sheridan Avenue, Suite 200
               Palo Alto, CA 94306
               Fax: (650) 327-0101
               Attention: Rodney C. Gilmore, Esq.

        if to Hawthorne Trust, to

               James E. Hawthorne as Trustee
               of the James and Roberta Hawthorne
               Family Trust U/T/A dated August 31, 1999
               620 Price Avenue
               Redwood City, Ca 94063
               Fax: (650) 364-4138

        with a copy to (which shall not constitute notice):

               Farella Braun & Martel
               Russ Building, 30th Floor
               235 Montgomery Street
               San Francisco, CA 94104
               Fax: (415) 954-4480
               Attention: Matthew Lewis, Esq.

        if to the Escrow Agent, to:

               Chase Manhattan Trust Company, N.A.
               One Oxford Centre, Suite 1100
               301 Grant Street
               Pittsburgh, PA 15219
               Attention: Douglas Wilson
               Fax: (412) 291-2070

or to such other Person as shall be designated in writing by any such party.

        12. Parties in Interest. This Agreement shall be binding upon and inure
to the benefit of the Sellers, the Purchaser and the Escrow Agent and their
respective successors and permitted assigns.

        13. Assignment. Neither Seller may assign its respective obligations
hereunder: the Purchaser may assign its rights under this Agreement to any
Person, including, without limitation. to its or any of its Subsidiaries'
financing sources by way of security, to any Person appointed to enforce such
security or any Person in connection with such enforcement.



                                       7


        14. Execution by Escrow Agent. The execution of this Agreement by the
Escrow Agent shall evidence its acceptance and agreement to the terms hereof.

        15. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH THE LAW OF THE STATE OF CALIFORNIA.



                                       8


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


                                        KINETICS ELECTRONICS MANAGEMENT, INC.



                                        By:
                                           -------------------------------------
                                                Name:
                                                Title:


                                        MAGNOLIA TREE, LLC


                                        By:
                                           -------------------------------------
                                                Name:
                                                Title:


                                        JAMES E. HAWTHORNE AS TRUSTEE
                                        OF THE JAMES AND ROBERTA HAWTHORNE
                                        FAMILY TRUST U/T/A DATED AUGUST 31, 1999


                                        By:
                                           -------------------------------------
                                                Name:
                                                Title:



                                       9


                                        CHASE MANHATTAN TRUST COMPANY, NATIONAL
                                        ASSOCIATION, as Escrow Agent


                                        By:
                                           -------------------------------------
                                                Name:
                                                Title:



                                                                      SCHEDULE 1



               LETTERHEAD OF KINETICS ELECTRONICS MANAGEMENT, INC.

                                                                          [date]

Chase Manhattan Trust Company, National Association

[Address]

Attention: ________________________________



Dear Sirs:

        With reference to the Stock Purchase Agreement, dated as of February
[28], 2001, by and among Kinetics Electronics Management, Inc., Magnolia Tree,
LLC and James E. Hawthorne, as Trustee of The James and Roberta Hawthorne Family
Trust U/T/A dated August 31, 1999, and the Escrow Agreement dated as of February
[28], 2001, by and among Kinetics Electronics Management, Inc., Magnolia Tree,
LLC, James E. Hawthorne, as Trustee of The James and Roberta Hawthorne Family
Trust U/T/A dated August 31, 1999, and Chase Manhattan Trust Company, National
Association, as Escrow Agent, we hereby claim the following amount:

               [INSERT ANY AMOUNT DUE AND OWING TO THE PURCHASER
               UNDER SECTION 2.3(c)(i) OF THE STOCK PURCHASE AGREEMENT]

        Capitalized terms used herein shall have the meaning given to such terms
in the Stock Purchase Agreement.

                                        Very truly yours,

                                        Kinetics Electronics Management, Inc.


                                        By:
                                           -------------------------------------
                                        Name:
                                        Title:
cc:     [Magnolia]
        [Hawthorne Trust]



                                                                      SCHEDULE 2



                                      FEES




                                             
             Annual Fee:                                     $3,000
             One-time Escrow Agent Review Fee:               $1,000
             6% Out-of-Pocket Annual Charge:                 $  240
                                                             ------
                                   Total                     $2,240

             



                                    Exhibit B



                  See Seller Non-Competition Agreement Attached



                        SELLER NON-COMPETITION AGREEMENT



        This SELLER NON-COMPETITION AGREEMENT, is dated as of February 28, 2001
(this "Agreement"), by and between Kinetics Electronics Management, Inc., a
California corporation (collectively with its Subsidiaries and Affiliates, the
"Company"), and James E. Hawthorne, an individual resident in the State of
California ("Seller").

                                   WITNESSETH:

        WHEREAS, as of the date hereof, the Company has acquired control of
Marchi Associates, Inc. (d/b/a Marchi Systems, Inc.), a California corporation
("Marchi"), pursuant to a Stock Purchase Agreement dated as of the date hereof
(the "Stock Purchase Agreement") by and among the Company, James E. Hawthorne,
as Trustee of The James and Roberta Hawthorne Family Trust U/T/A dated August
31, 1999 ("Hawthorne Trust"), and the other stockholder of Marchi;

        WHEREAS, Seller, having served in his capacity as an executive employee
of Marchi, has had since 1993 significant managerial responsibility for the
operations and business affairs of Marchi in such capacity and will remain an
executive employee of Marchi subsequent to the consummation of the transactions
contemplated by the Stock Purchase Agreement;

        WHEREAS, Hawthorne Trust will receive significant consideration by
reason of the consummation of the transactions contemplated by the Stock
Purchase Agreement and the Stock Repurchase and Earnout Agreement, dated as of
the date hereof (the "Stock Repurchase and Earnout Agreement"), by and between
the Company and Hawthorne Trust;

        WHEREAS, Seller is a beneficiary of, and is the duly appointed and
presently acting Trustee of, Hawthorne Trust;

        WHEREAS, the Company will be engaged in a number of businesses in
numerous jurisdictions throughout North America, Europe, Asia and Australia;

        WHEREAS, as a result of his affiliations with Marchi, Seller has had,
and continues to have, complete access to all confidential and proprietary
information concerning the business and operations of the Company;

        WHEREAS, Seller has developed, and continues to develop, numerous
personal contacts with customers, suppliers, and other business relations of the
Company which are of great value to the Company, and, as a result of such
contacts and relations, Seller is capable of utilizing such



nonpublic, confidential and proprietary information, and personal contacts to
compete with the Company and could cause great economic damage to the Company
thereby;

        WHEREAS, the Company and Seller are entering into this Agreement for the
purpose of preserving the proprietary rights, going concern value and goodwill
of the Company for the benefit of the Company by ensuring that Seller does not
use any of such nonpublic, confidential, and proprietary information nor
personal contacts for the period hereinafter set forth; and

        WHEREAS, the execution and delivery of this Agreement by Seller is a
condition precedent to consummation of the transactions contemplated by the
Stock Purchase Agreement.

        NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and Seller hereby covenant and agree as follows:

        16. Definitions. In addition to the other terms defined elsewhere in
this Agreement, unless the context shall expressly or by necessary implication
indicate to the contrary, the following terms, as used herein, shall have the
following meanings:

        (a) "Affiliate" shall mean, with respect to any specified Person, (i)
any other Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with,
such specified Person or (ii) any Person known by such specified Person to be
related to such Person by blood or marriage.

        (b) "Person" shall mean any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity.

        (c) "Restricted Period" shall mean the period commencing on the date on
which Seller's employment by Marchi is terminated (the "Commencement Date") and
ending on the date that is four (4) years following the Commencement Date.

        (d) "Subsidiaries" shall mean, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock then entitled to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of such
Person or a combination thereof, or (ii) if a limited liability company,
partnership, association or other business entity, a majority of the partnership
or other similar ownership interest thereof is at the time owned or controlled,
directly or indirectly, by such Person or one or more of the other Subsidiaries
of such Person or a combination thereof. For purposes hereof, a Person or
Persons shall be deemed to have a majority ownership interest in a limited
liability company, partnership, association or other business entity if such
Person or Persons shall be allocated a majority of limited liability company,
partnership, association or other business entity gains or losses or shall be or
control the sole managing director, manager or general partner of any such
limited liability company, partnership, association or other business entity.

        17. Non-Competition. The Seller agrees that, during the Restricted
Period, he shall not directly or indirectly own, operate, manage, control,
participate in, consult with, advise,



                                       2


provide services for, or in any manner engage in any business (including by
himself or in association with any person, firm, corporate or other business
organization or through any other entity) in competition with any business
within the United States or any other geographical area (collectively, the
"Geographical Area") in which the Company engages in during the employment of
the Seller by the Company (such existing business (which the Company
acknowledges and agrees is currently the manufacturing of thermocouples, heaters
and sensors for the semiconductor capital equipment industry), the "Lines of
Business"). Nothing herein shall prohibit the Seller from being a passive owner
of not more than 2% of the outstanding stock of a corporation which is publicly
traded, so long as the Seller has no active participation in the business of
such corporation.

        18. No Solicitation. During the Restricted Period, the Seller shall not,
directly or indirectly through another entity, (i) induce or attempt to induce
any employee of the Company to leave the employ of the Company, or in any way
interfere with the relationship between the Company and any employee thereof;
including without limitation, inducing or attempting to induce any union,
employee or group of employees to interfere with the business or operations of
the Company, (ii) hire any person who was an employee of the Company at any time
during the Seller's employment period, or (iii) induce or attempt to induce any
customer, supplier, distributor, franchisee, licensee or other business relation
of the Company to cease doing business with the Company, or in any way interfere
with the relationship between any such customer, supplier, distributor,
franchisee, licensee or business relation and the Company. Notwithstanding
anything to the contrary in this Section 3, the Seller may (i) provide general
advertisements and notices and (ii) respond to unsolicited inquiries from
employees, customers or suppliers of the Company; provided, that the Seller does
not employ any current or former employee of the Company within two (2) years
from the Commencement Date.

        19. Inventions, etc. Seller agrees to promptly disclose to the Company
all ideas, formulae. programs, systems, devices, processes, business concepts,
discoveries and inventions (hereinafter referred to collectively as
"discoveries"), whether or not patentable, which he conceived, made, developed,
acquired or reduced to practice, whether alone or with others and whether during
or after usual working hours, and which are related to the Company's business or
interests of the Company and are or have been used by the Company at any time
during the two-year period prior to the Commencement Date; provided, however,
that "discoveries" shall not include any invention that Seller developed
entirely on his own without using the Company's equipment, supplies, facilities
or trade secret information, unless that invention, at the time of conception or
reduction to practice relates to the business of the Company, to actual or
demonstrably anticipated research or development of the Company or results from
work performed by Seller for the Company. Seller hereby transfers and assigns to
the Company all of Seller's right, title, and interest in and to all
"discoveries," including any and all domestic and foreign patent rights therein
and any renewals thereof, it being understood that any and all such
"discoveries" shall be owned solely by and be the exclusive property of the
Company.

        Upon the request of the Company, Seller shall from time to time during
or after the expiration or termination of his employment, execute such further
reasonable instruments and do all such other reasonable and legal acts and
things as may be deemed necessary or desirable by the Company to protect and/or
enforce its rights in respect of the "discoveries". At the Company's request and
expense, Seller will assist the Company during the period of the



                                       3


employment of Seller with the Company and thereafter in connection with any
controversy or legal proceeding relating to the "discoveries". All expense of
filing or prosecuting any patent application shall be borne by the Company, but
Seller shall cooperate in filing and/or prosecuting any such application. Seller
shall receive no additional compensation for the performance of his obligations
hereunder, except as may be agreed to in writing by the Company.

        20. Confidentiality.

        (a) All information about the business and affairs of the Company
acquired by Seller prior to or after the date hereof (other than information
which is generally available to the public, except as a result of a breach by
any Person known by Seller to have any confidentiality obligation to the
Company), including, without limitation, its secrets and information about its
business, financial conditions, prospects, products, technology, know-how,
merchandising and advertising programs and plans, and the names of its
suppliers, customers, and lenders and the nature of its dealings with such
suppliers, customers and lenders as such dealings may exist from time to time,
which Seller has obtained, or which has been disclosed to him as a result of his
duties performed in his capacity as president of Marchi, or his past association
with or employment by the Company, constitute "Company Confidential
Information". Seller acknowledges that he has had and will have access to, and
knowledge of, Company Confidential Information, and that improper use or
revelation of same by Seller, whether during or after the expiration of his term
as an employee of the Company, could cause serious injury to the business of the
Company. Accordingly, Seller agrees that, except as required to perform his
duties under this Agreement or with the prior written permission of the Company
or as required by law, for the period ending at the end of the Restricted
Period, he will (i) not use any Company Confidential Information, (ii) keep
secret and inviolate all Company Confidential Information which shall come into
his possession, and (iii) not disclose the same to any other Person for so long
as such Company Confidential Information is not generally known by, or
accessible to, the public. This Section 5 shall not be violated by Seller
through disclosure of information which (i) at the time of disclosure is
publicly available through no act or omission by either Seller or any Affiliate
of Seller, (ii) is disclosed pursuant to a court order or as otherwise required
by law and upon the written advice of counsel, on condition that, to the extent
permitted by applicable law, notice of the requirement for such disclosure is
given to the Board of Directors of the Company prior to Seller making or
permitting any such disclosure and that Seller and his Affiliates cooperate in
such manner as the Company may reasonably request, at the Company's expense, in
resisting such disclosure, or (iii) is reasonably necessary in the course of
performing his duties as an employee of the Company. Seller further agrees that,
for the period ending at the end of the Restricted Period, he will not use any
Company Confidential Information for his own benefit or directly or indirectly
for the benefit of any Person other than the Company. Seller acknowledges that
any copyrightable subject matter created by Seller within the scope of his
employment, whether containing or involving Company Confidential Information or
not, is deemed a "workmade-for-hire" under the U.S. Copyright Act of 1976, as
amended, and the Company shall be deemed the sole author and owner thereof for
any purposes whatsoever. To the extent any such copyrightable subject matter is
not considered a "work-made-for-hire", all right, title and interest (including
all renewal rights) in such copyrightable subject matter is hereby deemed
assigned by Seller to the Company. Seller agrees to take all actions (including,
without limitation, filing appropriate forms) requested by the Company, at the
Company's expense, in order to secure the right, title and interest of the
Company in such copyrightable



                                       4


subject matter. In the event of any unauthorized publication of any Company
Confidential Information, the Company shall automatically own the copyright in
such publication.

        (b) Seller acknowledges that the operation and conduct of the business
of Marchi is special and unique and involves the use of trade secrets and
confidential information and that during the period of his employment with
Marchi, Seller has acquired and will acquire special knowledge and/or skill that
he could effectively utilize in competition with the Company. Seller further
acknowledges that the provisions of Sections 4 and 5 hereof are essential to the
goodwill and profitability of the Company and have provided substantial
inducement to the Company to execute and consummate the transactions
contemplated by the Stock Purchase Agreement, and that the application or
operation thereof shall not involve a substantial hardship upon his future
business or livelihood.

        (c) All files, records, correspondence, memoranda, notes or other
documents (including, without limitation, those in computer-readable form) or
property belonging to Marchi, whether prepared by Seller or otherwise coming
into his possession in the course of his performance of his duties as an
employee of Marchi or under any other employment or consulting agreement with
Marchi, shall be promptly surrendered to the Company and not retained by the
Seller (including, without limitation, any copies thereof) upon his termination
as an employee or consultant of the Company for any reason whatsoever; provided,
that Seller may retain a copy of all records relating to Seller's personnel
file.

        (d) The Company and Seller shall, and shall cause their Affiliates and
representatives to. treat this Agreement confidentially. Any publication or
other public release of this Agreement shall be subject to the mutual written
approval of the Company and Seller; provided, however, that this Section 5(d)
shall not apply to the publication or other public release of this Agreement if
required by law or by any rules of any stock exchange, in which case the
releasing party shall, to the extent practicable, consult the non-releasing
party in good faith in advance concerning the content of the release.

        21. No Disparagement. During the Restricted Period, the Seller shall not
take any action to disparage or criticize to any third parties any of the
products or services of the Company.

        22. Representations and Warranties of Seller. Seller represents and
warrants to the Company that: (i) Seller has all legal capacity to enter into
this Agreement and to perform his obligations hereunder; (ii) this Agreement has
been duly executed and delivered by Seller; (iii) this Agreement constitutes the
valid and binding obligation of Seller, enforceable against Seller in accordance
with its terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and by general principles of equity
(regardless of whether the issue of enforceability is considered in a proceeding
in equity or at law); and (iv) none of the execution, delivery and performance
of this Agreement by Seller (x) violates any law, rule, regulation or order of
any court or governmental authority with jurisdiction or oversight with respect
to Seller, (y) results in any breach of any provision of, or default under, any
material agreement or instrument to which Seller is a party or (z) requires
Seller to obtain any consent, authorization or approval from any governmental
authority or other person. Notwithstanding anything to the



                                       5


contrary in this Section 7, the Seller makes no representation whatsoever in
clause (iii) of the immediately preceding sentence with respect to the
enforceability of the scope and duration of the non-competition provisions of
this Agreement.

        23. Remedies. Seller acknowledges and agrees that any breach or
threatened breach of this Agreement will cause irreparable harm to the Company
and cannot be remedied solely by the recovery of damages. Therefore, in the
event of a breach or threatened breach by either Seller or an Affiliate of
Seller of Sections 2, 3, 4, 5 or 6 of this Agreement, the Company shall, in
addition to any other remedies it may have at law or in equity (including
without limitation damages or action for accounting or restitution) be entitled
to equitable relief (without being required to post a bond or other undertaking
or to prove actual damage) in the form of an injunction and/or restraining order
by the courts enumerated in Section 12 hereof. Any and all such remedies shall
be cumulative and the election of any remedy, at law or in equity, by the
Company shall not be to the exclusion of any other remedy then available to the
Company.

        24. Judicial Amendments; Severability. The parties hereto agree and
intend that the covenants contained in this Agreement shall be construed as a
series of separate covenants, and each such separate covenant shall be deemed
identical in terms. It is expressly understood and agreed that, although the
Company and Seller consider the restrictions contained in this Agreement to be
reasonable for the purpose of preserving for the Company's benefit the
proprietary rights, going concern value and goodwill of the Company, whenever
possible, each provision. term, and covenant of this Agreement shall be
interpreted in such a manner as to be effective and valid under applicable law,
but if any provision, term or covenant of this Agreement, including any of the
separate covenants of this Agreement, shall be held to be prohibited by or
invalid under such applicable law, then such provision, term or covenant shall
be ineffective only to the extent of such prohibition or invalidity, without
invalidating or affecting in any manner whatsoever the remainder of such
provision, term or covenant or the remaining provisions, terms or covenants of
this Agreement; provided that if a court having competent jurisdiction shall
find that any covenant contained in this Agreement is not reasonable, such court
shall have the power to reduce the duration and/or geographic area and/or scope
of such covenant, and the covenant shall be enforceable in such reduced form.
Upon determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the extent possible.

        25. Assignment. The rights and obligations of the Company hereunder
shall inure to the benefit of, and be binding upon, its successors and assigns.
Seller may not assign his obligations hereunder; the Company may, at any time,
assign its rights under this Agreement to any Person including, without
limitation, to its or any of its Subsidiaries' financing sources by way of
security, to any Person appointed to enforce such security or any Person in
connection with such enforcement.

        26. Notices. All notices and other communications under this Agreement
shall be in writing and shall be deemed given (i) when delivered by hand, (ii)
when transmitted by telecopier (with confirmation), provided that a copy is sent
at about the same time by registered mail, return receipt requested, (iii) one
business day after mailed, if sent by Express Mail,



                                       6


Fed-Ex. or other nationally recognized express delivery service, or (iv) three
days after mailed, if sent by registered or certified mail, return receipt
requested, to the addressee at the following addresses or telecopier numbers (or
to such other address or telecopier number as a party may specify by notice
given to the other party pursuant to this provision):


                      if to Company, to:

                      Kinetics Electronics Management, Inc.
                      2805 Mission College Blvd.
                      Santa Clara, CA 95054

                      Fax:          (408) 567-0196
                      Attention:    General Counsel



                      with copies to (which shall not constitute notice):

                      DB Capital Partners, Inc.
                      One Market Plaza
                      Steuart Tower, Suite 2400
                      San Francisco, CA 94105

                      Fax:          (415) 217-4288
                      Attention:    Jeff Ott
                                    Steven Dollinger
                      and:

                      Behrman Capital
                      Four Embarcadero Center, Suite 3640
                      San Francisco, CA 94111

                      Fax:          (415) 434-7310
                      Attention:    Greg Chiate



                      if to Seller to:

                      James E. Hawthorne
                      620 Price Avenue
                      Redwood City, CA 94063

                      Fax:   (650) 364-4138

                      with a copy to (which shall not constitute notice):

                      Farella Braun & Martel
                      Russ Building, 30th Floor
                      235 Montgomery Street
                      San Francisco, CA 94104



                                       7


                      Fax:          (415) 954-4480
                      Attention:    Matthew Lewis, Esq.

        or to such other Person as shall be designated in writing by any such
        party.


        27. General.

        (a) The section headings contained herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.

        (b) This Agreement sets forth the entire agreement and understanding of
the parties relating to the subject matter hereof, and supersedes all prior
agreements, arrangements and understandings, written or oral, between the
parties relating to the subject matter hereof, with the exception of the Stock
Purchase Agreement and the other agreements and transactions contemplated
therein to which Seller is a party.

        (c) This Agreement may be amended, modified, superseded, canceled,
renewed or extended and the terms or covenants hereof may be waived, only by a
written instrument executed by both parties hereto or, in the case of a waiver,
by the party waiving compliance. The failure of either party at any time or
times to require performance of any provision hereof shall in no manner affect
the right of such party at a later time to enforce the same. No waiver by either
party of the breach of any term or covenant contained in this Agreement, whether
by conduct or otherwise, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such breach. or a waiver of
the breach of any other term or covenant contained in this Agreement.

        (d) This Agreement may be executed in counterparts. each of which shall
be deemed to be an original instrument, but all of which taken together shall
constitute one agreement.

        (e) This Agreement, and the legal relations between the parties hereto,
shall be governed by and construed in accordance with the laws of the State of
New York applicable to agreements executed and to be performed solely within
such state.

        (f) Submission to Jurisdiction, Waiver of Jury Trial. The Company and
Seller hereby submit to the jurisdiction of the State and Federal courts located
within the State of California for purposes of all legal proceedings which may
arise hereunder or under any of the other documents entered into in connection
herewith. The Company and Seller irrevocably waive, to the fullest extent
permitted by law, any objection which he/it may have or hereafter have to the
laying of the venue of any such proceeding brought in such a court and any claim
that any such proceeding brought in such a court has been brought in an
inconvenient forum. THE COMPANY AND SELLER HEREBY KNOWINGLY, VOLUNTARILY, AND
INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH,
THIS AGREEMENT OR ANY OTHER DOCUMENTS ENTERED INTO IN CONNECTION HEREWITH, OR
ANY COURSE OF CONDUCT, COURSE OF



                                       8


DEALING, OR STATEMENTS (WHETHER VERBAL OR WRITTEN), OF THE COMPANY OR SELLER.

        28. Importance of this Agreement. It is understood by and between the
Company and Seller that the provisions of Sections 2, 3, 4, 5 and 6 of this
Agreement are an essential element of the Company's agreement to consummate the
transactions contemplated by the Stock Purchase Agreement and the Stock
Repurchase and Earnout Agreement and that, but for this Agreement, the Company
would not have entered into nor consummated the Stock Purchase Agreement or the
Stock Repurchase and Earnout Agreement.

                                    * * * * *

        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.

                                        KINETICS ELECTRONICS MANAGEMENT, INC.


                                        By:
                                           -------------------------------------
                                        Name:
                                        Title:


                                            JAMES E. HAWTHORNE



                                        ----------------------------------------
                                              James E. Hawthorne, Seller



                                       9


                                    Exhibit C

               See Stock Repurchase and Earnout Agreement Attached

                     STOCK REPURCHASE AND EARNOUT AGREEMENT

        This STOCK REPURCHASE AND EARNOUT AGREEMENT is dated as of February 28,
2001 (this "Agreement"), by and between Kinetics Electronics Management, Inc., a
California corporation (the "Company"), James E. Hawthorne, as Trustee of The
James and Roberta Hawthorne Family Trust U/T/A dated August 31, 1999 ("Hawthorne
Trust"), Kinetics Group, Inc., a Delaware corporation (with respect solely to
Section 16 of this Agreement) and Kinetics Holdings Corporation, a Delaware
corporation (with respect solely to Section 17 of this Agreement).

        Capitalized terms used and not otherwise defined herein shall have the
respective meaning assigned to such terms in the Stock Purchase Agreement (as
defined below).

                              W I T N E S S E T H:

        WHEREAS, as of the date hereof, the Company has acquired control of
Marchi Associates, Inc. (d/b/a Marchi Systems, Inc.), a California corporation
("Marchi"), pursuant to a Stock Purchase Agreement, dated as of the date hereof
(the "Stock Purchase Agreement"), by and among the Company, Hawthorne Trust and
the other stockholder of Marchi;

        WHEREAS, in connection with the transactions contemplated by the Stock
Purchase Agreement, James E. Hawthorne (the "Executive") will continue his
employment with Marchi, in the role of President;

        WHEREAS, the Executive is a beneficiary of, and is the duly appointed
and presently acting trustee of, Hawthorne Trust; and

        WHEREAS, as of the date hereof Hawthorne Trust is the lawful owner,
beneficially and of record, of 133,333 shares of Kinetics Class A Common Stock
and 1,200,000 shares of Kinetics Class B Common Stock.

        NOW, THEREFORE, for and in consideration of the premises and of the
mutual representations, warranties, covenants and agreements contained herein,
and of other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, and upon the terra and subject to the conditions
hereinafter set forth, the parties do hereby agree as follows:

        1. Definitions. In addition to the other terms defined elsewhere in this
Agreement, the following terms, as used herein, shall have the following
meanings:

        "Auditor" shall mean Ernst & Young.

        "Board" shall mean the Board of Directors of the Company.



                                       1


        "Cause" shall mean (i) the Executive's conviction (or pleading guilty or
nolo contendere) (A) for fraud, misappropriation, embezzlement or for any other
crime involving dishonesty or for any felony involving moral turpitude or (B)
for any felony which is reasonably likely to result in a material loss or damage
to the reputation of Marchi or KGI, (ii) the failure by Executive to perform his
duties with, or comply with the directives of the Board of Directors of, Marchi
or KGI, other than any such failure resulting from Executive's death or
Disability, which failure is not cured within thirty (30) days after receipt of
a written demand delivered to Executive by the Board, which demand specifically
identifies the manner in which the Board believes that Executive has not
performed his duties, or (iii) gross negligence by the Executive in connection
with or related to his employment with Marchi or KGI.

        "Change In Control" shall mean any transaction or series of related
transactions as a result of which (i) any Third Party or "group" (within the
meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended) of Third Parties becomes, directly or indirectly, a-beneficial owner"
(within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as
amended) of more than fifty percent (50%) of the outstanding Kinetics Common
Stock or, if and only if Executive is then employed by any Affiliate of KHC, the
outstanding common stock of such Affiliate, (ii) KHC or, if and only if
Executive is then employed by an Affiliate of KHC, such Affiliate (or any other
Affiliate of KHC which, directly or indirectly, "controls" (as such term is
defined in the definition of "Affiliate" contained in the Stock Purchase
Agreement) such Affiliate) consolidates with or merges into or with any Person
and after giving effect to such consolidation or merger any Third Party or
"group" (within the meaning of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended) of Third Parties owns, directly or indirectly, more
than fifty percent (50%) of the outstanding voting securities of the Person
surviving such consolidation or merger and, in the case of any Affiliate of KHC,
more than fifty percent (50%) of the outstanding voting securities of the
Affiliate employing the Executive, (iii) all or substantially all of the assets
of KHC or, if and only if Executive is then employed by an Affiliate of KHC,
such Affiliate are sold, leased, exchanged or otherwise transferred, directly or
indirectly, as an entirety to any Third Party or "group" (within the meaning of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) of
Third Parties, or (iv) less than half of the members of the Board of Directors
of KHC shall be Continuing Directors.

        "Continuing Director" shall mean the directors of KHC on the date hereof
and each other director if such director's nomination for election to the Board
of Directors of KHC is recommended by a majority of the then Continuing
Directors.

        "Disability" shall mean if as a result of the incapacity due to physical
or mental illness. Executive is unable to perform the duties of his employment
with Marchi or KGI (as determined by the Board) for a continuous period of 60
days or an aggregate of 90 days (whether or not consecutive) during any
consecutive 120-day period.

        "EBITDA" shall mean with respect to Marchi (a) net income (or net loss)
plus (b) the sum of (i) interest expense, (ii) income tax expense, (`ii)
depreciation expense, (iv) amortization expense and (v) extraordinary or unusual
losses deducted in calculating net income (or net loss) less (c) extraordinary
or unusual gains added in calculating net income (or net loss), in each case,



                                       2


of Marchi for the twelve months ending on September 30th of the fiscal year in
question, in each case determined in accordance with GAAP consistent with past
practice.

        "KGI" shall mean Kinetics Group, Inc., a Delaware corporation, and each
of its Subsidiaries and Affiliates.

        "Kinetics Class A Common Stock" shall mean the shares of voting class A
common stock, par value $0.01 per share, of Kinetics Holdings Corporation, a
Delaware corporation ("KHC"), which for all purposes of this Agreement shall
initially be valued at $3.00 per share.

        "Kinetics Class B Common Stock" shall mean the shares of nonvoting class
B common stock, par value $0.01 per share, of KHC, which for all purposes of
this Agreement shall initially be valued at $3.00 per share.

        "Kinetics Common Stock" shall mean the Kinetics Class A Common Stock and
the Kinetics Class B Common Stock.

        "KHC" shall have the meaning assigned to such term in the definition of
Kinetics Class A Common Stock.

        "Permitted Transferee" shall have the meaning set forth in the
Shareholders Agreement, dated as of August 30, 2000, as amended, by and among
Kinetics Holdings Corporation, a Delaware corporation, and the Stockholders
listed therein.

        "Person" shall mean any individual, partnership, corporation, trust,
unincorporated association or other entity which is recognized as having legal
personality.

        "Purchased Shares" shall mean (i) all shares of Kinetics Common Stock
transferred to Hawthorne Trust in connection with the transactions contemplated
by that certain purchase agreement, dated as of February 28, 2001, by and
between Hawthorne Trust and DB Capital Investors, L.P., a Delaware limited
partnership, and (ii) all shares of Kinetics Common Stock issued with respect to
the capital stock referred to in clause (i) above by way of stock dividend or
stock split or in connection with any conversion, merger, consolidation or
recapitalization or other reorganization affecting the capital stock. Purchased
Shares may only be transferred by Hawthorne Trust to a Permitted Transferee and
such transferred Purchased Shares shall continue to be Purchased Shares as
defined herein, and each such Permitted Transferee shall become a party to this
Agreement and succeed to the rights and obligations of Hawthorne Trust
hereunder. so long as such Permitted Transferee remains a Permitted Transferee.
Except as otherwise provided in this .Agreement, the Purchased Shares shall not
be subject to any pledge, lien, mortgage, hypothecation, security interest,
charge, option or other encumbrance whatsoever.

        "Shareholders Agreement" shall have the meaning assigned such term in
the definition of Third Party.

        "Subsidiaries" shall mean, with respect to any Person, any corporation,
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock then entitled to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly,



                                       3


by such Person or one or more of the other Subsidiaries of such Person or a
combination thereof; or (ii) if a limited liability company, partnership,
association or other business entity, a majority of the partnership or other
similar ownership interest thereof is at the time owned or controlled, directly
or indirectly, by such Person or one or more Subsidiaries of such Person or a
combination thereof. For purposes hereof, a Person or Persons shall be deemed to
have majority ownership interest in a limited liability company, partnership,
association or other business entity if such Person or Persons shall be
allocated a majority of limited liability company. partnership, association or
other business entity gains or losses or shall be or control the sole managing
director, manager or general partner of any such limited liability company,
partnership, association or other business entity.

        "Termination Date" shall mean the date on which Executive's employment
with Marchi or KGI is terminated.

        "Third Party" shall mean any Person who was not (i) a party to the
Shareholders Agreement, dated as of August 30, 2000, by and among KHC and the
stockholders party thereto (the "Shareholders Agreement") immediately after the
date hereof or (ii) an Affiliate of any Person referenced in clause (i) of this
definition of Third Party.

        2. Option to Repurchase the Purchased Shares Upon Termination of
Executive's Employment.

        (a) Repurchase of the Purchased Shares. If Executive's employment with
Marchi or KGI shall terminate at any time prior to the date which is three (3)
years from the date hereof as a result of either voluntary termination by the
Executive or termination for Cause, then the Company or the Company's designee
shall have the right, exercisable in the Company's sole discretion, by notice
(the "Election Notice") to the Executive and/or any one or more Permitted
Transferees at any time prior to the date which is three (3) years from the date
hereof, to repurchase any or all of the amount of Purchased Shares set forth
next to the corresponding time period on the table set forth below, whether held
by Executive or by one or more Permitted Transferees at the price determined in
accordance with the provisions of Section 3 hereof.



                                                     Percentage of Purchased Shares
                  Time Period                            Subject to Repurchase
                  -----------                        ------------------------------
                                                  
For the period beginning on the date hereof and                   100%
ending on and including the date which is one
(1) year from the date hereof:

For the period beginning on the date after the                75% hereof.
date which is one (1) year from the date hereof
and ending on and including the date which is
two (2) years from the date

For the period beginning on the date after the                     50%
date which is two (2) years from the date
hereof and ending on and including the date




                                        4


                                                  
which is three (3) years from the date hereof:

Anytime after the date which is three (3) years                    0%
from the date hereof:




        As shown by the table above, the amount of Purchased Shares subject to
the Company's right of repurchase shall decrease each successive full year
Executive remains employed by Marchi or KGI.

        Upon a Change In Control, the Company's repurchase rights shall be
deemed to have been automatically terminated on the day immediately preceding
the Change In Control without any further action required by Executive or the
Company.

        (b) Closing of the Repurchase of Purchased Shares. In the event the
Company elects to repurchase the Purchased Shares, the transaction for the
purchase of the Purchased Shares by the Company pursuant to this Section 2 shall
be consummated (the "Closing") on or before the thirtieth (30th) day following
the date on which the Election Notice was given or deemed given (the "Closing
Date"). The Closing shall take place at the Company's executive offices. The
Election Notice shall set forth the date and time of the Closing as well as the
proposed purchase price. At the Closing, the Company or its designee shall pay
the Purchase Price (as defined below) in the manner specified in Section 3(c)
and Hawthorne Trust or, as the case may be, one or more Permitted Transferees,
shall deliver the certificate or certificates representing such Purchased Shares
to the Company, or its nominee, free and clear of any liens or encumbrances and
duly endorsed in blank for transfer or accompanied by duly executed stock
powers. The Company or its designee shall not be entitled to receive
representations and warranties from Hawthorne Trust or, as the case may be, any
one or more Permitted Transferees, in connection with the purchase of such
Purchased Shares other than representations and warranties with respect to
Hawthorne Trust's or such Permitted Transferees' (i) valid ownership of the
Purchased Shares free and clear of all liens and encumbrances and (ii)
authority, capacity, power and right to enter into and consummate such sale
without violation of its organizational documents any applicable law or any
other agreement.

        3. Purchase Price for Purchased Shares.

        (a) Purchase Price. The purchase price to be paid by the Company for the
Purchased Shares pursuant to Section 2 shall be equal to the lesser of (i) $3.00
multiplied by the number of Purchased Shares, and (ii) the fair market value of
the Purchased Shares as determined in good faith by the Board or as conclusively
determined pursuant to Section 3(b) (the "Purchase Price").

        (b) Objection to Purchase Price. (i) In the event that Hawthorns Trust
does not object to the determination by the Board of the Purchase Price by
written notice of objection (the "Notice of Objection") delivered to the Company
within five (5) business days after Hawthorns Trust's receipt of the Election
Notice, such Notice of Objection to describe in



                                       5


reasonable detail Hawthorns Trust's proposed adjustment to the Purchase Price,
the Purchase Price set forth in the Election Notice shall be deemed final and
binding.

               (ii) If Hawthorns Trust delivers a Notice of Objection to the
Company, then any dispute shall be resolved as follows:

               (x) Hawthorns Trust and the Company shall promptly endeavor to
        agree upon the Purchase Price. In the event that a written agreement
        determining the amount of the Purchase Price has not been reached within
        ten (10) business days after the date of receipt by the Company from
        Hawthorns Trust of the Notice of Objection thereto, then the Company's
        determination of the Purchase Price and Hawthorns Trust's determination
        of the Purchase Price shall be submitted to Arthur Andersen (the
        "Arbitrator"). Each of the Company and Hawthorns Trust shall have an
        opportunity to present to the Arbitrator and the other party its
        rationales and procedures for determining the Purchase Price.

               (y) Within ten (10) business days after each party has submitted
        its presentation to the Arbitrator regarding the determination of the
        Purchase Price, the Arbitrator shall select either the Purchase Price
        proposed by the Company or the Purchase Price proposed by Hawthorns
        Trust. The decision of the Arbitrator shall be final and binding upon
        each party hereto; provided, that the Company shall have five (5)
        business days after receipt of the Arbitrator's decision to notify
        Hawthorns Trust that the Company revokes its Election Notice and has
        decided not to exercise its option to repurchase granted hereunder.

               (z) In the event Hawthorns Trust and the Company submit their
        respective determinations of the Purchase Price to the Arbitrator for
        resolution, the party against whom the Arbitrator decides will be
        responsible for the fees and expenses of the Arbitrator.

        (c) Manner of Payment. The Company shall pay the Purchase Price (less
any taxes or other charges required to be withheld pursuant to applicable law)
in a lump sum cash payment on the Closing Date. The Company may pay the purchase
price for such Purchased Shares by offsetting amounts outstanding under any
indebtedness or obligations owed by Executive or, as the case may be, any
Permitted Transferee, to the Company. In the event the Company intends to offset
the Purchase Price, as set forth herein, the Company shall provide Executive or,
as the case may be, any Permitted Transferee, with the amount and reason for the
offset, in reasonable particularity, in writing at least ten (10) days prior to
the Closing Date.

        4. Earnout: Earnout Payment. (a) If any performance test outlined below
is met, the Company shall pay or cause to be paid to Hawthorne Trust one of the
following amounts (the "Earnout Amount"), in accordance with Section 4(c)
hereof:

               (x) Four Million Dollars ($4,000,000), if the cumulative EBITDA
        of Marchi for the fiscal years ended September 30, 2001, September 30,
        2002, and September 30, 2003, equals or exceeds Thirty Six Million
        Dollars ($36,000,000); or

               (y) Three Million Dollars ($3,000,000), if the cumulative EBITDA
        of Marchi for the fiscal years ended September 30, 2001, September 30,
        2002, and September 30, 2003, equals or exceeds Thirty Two Million
        Dollars ($32,000,000);

provided, that, Hawthorne Trust shall not be entitled to the Earnout Amount, if
any, pursuant to this Section 4(a), if Executive's employment with Marchi or KGI
shall have been



                                       6


terminated at any time prior to the date which is three (3) years from the date
hereof as a result of Executive's voluntary termination or termination for
Cause.

        (b) (i) The Earnout Amount shall be determined by reference to a
statement of EBITDA for each of the fiscal years ended September 30, 2001,
September 30, 2002, and September 30, 2003 (collectively, the "EBITDA
Statements'") prepared by the Auditor, which EBITDA Statements shall be based
upon the results of operations of Marchi as reported in the consolidated
financial statements of KGI (or one of its Affiliates, as the case may be) as
audited by the Auditor with respect to such fiscal years and be consistent with
the definition of "EBITDA" contained in this Agreement. In the event Hawthorne
Trust does not object to the calculation of EBITDA contained in the EBITDA
Statements prepared by the Auditor by written notice of objection to the Board
(the "EBITDA Objection Notice") delivered to the Company within twenty (20)
business days after Hawthorne Trust's receipt of the EBITDA Statements, such
EBITDA Objection Notice to describe in reasonable detail Hawthorne Trust's
proposed adjustment to the calculation of EBITDA contained in the EBITDA
Statements, the EBITDA Statements shall be binding and conclusive upon and
deemed to be accepted by the Company and Hawthorne Trust for purposes of
determining the Earnout Amount, if any.

                      (ii) Upon delivery of the EBITDA Objection Notice,
        Hawthorne Trust and its accountants (A) shall be permitted reasonable
        access to review the books and records and work papers related to the
        preparation of the EBITDA Statements and the consolidated financial
        statements of KGI (or one of its Affiliates, as the case may be) and (B)
        may make inquiries of the Company, KGI (or one of its Affiliates, as the
        case may be), and/or their respective accountants (including the
        Auditor) regarding questions or disagreements with any of the EBITDA
        Statements or consolidated financial statements of KGI (or one of its
        Affiliates, as the case may be) arising in the course of their review
        thereof. The Company and Hawthorne Trust shall use commercially
        reasonable efforts to resolve their differences, and if such differences
        are not resolved in writing within thirty (30) business days after
        Hawthorne Trust's delivery of the EBITDA Objection Notice to the
        Company, then such differences shall be referred to Arthur Andersen (the
        "Third-Party Accountant").

                      (iii) The Third-Party Accountant shall only consider those
        items actually in dispute between the parties and shall otherwise
        conduct its review and make its determination in accordance with GAAP
        and the provisions, definitions, terms and conditions of this Agreement.
        In making its determination, the Third-Party Accountant shall only adopt
        either the Auditor's or Hawthorne Trust's position on each disputed
        item. Within twenty (20) business days of the submission of any dispute
        to the Third-Party Accountant pursuant to this Section 4(b), the
        Third-Party Accountant shall render a decision in accordance with this
        Section 4(b), along with a statement of its reasons therefor and a
        calculation of EBITDA for each of the fiscal years ended September 30,
        2001, September 30, 2002, and September 30, 2003 (the "Third-Party
        EBITDA Statements"). Each party shall provide the Third-Party Accountant
        with reasonable access to its books, records, work papers, accountants
        and employees prepared or use in connection with its respective
        calculation of EBITDA. The Third-Party EBITDA Statements shall be
        binding and conclusive upon and deemed to be accepted by the Company and
        Hawthorne Trust for purposes of determining the Earnout Amount, if any.



                                       7


                      (iv) The fees and expenses of the Third-Party Accountant
        for any determination pursuant to this Section 4(b) shall be paid by (A)
        the Company, if the Third-Party EBITDA Statements create a different
        obligation of the Company with respect to the payment of the Earnout
        Amount, if any, pursuant to Section 4(a), as the EBITDA Statements would
        have created had no EBITDA Objection Notice been delivered by Hawthorne
        Trust and (B) Hawthorne Trust, if the Third-Party EBITDA Statements
        create the identical obligation of the Company with respect to the
        payment of the Earnout Amount, if any, pursuant to Section 4(a), as the
        EBITDA Statements would have created had no EBITDA Objection Notice been
        delivered by Hawthorne Trust.

        (c) The Company shall pay to Hawthorne Trust the Earnout Amount, if any,
within fifteen (15) business days after the later of (x) the date on which the
EBITDA Statements are conclusively determined pursuant to Section 4(b) and (y)
the date which is three (3) years from the date hereof, by wire transfer of
immediately available funds to an account designated by Hawthorne Trust at least
three (3) business days prior to the date of payment.

        5. Remedies. The parties hereto shall be entitled to enforce their
rights under this Agreement specifically to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
existing in their favor. Hawthorne Trust acknowledges and agrees that money
damages would not be an adequate remedy for any breach of its obligations under
this Agreement and that the Company may, in its sole discretion, apply to any
court of law or equity of competent jurisdiction for specific performance and/or
injunctive relief (without posting bond or other security) in order to enforce
or prevent any violation of the provisions of this Agreement. Any and all such
remedies shall be cumulative, and the election of any remedy, at law or in
equity, by the Company shall not be to the exclusion of any other remedy then
available to the Company.

        6. Amendment. Except as otherwise provided herein, any provision of this
Agreement may be amended or waived only with the prior written consent of
Hawthorne Trust and the Company.

        7. Successors and Assigns. All covenants and agreements contained in
this Agreement (including, without limitation, the obligation of the Company to
pay the Earnout Amount, if any) by or on behalf of any of the parties hereto
shall bind and inure to the benefit of the respective successors and permitted
assigns of the parties hereto whether so expressed or not.

        8. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.

        9. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall constitute an original, but all of which
taken together shall constitute one and the same Agreement.



                                       8


        10. Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.

        11. Governing Law. This Agreement, and the legal relations between the
parties hereto, shall be governed by and construed in accordance with the laws
of the State of California applicable to agreements executed and to be performed
solely within such state.

        12. Jurisdiction: Venue. The Company and Hawthorne Trust hereby submit
to the jurisdiction of the State and Federal courts located within the State of
California for purposes of all legal proceedings which may arise hereunder or
under any of the other documents entered into in connection herewith. The
Company and Hawthorne Trust- irrevocably waive, to the fullest extent permitted
by law, any objection which he/it may have or hereafter have to the laving of
the venue of any such proceeding brought in such a court and any claim that any
such proceeding brought in such a court has been brought in an inconvenient
forum. THE COMPANY AND HAWTHORNE TRUST HEREBY KNOWINGLY, VOLUNTARILY, AND
INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH,
THIS AGREEMENT OR ANY OTHER DOCUMENTS ENTERED INTO IN CONNECTION HEREWITH, OR
ANY COURSE OF CONDUCT, COURSE OF DEALING, OR STATEMENTS (WHETHER VERBAL OR
WRITTEN). OF THE COMPANY OR HAWTHORNE TRUST.

        13. Notices. All notices and other communications under this Agreement
shall be in writing and shall be deemed given (i) when delivered by hand, (ii)
when transmitted by telecopier (with confirmation), provided that a copy is sent
at about the same time by registered mail, return receipt requested, (iii) one
business day after mailed, if sent by Express Mail, Fed Ex, or other nationally
recognized express delivery service, or (iv) three days after mailed, if sent by
registered or certified mail, return receipt requested, to the addressee at the
following addresses or telecopier numbers (or to such other address or
telecopier number as a party may specify by notice given to the other party
pursuant to this provision):

        If to Hawthorne Trust, to:

        James E.  Hawthorne, as Trustee of The
        James and Roberta Hawthorne Family
        Trust U/T/A dated August 31, 1999
        620 Price Avenue
        Redwood City, CA 94063
        Fax: (650) 364-4138

        with a copy to (which shall not constitute notice):

        Farella Braun & Martel
        Russ Building, 30th Floor
        235 Montgomery Street
        San Francisco, CA 94104
        Fax: (415) 954-4480



                                       9


        Attention: Matthew Lewis, Esq.

        If to the Company, to:

        Kinetics Electronics Management, Inc.
        2805 Mission College Blvd.
        Santa Clara, CA 95054
        Fax: (408) 567-0196
        Attention: General Counsel

        with copies to (which shall not constitute notice):

        DB Capital Partners, Inc.
        One Market Plaza Steuart Tower, Suite 2400
        San Francisco, CA 94105
        Fax: (415) 217-4288
        Attention:  Jeff Ott
                    Steven Dollinger
        and:

        Behrman Capital
        Four Embarcadero Center, Suite 3640
        San Francisco, CA 94111
        Fax: (415) 434-7310
        Attention: Greg Chiate

        or to such other address or to the attention of such other Person as the
recipient party has specified by prior written notice pursuant to this Section
13 to the sending party.

        14. Entire Agreement. This Agreement constitutes the entire
understanding between Hawthorne Trust and the Company with respect to the
subject matter hereof and supersedes all other agreements, whether written or
oral, with respect to the subject matter hereof.

        15. Effectiveness. This Agreement shall become effective upon the
occurrence of the Closing, as such term is defined in the Stock Purchase
Agreement.

        16. KGI Guarantee. (a) KGI irrevocably and unconditionally guarantees
the obligations of the Company under Section 4 of this Agreement. If the Company
shall fail in any respect to fulfill any of such obligations, Hawthorne Trust
shall be at liberty to act, and KGI shall be liable, as if KGI were the party
principally bound by such obligations.

        (b) The guarantee contained in this Section 16 is a continuing guarantee
and shall remain in force until all obligations of the Company pursuant to this
Agreement, if any, have been fulfilled.

        (c) The obligations of KGI under this Section 16 shall not be affected
by any act, omission matter or thing which, but for these provisions, might
operate to release or



                                       10


otherwise exonerate KGI from such obligations or affect such obligations,
including and whether or not known to KGI:

                      (i) any time, indulgence, waiver or consent at any time
        given to the Company or any other person;

                      (ii) any compromise or release of, or abstention from
        perfecting or enforcing, any rights or remedies against the Company or
        any other person;

                      (iii) any legal limitation, disability, incapacity or
        other circumstance relating to the Company or any person or any
        amendment or supplement to or variation of the terms of this Agreement;

                      (iv) any irregularity, unenforceability or invalidity of
        any obligations of the Company under this Agreement or the dissolution,
        amalgamation, reconstruction or insolvency of the Company; or

                      (v) any other circumstance whatsoever which may vary the
        risks of the Company or might otherwise constitute a legal or equitable
        discharge of a surety or guarantor.

        (d) The guarantee contained in this Section 16 may be enforced by
Hawthorne Trust without first having to take any steps or proceedings against
the Company or any other person.

        (e) With respect to the guarantee contained in this Section 16, KGI
hereby waives all of its rights of subrogation, reimbursement, indemnification
and contribution and any other rights and defenses that are or may become
available to KGI by reason of Sections 2787 to 2855, inclusive, of the
California Civil Code. KGI acknowledges that to the extent it has had any
questions or concerns regarding the effect of the foregoing waivers, it has
consulted its attorney and resolved all questions and concerns to its
satisfaction. With respect to the guarantee contained in this Section 16, KGI
waives all rights and defenses arising out of an election of remedies by
Hawthorne Trust, even though that election of remedies, such as nonjudicial
foreclosure with respect to security for a guaranteed obligation, has destroyed
KGI's rights of subrogation and reimbursement against the Company by the
operation of Section 580d of the Code of Civil Procedure or otherwise follows:

        17. KHC Matters. (a) KHC represents and warrants to Hawthorne Trust as

                      (i) As of the date hereof, KHC has the authorized and
        issued capital stock set forth on Exhibit A hereto. Except as set forth
        on Exhibit A hereto, there are no outstanding (x) options, warrants or
        other rights to purchase Kinetics Common Stock, (y) agreements or other
        obligations of KHC to issue Kinetics Common Stock, or (z) other rights
        to convert any obligation into, or exchange any securities for, Kinetics
        Common Stock.

                      (ii) Since September 30, 2000, there has been no material
        adverse change in the business, properties, assets, liabilities, results
        of operations, condition



                                       11


        (financial or otherwise), customer relationships or supplier
        relationships of KHC, and Hawthorne Trust shall have received a
        certificate duly executed by KHC, dated the Closing Date, to such
        effect. KHC makes no representations and expresses no opinion regarding
        the effect an industry or general economic slowdown or recession might
        have on the business, properties, assets, liabilities, results of
        operations, condition (financial or otherwise), customer relationships
        or supplier relationships of KHC, and Hawthorne Trust hereby agrees and
        acknowledges that such industry or general economic slowdown or
        recession shall not constitute a material adverse change for all
        purposes herein.

        (b) Notwithstanding any other provision of the Shareholders Agreement,
in the event of a sale transaction pursuant to Section 2.5 of the Shareholders
Agreement that for federal or California income tax purposes is deemed to have
occurred on or before the first anniversary of the Closing Date (as such term is
defined in the Stock Purchase Agreement), KHC shall indemnify, defend and hold
harmless Hawthorne Trust, on an after tax basis, from any Tax Loss (as defined
below) incurred by Hawthorne Trust solely as a result of such sale transaction.
"Tax Loss" means (i) an amount equal to one-half of the excess of the tax
actually payable by Hawthorne Trust at Hawthorne Trust's combined federal and
California rates on such sale transaction over the tax that would have been
actually payable by Hawthorne Trust at Hawthorne Trust's combined federal and
California rates on such sale transaction had such sale transaction been deemed
to have occurred immediately after the first anniversary of the Closing Date,
and (ii) any losses, costs, liabilities and expenses, including reasonable
attorney fees, incurred in connection with the enforcement of this
indemnification provision. All amounts payable under this provision shall be
payable free and clear of all taxes thereon save only as may be required by law.
If any taxes are required by law to be paid by Hawthorne Trust on account of any
amount received hereunder, Hawthorne Trust shall be paid such amount as will,
after such taxes have been paid by Hawthorne Trust, leave Hawthorne Trust with
the same amount as Hawthorne Trust would have been entitled to receive in the
absence of any such requirement to pay tax on account of an amount payable
hereunder.



                                       12


        IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.

                                        KINETICS ELECTRONICS MANAGEMENT, INC.


                                        By:
                                           -------------------------------------
                                        Name:
                                        Title:


                                        KINETICS GROUP, INC.
                                           (with respect solely to Section 16 of
                                           this Agreement)


                                        By:
                                           -------------------------------------
                                        Name:
                                        Title:


                                        KINETICS HOLDINGS CORPORATION
                                           (with respect solely to Section 17 of
                                           this Agreement)


                                        By:
                                           -------------------------------------
                                        Name:
                                        Title:


                                        JAMES E. HAWTHORNE, AS TRUSTEE OF THE
                                           JAMES AND ROBERTA HAWTHORNE FAMILY
                                           TRUST U/T/A DATED AUGUST 31, 1999


                                        By:
                                           -------------------------------------
                                        Name:
                                        Title:



                                       13


                                                                       EXHIBIT A


                                 Capitalization



        The authorized capital stock of KHC consists of 230,000,000 shares of
Kinetics Class A Common Stock, par value $.01, of which shares 9,241,149 are
issued and outstanding and 230,000,000 shares of Kinetics Class B Common Stock,
par value $.01, of which shares 83,170,385 are issued and outstanding. The table
below sets forth all of the outstanding options, warrants or other rights to
purchase Kinetics Class A and Kinetics Class B Common Stock.



Warrants:                                         Amount
- ---------                                         ------
                                               
Initial Warrants (Exercise Price - $3.00)         Class A - 9,894,954
                                                  Class B - 89,054,586

Note Warrants (Exercise Price - $3.00)            Class A - 715,009
                                                  Class B -- 6,435,085

Senior Subordinated Debt Warrants (Exercise       Class A - 332,489
Price - $0.01)                                    Class B -- 2,992,402

Options, others:

Convertible Promissory Note (Conversion Price -   Class A - 833,333
$3.00)                                            Class B -- 7,500,000

Employee Participation Stock Options              Up to 15% of the Issuer's total common equity
(Exercise Price - $3.00)




                                       1