-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QLfJR5pbdc/OUInPPI3BJVKVVx5/hNHCfyqD4eDJymhIZX4568FTA3cwjDsleF7P rW/EjkN43N6ajoxVV1k87w== 0000892569-01-500665.txt : 20010810 0000892569-01-500665.hdr.sgml : 20010810 ACCESSION NUMBER: 0000892569-01-500665 CONFORMED SUBMISSION TYPE: 10-12G PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 20010809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMONWEALTH ENERGY CORP CENTRAL INDEX KEY: 0001156443 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 10-12G SEC ACT: 1934 Act SEC FILE NUMBER: 000-33069 FILM NUMBER: 1702596 MAIL ADDRESS: STREET 1: 15901 RED HILL AVENUE STREET 2: SUITE 100 CITY: TUSTIN STATE: CA ZIP: 92780 10-12G 1 a74807ge10-12g.txt FORM 10 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10 ------------------------ GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMONWEALTH ENERGY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 33-0769555 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
15901 RED HILL AVENUE, SUITE 100, TUSTIN, CALIFORNIA 92780 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 258-0470 SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH TO BE SO REGISTERED EACH CLASS TO BE REGISTERED NONE NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK (TITLE OF CLASS) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- Item 1. Business.................................................... 1 Item 2. Financial Information....................................... 6 Item 3. Properties.................................................. 11 Item 4. Security Ownership of Certain Beneficial Owners and Management................................................ 11 Item 5. Directors and Executive Officers............................ 12 Item 6. Executive Compensation...................................... 14 Item 7. Certain Relationships and Related Transactions.............. 15 Item 8. Legal Proceedings........................................... 15 Item 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters.................... 17 Item 10. Recent Sales of Unregistered Securities..................... 18 Item 11. Description of Registrant's Securities to be Registered..... 18 Item 12. Indemnification of Officers and Directors................... 19 Item 13. Financial Statements and Supplementary Data................. 19 Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures................................. 19 Item 15. Financial Statements and Exhibits........................... 19
i 3 ITEM 1. BUSINESS A. Background and Overview. We were incorporated on August 15, 1997. Since then our primary business has been the sale of retail electric power to residential and small commercial customers in the newly deregulated California electricity market. We began providing electric service as one of more than 300 licensed Electric Service Providers ("ESPs") in the state and aggregated customers via an internal call center. As our customer base grew, we began developing software to better manage our back office customer service functions associated with servicing electricity accounts. We also began to provide service to larger commercial, industrial and governmental customer accounts. Once we had established a foothold in California, we expanded our retail electricity services to end users in Pennsylvania, specifically into the Pennsylvania Electric Company territory ("PECO"). We established a new tradename, "electricAmerica," in Pennsylvania and began aggregating residential, commercial, industrial and governmental customers via our call center. Currently, we sell electric power to approximately 55,000 end-use customers in California and approximately 35,000 end-use customers Pennsylvania. A portion of the electric power we sell is delivered to our retail customers by utility distribution companies ("UDCs") and electric distribution companies ("EDCs") which measure electric power usage and bill customers on our behalf. Three UDCs in California and one EDC in Pennsylvania conduct these activities on our behalf. The remaining portion of our electric power is sold to large wholesale customers by our own energy trading department. Prior to the inception of electricity deregulation in 1998, the retail electric service industry was controlled almost exclusively by utilities. Presently, eight states and Washington, D.C. offer deregulated retail electric service, while fourteen states are transitioning to deregulated status. Our opportunities for expansion may increase as more states and territories deregulate. As in other industries that have deregulated, competition in the electric service industry is intended to provide consumers with a choice of multiple suppliers that is expected to promote product differentiation, lowered costs and enhanced services. To obtain these features, customers may switch electric service from their utility to an alternative supplier. We realize that the majority of our revenues come from our successful management of one power contract that terminates in July 2002 and may not be renewed on terms as favorable as those we currently have. In order to protect against this eventuality, for the past nine months we have expanded a great deal of effort to diversify. In this registration statement we have attempted to describe the changes our Company is making to be able to have a diversified energy company that allows us to take advantage of the opportunities afforded by the energy marketplace in all of United States. We are not entirely dependent on serving and expanding beyond our two current deregulated markets. We also have been pursuing other business opportunities in regulated electric service markets. Our experience in the energy markets has led us to increase our breath of service offerings, leverage our existing energy expertise and pursue a diversification strategy that includes: - Establishment of a trading desk to better manage and schedule our energy load, and our wholesale power purchases and sales; - The sale of energy-efficient products and services to retail customers through our own call center; - The management and fulfillment of utility back office functions for energy retailers, generators, utilities, municipalities and cooperatives; - Energy management programs, including energy curtailment, distributed generation and alternative power generation for commercial, industrial and governmental electric service customers; - Procurement of government sponsored energy-related grants to augment our research and development efforts; 1 4 - Creation of separate, energy-focused profit centers, such as our call center; and - Investments in energy-related ventures synergetic with our plans. B. Products and Services. To date our business activities are comprised primarily of providing retail electricity services and wholesale power procurement and sales. We are transitioning to provide a broader scope of energy related services including energy efficient products, managed back office services, energy management programs, energy research and development and load aggregation. None of these services have developed to the point of being a separate business segment. 1. Retail Electricity We offer electric "product" and service to customers on month-to-month or longer-term service contracts. The difference between the customers' list price for energy and the sum of our wholesale electricity purchase cost and ancillary costs provide us a gross profit/loss margin. We provide a value proposition to customers by pricing electric products below, or delivering a more environmentally friendly product than, our competitors. We are licensed in California by the California Public Utilities Commission as an Electric Service Provider (License #1092); in Pennsylvania by the Pennsylvania Public Utility Commission as an Electric Generation Supplier (License #A-110117); in New Jersey by the New Jersey Board of Public Utilities as an Electric Generation Supplier (License #ESL-0046); in Ohio by the Public Utilities Commission of Ohio as a Certified Electric Supplier (License #01-074); and we are in the license approval process in Texas as a Retail Energy Provider and in Michigan as an Alternative Electric Supplier. We are also licensed as a Power Marketer by the Federal Energy Regulatory Commission ("FERC"). These licenses permit us to sell electrical power to commercial, industrial, governmental and residential customers. We purchase electricity under a mix of long-term and short-term wholesale contracts and by spot purchases in regional power exchanges. In California we currently provide customers with environmentally friendly power purchased via contract with a large generator. In Pennsylvania, we provide customers with a 50% environmentally friendly power product derived from multiple sources, purchased via contracts with utilities and generators. The electricity distribution infrastructure utilized by utility companies prior to deregulation of the energy industry remains the only current method of distribution to the end-use customer. We use this established electricity network for the delivery of energy to our customers. We do not own or operate these lines, but our company and our customers pay the utility companies that own the lines ancillary fees for use of this distribution network. These fees are collected by the respective independent system operator ("ISO") or regional transmission organization ("RTO") for a specific region or state, and typically run 5% to 10% of prevailing retail electricity market prices. The ISO or RTO insure that proper electricity reserve margins are in place at all times, as electricity must have supply and demand in near perfect balance to insure reliable service. Due to the variable electricity usage patterns of our customers, frequently we are left with excess electricity, which we are committed to purchase, and which must be resold, since it cannot be stored. We use our best efforts to sell this excess electricity in the wholesale electricity market, which maximizes our revenue and minimizes supply waste. Conversely, increased usage by our customers may require us to purchase additional electricity to cover increased demand. 2. Wholesale Power Procurement and Sales We have established a trading desk that buys and sells our electricity in regional worldwide markets. Excess capacity is sold to groups short on supply, while additional capacity is procured from time to time when required to supply our customers usage. These purchases and sales are regulated by FERC and reports are made on a regular basis to the U.S. Department of Energy. Typically, electricity is more expensive during peak hours -- that is, when demand and usage are highest. Weather, generation capacity, transmission, distribution and other market issues are significant factors in determining our wholesale procurement and sale strategies. 2 5 Because electricity is a "real-time" commodity (as soon as it is produced, it must be delivered into the grid to meet the demand by the end user) and is not inventoried, effective management of our electricity supply and demand is crucial to wholesale and retail market success. 3. Energy Efficient and Emergency Preparedness Products We developed and utilize our own inside sales force to sell energy efficient and emergency preparedness products to customers by telephone. Energy conservation and home safety are important issues to customers and we have achieved success selling them energy management controllers, compact fluorescent lamps, natural gas shut-off valves and other such devices. These products are targeted to residential, commercial, industrial and governmental customers. We fulfill orders for products and ship some of these products through our warehouse, but most are fulfilled and delivered from the manufacturers or distributors. 4. Managed Back Office Services We established a wholly-owned subsidiary, UtiliHost, Inc., whose primary business is managing the customer-related back office processes for commodity trading partners. The core technology of UtiliHost is software that originally was developed by us to better manage electric service customers internally. TACT(TM) (Trans-Action Control Technology) and TRIUMPH(TM) (Total Resource Internet Utility Management Power Host) are proprietary software products used by UtiliHost to provide services and manage back office processes for clients. TACT acts as a data translator between trading partner transactions, while TRIUMPH is a comprehensive, modular software package that calculates and manages back office processes such as customer enrollment, forecasting, metering, ancillary products, billing, accounts receivable, customer service and settlement. We are commencing to market UtiliHost(TM) in the U.S. and Canada, primarily in deregulated energy markets. 5. Energy Management Programs Energy curtailment programs provide a financial benefit to our customers through lower electrical usage, while we benefit by avoiding the purchase of expensive power from other suppliers. The resulting savings is ultimately shared between the customer and us. Our sales department markets these programs to commercial, industrial and governmental entities seeking to save energy costs by decreasing their energy usage during peak periods. Distributed generation programs provide customers with on site electrical power generation, which improves reliability while also equipping them with a cost-effective source for seasonal or peak demand power. When certain industrial manufacturing processes are interrupted by a power outage, the results can be disastrous. Millions of dollars in materials, labor and time may be lost. Our sales department, along with outside consultants and associated vendors, formulate a custom energy solution for clients that have uninterruptable power requirements. 6. Energy Research and Development We were recently selected by the California Energy Commission to receive more than $11 million in matching funds intended for development of renewable energy technologies. Launched in 1998, PIER (Public Interest Energy Research) funds various electricity-related research, development and demonstration projects. Our proposal, entitled "Biogas/PV Micro-Grid Renewable Resource Program," was the only private company proposal selected for the award. Phase One of this project will include assessing regional electricity needs, renewable resources and power grid capabilities in at least two areas in California. Our focus will be on developing a method of blending biogas and solar resources to meet California's energy needs. Phase Two of this project will include a waste collection and generation option addressing ground water contamination developed for the California Dairy Industry and various Photovoltaic (solar) systems. 7. Load Aggregation We are currently discussing with several generators and utilities a comprehensive solution to cities and major commercial and industrial customers to meet their energy demand. We will assist cities to become municipal utilities by providing them all required back-room services. We will do the same for major 3 6 commercial and industrial customers to meet their electricity demand requirements. This program allows us a diversified approach to aggregating customers. To date, we have not entered into any contracts to provide load aggregation services. 8. ACT As we diversify our business and revenue streams, we have decided to establish separate divisions within our company that have profit and loss responsibility. Our call center, now called Advanced Client Technologies ("ACT"), outsources services to third party energy-related firms, and provides us with inbound, outbound and customer service functions for electricAmerica. A new division of our company, ACT specializes in aggregating electric service residential and small commercial customers, selling energy efficient and emergency preparedness products and handling inbound customer service inquiries. Call monitoring, third party verification and call reporting are also provided. In addition to maintaining our own customer aggregation and service needs, ACT's market focus has been on clients seeking to aggregate energy customers in deregulated markets. 9. Summit Energy Ventures, L.L.C. We have invested in Summit Energy Ventures, L.L.C. ("Summit"), a long-term venture fund focused on the acquisition of, or investment in, strategic companies in the energy field. Our company sets the investment criteria and the ultimate investment decisions of this fund. We have committed a total of $25 million to this investment and made the initial capital contribution of $15 million in July, 2001 which represents to date all the capital contribution to Summit. None of our directors or officers hold any interest in this venture fund. C. Marketing. Our success to date has depended upon our ability to identify and enter favorable restructured energy markets and to achieve sufficient customer scale to create a profitable operating cost structure. Specifically, we are: - Selectively entering retail energy markets that have rate structures, market rules, consumer demographics, energy consumption patterns, access to favorable electricity supply and risk management profiles that are designed to enable us to provide savings and flexibility to our customers at an acceptable margin. - Capitalizing on the brand recognition of "electric" through our web site at www.electric.com and through our inbound toll-free number, 1-800-ELECTRIC. - Taking advantage of the increasing consumer acceptance of online commerce, both directly through our web sites (www.electricamerica.com and www.electric.com) and through traditional channels. - Developing strategic marketing alliances with established power suppliers to offer competitive electric products and services to, and management of, aggregations of customers. - Cross-selling additional products and services to our customers, such as energy efficiency and emergency-preparedness products. - Positioning UtiliHost as a means for clients to outsource their electricity customer service management. D. Competition. We face competition in the electricity service business from a small number of energy retailers vying for residential and commercial customers, and from the incumbent utilities. In California over 300 companies began marketing electricity on a retail basis at the beginning of the deregulated California electricity market. We are one of a handful that remains. We face competition in selling energy efficient and emergency preparedness products from many sources, including traditional hardware retailers and online energy product retailers. 4 7 We face competition in managing back office services from application service provider (ASP)/ outsourcing vendors, utility billing vendors and large enterprise-wide software and systems integrators. E. Employees. We currently employ approximately 160 people; 156 at the Tustin, California offices, and four at the Cherry Hill, New Jersey office. We are not a party to any collective bargaining agreement or labor union contract, nor has it been subjected to any strikes or employment disruptions in its brief history. Management believes that we enjoy a good relationship with our employees. F. Governmental Regulation. To market electric power in a given area, we are required to register with the appropriate state public utilities commission, maintain a Power Marketer certificate from FERC, and comply with lawful and regulatory requirements. States will require that we be registered with, and comply with, the protocols of an ISO or RTO for scheduling and moving electricity on the transmission system. Some states require that power marketers must also meet a renewable energy portfolio standard where a portion of the electricity they sell must be generated by renewable energy resources. In some states, registration as a retail electric provider simply requires that we obtain and maintain a certificate or license to do business in the state. We have been granted the necessary FERC permit, and have applied for all relevant state license and certificates required in our initial target markets. G. Forward-Looking Statements. This registration statement includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts contained in this documents are forward-looking statements. Forward-looking statements include, but are not limited to, statements relating to expansion opportunities for the subsidiary companies, extension of Commonwealth's business model to new markets and industries, demand in the market for UtiliHost services, completion of acquisitions of certain assets, and growth or retail energy operations and demand for retail energy outsourcing and back office solutions. When used in this document, the words "anticipate," "believe," "estimate," "expects," "intend," "may," "project," "plan," "should," and similar expressions are intended to be among the statements that identify forward-looking statements. Although Commonwealth believes that its expectations reflected in these forward-looking statements are based on reasonable assumptions, such statements involve risks and uncertainties and no assurances can be given that actual results will be consistent with these forward looking statements. In particular, the following items may affect our future: - The California State Legislature, the Governor's Office and the California Public Utilities Commission may enact and enforce legislation that could adversely affect our operations in California. - We are required to obtain and maintain licenses from the states in which we sell electricity. - In certain states, competitive restructuring of retail marketing may prevent us from selling electricity. - We are completely dependant upon a limited number of third parties that we do not control to generate and supply to us electricity and their failure or delay in entering into or performing their contracts with us will have a material adverse effect on our operations and financial condition. - We are completely dependent upon a limited number of utilities that we do not control for the transmission and distribution of the electricity we sell to our customers and their failure or delay in entering into or performing their contracts with us will have a material adverse effect on our operations and financial condition. 5 8 ITEM 2. FINANCIAL INFORMATION A. Selected Financial Data. The following table summarizes certain selected financial data for Commonwealth Energy Corporation. Our statement of operations data for the period August 15, 1997 (date of incorporation) through July 31, 1998 and each of the two years in the period ended July 31, 2000 and our balance sheet data at July 31, 1998, 1999 and 2000 set forth below are derived from audited consolidated financial statements. Our statement of operations data for the nine months ended April 30, 2000 and 2001 and the balance sheet data at April 30, 2001 set forth below are derived from unaudited consolidated financial statements.
PERIOD FROM NINE MONTHS ENDED AUGUST 15, YEARS ENDED JULY 31, APRIL 30, 1997 THROUGH -------------------- ------------------- JULY 31, 1998 1999 2000 2000 2001 ------------- -------- -------- ------- -------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE INFORMATION) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net revenue......................... $ 1,387 $ 39,124 $ 99,624 $56,790 $144,038 Direct energy costs................. 3,735 38,729 86,732 50,564 55,620 ------- -------- -------- ------- -------- Gross (negative) margin............. (2,348) 395 12,892 6,226 88,418 Other costs and expenses(1)......... 5,928 18,940 22,037 15,750 15,262 ------- -------- -------- ------- -------- Income (loss) from operations....... (8,276) (18,545) (9,145) (9,524) 73,156 Interest income, net................ 19 123 499 532 1,047 ------- -------- -------- ------- -------- Income (loss) before income taxes... (8,257) (18,422) (8,646) (8,992) 74,203 Provision for income taxes.......... -- -- -- -- 20,069 ------- -------- -------- ------- -------- Net income (loss)(2)(3)............. $(8,257) $(18,422) $ (8,646) $(8,992) $ 54,134 ======= ======== ======== ======= ======== Net income (loss) per common share: Basic............................. $ (.66) $ (.69) $ (.26) $ (.27) $ 1.71 ======= ======== ======== ======= ======== Diluted........................... $ (.66) $ (.69) $ (.26) $ (.27) $ 1.49 ======= ======== ======== ======= ======== Weighted-average shares outstanding: Basic............................. 12,561 26,625 33,519 33,365 31,587 ======= ======== ======== ======= ======== Diluted........................... 12,561 26,625 33,519 33,365 36,291 ======= ======== ======== ======= ========
AT JULY 31, ---------------------------- AT APRIL 30, 1998 1999 2000 2001 ------ ------- ------- ------------ (UNAUDITED) BALANCE SHEET DATA: Working capital......................... $1,896 $12,428 $12,803 $ 59,469 Total assets............................ 7,205 27,858 41,590 100,410 Long-term debt.......................... -- -- -- -- Shareholders' equity.................... 3,131 19,900 24,236 79,090
- --------------- (1) Includes stock-based compensation costs as follows:
AMOUNT -------------- (IN THOUSANDS) Period from August 15, 1997 through July 31, 1998........... $ 464 Year ended July 31, 1999.................................... 5,718 Year ended July 31, 2000.................................... 445 Nine months ended April 30, 2000 (unaudited)................ 445 Nine months ended April 30, 2001 (unaudited)................ 575
(2) No cash dividends have been paid on our common stock. 6 9 (3) Our convertible preferred stock provides for cumulative dividends, which accrue at an annual rate of 10% and are payable at the discretion of our Board of Directors. Such dividends have been accrued as follows:
AMOUNT -------------- (IN THOUSANDS) Period from August 15, 1997 through July 31, 1998........... $64 Year ended July 31, 1999.................................... 84 Year ended July 31, 2000.................................... 84 Nine months ended April 30, 2000 (unaudited)................ 63 Nine months ended April 30, 2001 (unaudited)................ 62
B. Management's Discussion and Analysis of Financial Condition and Results of Operations. Our primary business to date has been the sale of electric power to retail customers in California and, beginning January 2000, in Pennsylvania and the sale of electric power to wholesale customers in California. We are licensed by the FERC as a power marketer and by the California, Pennsylvania, New Jersey and Ohio Public Utilities Commissions as an electric services or electric generation supplier. We plan to enter new deregulated electric power markets in the future. We are in the licensing process in Texas and Michigan. As of July 31, 2000, we delivered electricity to approximately 80,000 customers in California and Pennsylvania. The growth of this business depends upon the deregulated status of each state, the availability of cost-effective energy purchases to us and the acquisition of retail or commercial customers by us. RESULTS OF OPERATIONS NINE MONTHS ENDED APRIL 30, 2001 COMPARED TO NINE MONTHS ENDED APRIL 30, 2000 Net revenue Net revenues increased by $87.2 million, or 153.6%, from $56.8 million for the nine months ended April 30, 2000 to $144.0 million for the nine months ended April 30, 2001. California electricity sales represented $71.0 million of the increase, while Pennsylvania electricity sales accounted for $16.2 million of the increase. Our California wholesale electricity sales contributed $52.0 million of the increase and the remainder of the California increase resulted from increased electricity prices to other customers. The increased Pennsylvania sales were attributable to having a full nine months of electricity sales compared to four months in the comparable period of 2000. At April 30, 2001, we had 90,123 customers compared to 97,394 customers at April 30, 2000. Direct energy costs Direct energy costs grew to $55.6 million for the nine months ended April 30, 2001, an increase of $5.0 million, or 10%, from $50.6 million for the nine months ended April 30, 2000. This increase was due to Pennsylvania electricity purchases for the full nine months ended April 30, 2001 as compared to only four months for the nine months ended April 31, 2000. Direct energy costs, as a percent of net revenues, decreased from 89.0% for the nine months ended April 30, 2000 to 38.6% for the nine months ended April 30, 2001. This decrease was driven by the increased sales prices in the California wholesale market, shedding load to avoid dependency on the spot market and improved energy procurement methods. Other costs and expenses Other costs and expenses decreased from $15.8 million for the nine months ended April 30, 2000, a decrease of $.5 million, or 3.1% to $15.3 million for the nine months ended April 30, 2001. Other costs and expenses, as a percent of net sales, decreased from 27.7% for the nine months ended April 30, 2000 to 10.6% for the nine months ended April 30, 2001. Other costs and expenses include selling and marketing expenses and general and administrative expenses, both of which include stock-based compensation charges, as well as other expenses. Before stock-based compensation charges, selling and marketing expenses decreased by $2.0 million for the nine months ended April 30, 2001 over the nine months ended April 30, 2000 due to 7 10 decreased promotional activities. Before stock-based compensation charges, general and administrative expenses increased by $3.0 million for the nine months ended April 30, 2001 over the nine months ended April 30, 2000 primarily due to the increased legal expenses from litigation regarding prior management, increased payroll expenses and the continued development of our billing system. Other expenses decreased by $1.6 million for the nine months ended April 30, 2001 compared to the same period in 2000 due to the costs of severance packages related to the request for and ultimate resignation of our former Chief Executive Officer and President being recorded during 2000. The decrease in other costs and expenses as a percent of net sales was due primarily to the increased sales prices in the California wholesale market. Interest income, net Interest income, net, grew to $1.0 million for the nine months ended April 30, 2001, an increase of $.5 million or 96.7%, from $.5 million for the nine months ended April 30, 2000. The increase is attributable to the increase in cash flow available for investments provided from operations offset in part by a $.6 million increase in interest expense due to borrowings which were outstanding on our line of credit during the nine months ended April 30, 2001. Provision for income taxes The provision for income taxes increased to $20.1 million during the nine months ended April 30, 2001 compared to no provision for income taxes for the nine months ended April 30, 2000 for which period we reported a loss before income taxes. The income tax rate for the nine months ended April 30, 2001 was 27.0% which is below the expected income tax rate primarily due to a reversal of our deferred income tax asset valuation allowance in the amount of $13.0 million. Net income Net income increased to $54.1 million for the nine months ended April 30, 2001, an increase of $63.1 million, or 702.0%, from the $9.0 million loss for the nine months ended April 30, 2000. This increase in net income is primarily attributable to a $82.2 million increase in gross margin, offset in part by the provision for income taxes of $20.1 million. YEAR ENDED JULY 31, 2000 COMPARED TO YEAR ENDED JULY 31, 1999 Net revenue Net revenues increased by $60.5 million, or 154.6%, from $39.1 million in fiscal 1999 to $99.6 million in fiscal 2000. California energy sales represented $57.7 million of the increase, while Pennsylvania sales, which commenced in January 2000, accounted for $2.8 million of the increase. California electricity price increases that began in May 2000 contributed to an estimated $15.0 million of the increase in California energy sales. The remainder of the sales increase resulted from new customers. At July 31, 2000, the Company had 80,528 customers compared to 51,987 customers at July 31, 1999. Direct energy costs Direct energy costs grew to $86.7 million in fiscal 2000, an increase of $48.0 million, or 124.0%, from $38.7 million in fiscal 1999. This increase was due to a higher level of energy purchases in fiscal 2000 as compared to fiscal 1999 due to our increased customer base. Direct energy costs, as a percent of net revenues, decreased from 99.0% in 1999 to 87.1% in fiscal 2000. This decrease in the energy cost percentage was driven by the higher California retail prices during the latter part of fiscal 2000, an increase of higher margin residential customers and improved energy procurement methods. These favorable components were partially offset by higher costs of electricity purchases in the wholesale market for quantities in excess of our fixed price contract. 8 11 Other costs and expenses Other costs and expenses grew to $22.0 million in fiscal 2000, an increase of $3.1 million, or 16.4%, from $18.9 million in fiscal 1999. Other costs and expenses, as a percent of net sales, decreased from 48.4% in fiscal 1999 to 22.1% in fiscal 2000. Other costs and expenses include selling and marketing expenses and general and administrative expenses, both of which include stock-based compensation charges, as well as other expenses. Before stock-based compensation charges, selling and marketing expenses increased by $4.2 million in fiscal 2000 over fiscal 1999 due to increased promotional and telemarketing activities as we changed our customer base from industrial to residential customers. Before stock-based compensation charges, general and administrative expenses increased by $1.9 million in fiscal 2000 over fiscal 1999 primarily due to development and maintenance of our in-house information technology systems. Stock-based compensation charges decreased by $5.3 million in fiscal 2000 compared to fiscal 1999 due to fewer fully vested options being granted in fiscal 2000 which also had a lower average difference between the fair value of the our common stock at date of grant and the option exercise prices. Other expenses increased by $2.3 million in fiscal 2000 over fiscal 1999 due primarily to $.7 million of commercial and industrial customer termination costs and to severance arrangements with former officers. The decrease of other costs and expenses as a percent of net sales was due primarily to our ability to add customers at a greater rate than our general and administrative expenses increased. Interest income, net Interest income, net, grew to $.5 million in fiscal 2000, an increase of $.4 million, from fiscal 1999. The increase is attributable to having a full year's impact on investment income of capital raised in fiscal 1999. Net loss Net loss declined to $8.6 million in fiscal 2000, a decrease of $9.8 million, or 53.1%, from $18.4 million in fiscal 1999. This decrease in net loss is primarily attributable to a $12.5 million increase in gross margin offset in part by a $3.1 million increase in other costs and expenses. YEAR ENDED JULY 31, 1999 COMPARED TO PERIOD ENDED JULY 31, 1998 Net revenues Net revenues increased by $37.7 million to $39.1 million in fiscal 1999 compared to $1.4 million in fiscal 1998. The increase is attributed to new customers obtained in fiscal 1999 and to customers obtained in fiscal 1998 (sales began in April 1, 1998) having a full year of revenue in fiscal 1999. During most of fiscal 1998 we were in a start-up phase primarily raising capital and developing our marketing strategy. Direct energy costs Direct energy costs grew to $38.7 million in fiscal 1999, an increase of $35.0 million from $3.7 million in fiscal 1998. Direct energy costs, as a percentage of net sales, were 99.0% in fiscal 1999 compared to a negative margin of $2.3 million in fiscal 1998. The increase in direct energy costs is a result of the increase in net revenues in fiscal 1999 compared to fiscal 1998. Other costs and expenses Other costs and expenses grew to $18.9 million in fiscal 1999, an increase of $13.0 million, or 219.4% from $5.9 million in fiscal 1998. Other costs and expenses include selling and marketing expenses, both of which include stock-based compensation charges, as well as other expenses. Before stock-based compensation charges, selling and marketing expenses increased by $.4 million in fiscal 1999 over fiscal 1998 due to increased telemarketing activities. Before stock-based compensation charges, general and administrative expenses increased by $6.9 million in fiscal 1999 over fiscal 1998 mainly due to increase in employees. Stock-based compensation changes increased by $5.3 million in fiscal 1999 compared to fiscal 1998 due to more fully 9 12 vested stock option grants in fiscal 1999. In fiscal 1999, there also was $.4 million of other expenses related to accruals for possible legal actions. Interest income, net Interest income, net increased by $.1 million in fiscal 1999 over fiscal 1998 due to a greater average amount of funds available during fiscal 1999. Net loss Net loss increased to $18.4 million in fiscal 1999, an increase of $10.2 million, or 123.1%, from $8.3 million in fiscal 1998. This increase in net loss is primarily attributable to a $13.0 million increase in other costs and expenses, offset in part by a $2.7 million improvement in gross margin. Liquidity and Capital Resources Through July 31, 2000, most of our capital was raised through a series of private placements for the sale of all classes of stock which provided an aggregate of $51.1 million of net proceeds, of which $41.3 million was used to support our operating activities which were unprofitable through July 31, 2000. We began profitable operations during the nine months ended April 30, 2001. Cash flow from operations for the nine months ended April 30, 2001 was $51.5 million an increase of $61.5 million compared with cash used from operations in the nine months ended April 30, 2000 of $9.9 million. Net profit for the nine months ended April 30, 2001 of $54.1 million, compared to a net loss of $9.0 million for the nine months ended April 30, 2000, was the primary reason for this increase. California's higher retail and wholesale prices were the key influences on our profitability. Investing activities for nine months ended April 30, 2001 include only purchases of property and equipment of $.8 million, a decrease of $.6 million compared to the nine months ended April 30, 2000. Cash used in financing activities for the nine months ended April 30, 2001 was $4.7 million, compared to cash provided of $10.5 million for the nine months ended April 30, 2000. The change of $15.2 million is due primarily to the absence of sales of common stock during the nine months ended April 30, 2001, which provided cash of $12.8 million during the nine months ended April 30, 2000, and an increase in restricted cash of $2.3 million. Cash flow used in operations for fiscal 2000 was $15.0 million, a decrease in cash used of $5.2 million compared to fiscal 1999. The major components of cash used in operations in fiscal 2000 were the net loss of $8.6 million and an increase in billed and unbilled accounts receivable of $13.2 million. The higher California electricity prices in the fourth quarter of fiscal 2000 drove sales higher resulting in higher accounts receivables. During fiscal 2000, we used cash of $1.8 million for investing activities, a decrease of $.7 million compared with the prior year. Investing activities during fiscal 2000 consisted only of purchases of property and equipment. Financing activities in fiscal 2000 were comprised of three components. Net cash proceeds from the sale of common stock were $12.1 million. This compares with $28.3 million in net capital raised in fiscal 1999 from the sale of common stock. We also borrowed $5.3 million under a $15 million credit facility that was entered into in June 2000. The borrowings from the credit facility were used primarily to pay for California electricity purchases, the price of which had increased significantly during the fourth quarter of fiscal 2000. There was also an increase of $2.7 million in restricted cash during fiscal 2000 required for additional collateral to support additional energy purchases both in California and Pennsylvania. We expect that our existing funds, our existing line of credit and our cash flow from operations will be sufficient to fund our operations and meet our capital requirements for the next 12 months. C. Inflation. Inflation has not been a material factor in either revenue or operating expenses during our existence. 10 13 D. Quantitative and Qualitative Disclosures About Market Risk. We do not have or use any derivative instruments as of April 30, 2001 nor do we have any plans to enter into such derivative. We generally invest cash equivalents in high-quality credit instruments consisting primarily of high yielding money market funds, bankers acceptance notes and government agency securities with maturities of 90 days or less. We do not expect any material loss from our cash equivalents and therefore believe that our potential interest rate exposure is not material. We do not currently invoice customers in any currency other than the United States dollar. In addition, we do not currently incur significant expenses denominated in foreign currencies. Therefore, we believe that we are not currently subject to significant risk as a result of currency fluctuations. ITEM 3. PROPERTIES Our principal executive office is located in Tustin, California. This facility houses the Company's administrative operations. The Company leases approximately 33,104 square feet of office space at these premises pursuant to a lease that expires on April 14, 2004. We lease additional office space for our East Coast operations in Cherry Hill, New Jersey. This additional space consists of 1,210 square feet pursuant to a three-year lease executed on August 25, 1999. We believe that our leased property is in good condition, is well maintained and is adequate for our current and immediately foreseeable operating needs. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information with respect to beneficial ownership of our Series A Convertible Preferred Stock and Common Stock as of April 30, 2001 for: - each person known by us to beneficially own more than 5% of our Series A Convertible Preferred Stock or 5% of our common stock; - each executive officer named in the Summary Compensation Table set forth in Item 6 -- "Executive Compensation"; - each of our directors; and - all of our executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities. Unless otherwise indicated, the address for those listed below is c/o Commonwealth Energy Corporation, 15901 Red Hill Avenue, Suite 100, Tustin, California 92780. Except as indicated by footnote, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The number of shares of common stock outstanding used in calculating the percentage for each listed person includes the shares of common stock underlying options held by such persons that are exercisable within 60 days of July 31, 2001, but excludes shares of common stock underlying options held by any other person. Percentage of beneficial ownership is based on 28,255,303 shares of common stock and 939,000 shares of Series A Convertible Preferred Stock outstanding as of April 30, 2001. 11 14
PERCENT TITLE OF CLASS NAME AMOUNT OF CLASS -------------- ------------------------ --------- -------- Series A Convertible Preferred Stock..... Joseph P. Saline 50,000 5.32% Robert Perkins 25,000 2.66% Common Stock............................. Ian B. Carter 2,000,000(1) 6.61% Robert Perkins 252,000(2) * Richard Paulsen 225,000(3) * John Barthrop 175,000(4) * James Oliver 125,000(5) * Brad Gates 50,000(6) * Joseph P. Saline 50,000 * Series A Convertible Preferred Stock..... Directors and Executive Officers as a Group 75,000 7.98% Common Stock............................. Directors and Executive Officers as a Group 2,877,000(7) 9.24%(8)
- --------------- * Represents less than one percent. (1) Includes 1,950,000 shares subject to options exercisable within 60 days of July 31, 2001. (2) Includes 120,000 shares subject to options exercisable within 60 days of July 31, 2001. (3) Includes 225,000 shares subject to options exercisable within 60 days of July 31, 2001. (4) Includes 173,000 shares subject to options exercisable within 60 days of July 31, 2001. (5) Includes 125,000 shares subject to options exercisable within 60 days of July 31, 2001. (6) Includes 50,000 shares subject to options exercisable within 60 days of July 31, 2001. (7) This figure is based on the current number of shares of Common Stock that each director and executive officer of the Company owns plus the number of shares of Common Stock that each director and executive officer has the right to obtain within 60 days from July 31, 2001. (8) This percentage was derived by dividing the figure obtained in footnote (7) above by the total number of shares of Common Stock outstanding as of April 30, 2001 plus the number of shares of Common Stock that each director and executive officer has the right to obtain within 60 days from July 31, 2001. See Item 8, "Legal Proceedings." ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS A. Identification of Directors. Our directors and their ages as of July 31, 2001 are as follows:
NAME AGE POSITION ---- --- -------- Ian B. Carter.................................. 62 Chairman of the Board Bradley L. Gates............................... 61 Director Robert C. Perkins.............................. 61 Director Junona A. Jonas................................ 57 Director Joseph P. Saline, Jr........................... 59 Director
The directors of the Company serve as such until the next annual meeting of the shareholders of the Company or until their successors are elected and qualified. IAN B. CARTER -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Mr. Carter has been a member of the Board since January 1999 and Chief Executive Officer since January 2000. For four months prior to that, he acted as Interim President. From June 1986 through September 1999, Mr. Carter successfully owned and operated several companies. He spent 14 years with Coldwell Banker Commercial Brokerage, as an investment specialist. He spent four years as a Systems Engineer and Salesman with IBM. Mr. Carter spent almost seven years in the United States Army serving in 12 15 Vietnam, Europe and the Pentagon. Mr. Carter received his Bachelor of Science (BS) degree in Engineering from the United States Military Academy at West Point, New York and his Master in Business Administration (MBA) in finance from the University of Southern California. BRADLEY L. GATES -- DIRECTOR Bradley L. Gates has been a member of the Board since January 1999, and has nearly 40 years of distinguished professional business and law enforcement experience. He served as the elected Sheriff of Orange County, California from 1974 until his retirement in 1998. Mr. Gates received an MS degree and Bachelor of Science degree in criminology from California State University, Long Beach. ROBERT C. PERKINS -- DIRECTOR Mr. Perkins has been a member of the Board since January 1999. For the past 30 years, Mr. Perkins has served as Chairman and CEO of Hospital Management Services providing financial and management consulting to hospitals and similar institutions. Mr. Perkins received his Bachelor of Science degree in accounting from Bob Jones University. JUNONA A. JONAS -- DIRECTOR Ms. Jonas has been a member of the Board since January 2001. She brings experience from a career with PG&E that spanned from 1978 through 1999 during which time she served as the first President and COO of PG&E's retail energy services subsidiary, Vantus Energy Corporation. After her success with Vantus Corporation, Ms. Jonas became the Vice President, Gas and Electricity Supply at PG&E. Ms. Jonas also served as past President and COO of utility.com. She currently serves as the General Manager of Alameda Power and Telecom. Ms. Jonas has a Bachelors degree from Santa Clara University and a Masters degree from Stanford and Cal State University Hayward. JOSEPH P. SALINE, JR. -- DIRECTOR Mr. Saline has been a member of the Board since January 2001. Mr. Saline is currently an Operations Manager at Litton Industries in their Integrated Systems Division, and also serves on the board of directors of InterBill Inc. in Rohnert Park, California. Mr. Saline retired as a Colonel in the United States Air Force Reserve. He received a Bachelors degree from the University of Detroit and a Masters degree from Purdue University. B. Identification of Executive Officers. Our executive officers and their ages as of March 31, 2001 are as follows:
NAME AGE POSITION ---- --- -------- Ian B. Carter............................ 62 Chief Executive Officer Richard L. Paulsen....................... 53 Chief Operating Officer James L. Oliver.......................... 53 Chief Financial Officer John A. Barthrop......................... 58 General Counsel and Secretary
RICHARD L. PAULSEN -- CHIEF OPERATING OFFICER Mr. Paulsen has been the Chief Operating Officer since May 2000. Mr. Paulsen previously served as the CEO and President of Olicon Imaging Systems, Inc., a national supplier of diagnostic imaging products and services. Prior to that, Mr. Paulsen worked at Wieden and Kennedy, Inc. an advertising agency, as Executive Vice President and Chief Operating Officer. From 1978 to 1986, he started and financed the firm of Basic Computer Systems, Inc., a national supplier of application software and systems. Mr. Paulsen graduated from Loyola University with a Bachelor of Science degree in mathematics. 13 16 JAMES L. OLIVER -- CHIEF FINANCIAL OFFICER Mr. Oliver has been the Chief Financial Officer of the Company since November 1999. Mr. Oliver spent seven years with Emerson Electric Co. as Chief Financial Officer for two operating units. Mr. Oliver served as CFO for a business unit of Smithkline Beckman, as head of strategic and financial planning for an operating unit of Dresser Industries. He has consulted for a variety of companies including Snapple, the Stanley garage door opener business and the private equity firm of former U.S. Secretary of the Treasury, William E. Simon. Mr. Oliver received his Bachelor of Science degree in accounting and finance from the University of Southern California. JOHN A. BARTHROP -- GENERAL COUNSEL Mr. Barthrop has been our General Counsel since May 1999, and has over 30 years of experience practicing law and counseling businesses. Prior to accepting a position with us, he was a principal member of the business and litigation law firm of Smith, Sinek & Barthrop. He owned and operated his own law firm in Orange, California for over 15 years. He was General Counsel and Assistant to the President for a national real estate development company, responsible for negotiating phased retail development projects in the Western states. He was also Associate General Counsel for the Beneficial Standard. Mr. Barthrop obtained a Bachelor of Science degree from the University of Washington and a Juris Doctorate from University of California, Hastings College of Law, and is licensed to practice before the State Courts and the U.S. District Courts. C. Family Relationships. There are no family relationships among directors, executive officers or persons nominated or chosen by the Company to become directors or executive officers. ITEM 6. EXECUTIVE COMPENSATION The following table sets forth for each of the past three fiscal years, all compensation received for services rendered in all capacities by all persons serving as chief executive officer and each of the other current most highly compensated executive officers of our company.
LONG TERM COMPENSATION ---------------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS --------------------------------------- ---------- --------------------------------- (A) (B) (C) (D) (E) (F) (G) (H) (I) OTHER SECURITIES ANNUAL RESTRICTED UNDERLYING ALL OTHER NAME AND PRINCIPAL FISCAL COMPEN- STOCK OPTIONS/ LTIP COMPEN- POSITION YEAR SALARY BONUS SATION(2) AWARD(S) SARS PAYOUTS SATION ------------------ ------ -------- ------- --------- ---------- ---------- ------- --------- Ian Carter, Chief 2000 $211,932 $ -- $7,800 -- 3,300,000(3) $ -- $ -- Executive Officer 1999 -- -- -- -- 200,000 -- -- Frederick Bloom, 2000 184,899 50,000 -- -- -- -- 40,373(1) Former Chief 1999 168,250 25,000 -- -- -- -- -- Executive Officer 1998 90,412 -- -- -- -- -- -- John Barthrop, 2000 101,552 -- -- -- -- -- -- General Counsel 1999 21,154 -- -- -- 50,000 -- -- James L. Oliver, Chief 2000 76,058 -- 2,800 -- -- -- -- Financial Officer
- --------------- (1) Represents severance payments made in conjunction with the employee's resignation and severance agreement effective June 1, 2000. (2) Represents auto allowances paid. (3) Represents stock options to be granted pursuant to performance criteria in his employment contract. Executive compensation is determined by a Compensation Committee elected by the Board. The Compensation Committee is currently comprised of: Robert Perkins, Brad Gates and Ian Carter. The Compensation Committee meets periodically or on as needed basis and decides compensation structure and 14 17 amounts on the basis of comparable executive compensation structures and amounts as established by a peer group of companies, our performance and other factors as may be determined to be useful in making such determination by the Compensation Committee. Mr. Carter recuses himself on compensation issues relating to himself. The Compensation Committee was formed by the Board in September 1999, and both Mr. Perkins and Mr. Carter were appointed to the Compensation Committee in December 1999. Mr. Gates was appointed in January 2001 and replaced Ms. Anderson (a former board member) on this Committee. On September 23, 1999, Mr. Carter was retained by us to serve as our interim President. Subsequently, on January 1, 2000, our Board of Directors appointed Mr. Carter as Chief Executive Officer and we entered into an employment agreement with him, that provides for an initial term of employment expiring on December 31, 2004. Under the board approved agreement, Mr. Carter is entitled to a starting annual base salary of $275,000 and annual increases upon each anniversary date. In addition, Mr. Carter under a performance-based option provided by his employment agreement could earn the right to purchase up to 4,700,000 shares of our Common Stock. The option has an exercise price of $2.50 per share and will expire on January 1, 2010. Except for an option exercisable for 250,000 shares of Common Stock that immediately vested on January 1, 2000, the remaining option are performance based and become exercisable only upon the occurrence of specific events. As of April 30, 2001, performance had been achieved for 1,500,000 of the shares. On January 1, 2000, Mr. Bloom was asked to resign from his position as our Chief Executive Officer. He did and at the same time accepted a position as President of our wholly-owned subsidiary, electricAmerica, Inc. The request for his resignation was prompted by a pending action against us by the California Public Utilities Commission. Effective June 1, 2000, Mr. Bloom was asked to resign from his position at electricAmerica and he did. His resignation was accepted and we then entered into a separation and severance agreement with Mr. Bloom that provided for severance payments to be made by us. This second resignation was prompted by pending legislation against us in California. The terms of the severance agreement provide for monthly payments over a five-year period. Payments under the severance agreement initially totaled $1,187,200. In December 2000, we ceased making severance payments pending the outcome of litigation between the Company and Mr. Bloom. See "Item 8, Legal Proceedings." On November 1, 2000, we entered into an employment agreement with Mr. Richard Paulsen as our Vice President and Chief Operating Officer for an initial term of employment expiring on December 31, 2004. The agreement provides for an initial salary of $275,000, and an annual increase each year beginning on January 1, 2002. Pursuant to the employment agreements entered into on November 1, 2000 with Messrs. Paulsen, Barthrop and Oliver, each will receive an option to purchase an aggregate of 900,000, 500,000 and 500,000 shares, respectively, of our common stock. The options will have a three-year vesting period and an exercise price of $2.75 a share. All of the options will expire on November 1, 2007. Pursuant to the previous employment agreement entered into on May 6, 1999 with John Barthrop, he will receive an option to purchase 48,000 shares of our Common Stock. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 8. LEGAL PROCEEDINGS We have sued Frederick M. Bloom, the founder and former Chairman and Chief Executive Officer of our company, in an action entitled Commonwealth Energy Corporation, et al. v. Bloom, Orange County Superior Court case No. 00CC15507. The case states causes of action on behalf of both the Company and its subsidiary electricAmerica, Inc. against Bloom for fraud regarding issuance of Commonwealth shares (the complaint specifies Mr. Bloom failed to pay the amount he stated he paid for his founder's shares), fraud in obtaining an 15 18 employment agreement, fraud in obtaining a severance agreement, breach of fiduciary duty to us by his failure to exercise due care and loyalty, and breach of fiduciary duty regarding signing and submitting information to the California Public Utilities Commission ("CPUC"). According to our amended complaint and the CPUC investigation, Mr. Bloom failed to disclose to the CPUC the following actions taken against him prior to the formation of Commonwealth when Mr. Bloom was employed and self-employed as a stock promoter: (a) Cease and Desist Order against Bloom by the State of Missouri in 1988. (b) Cease and Desist Order against Bloom by the State of New Mexico in 1989, Mr. Bloom was placed on Pre-Prosecution Probation for selling unregistered commodities. (c) In 1991, Mr. Bloom was placed on a Pre-Prosecution Probation program by the District Attorney's office in Albuquerque based on an order by the New Mexico Securities Division for engaging in practices which operate as a fraud or deceit upon New Mexico residents. (d) Desist and Refrain Order against Mr. Bloom by the State of California in 1994 for selling securities without prior registration or qualification. (e) Desist and Refrain Order against Mr. Bloom by the State of California in 1994 for acting as an unlicensed broker-dealer. (f) Cease and Desist Order against Mr. Bloom by the State of South Dakota in 1995 for the sale of unregistered securities and the omission of material facts with respect to the sale of securities. (g) Cease and Desist Order and a fine were entered against Mr. Bloom by the State of Oregon in 1996 for selling securities without prior registration, and failure to disclose to potential investors the prior cease and desist orders that were previously issued against Bloom. Based on Mr. Bloom's alleged failure to provide and pay the consideration required to issue the founder's shares, we are seeking court confirmation for rescission of said founder's shares. In addition, we are seeking judgment against Bloom for all actual, consequential and incidental damages as set forth in the causes of action against Bloom. The trial in this case against Mr. Bloom is scheduled for October 2001. On an interim basis until the Court reaches a decision regarding the validity of shares registered in Mr. Bloom's name, on February 23, 2001, our board of directors instructed management to reflect on our stock records that only a portion of the shares previously standing in Mr. Bloom's name continue to be reflected as valid on our stock records (in the name of the current owners of those shares). Based upon the evidence available to the board to the effect that only a portion of the required consideration was paid by Mr. Bloom for his shares, the board on an interim basis directed that only a similar portion of the shares issued to Mr. Bloom be recognized as validly issued. Taking the board's approach, the following actions by Mr. Bloom brought the balance of shares owned by Mr. Bloom or his trust to less than zero: (a) Mr. Bloom, while Chairman and Chief Executive Officer sold 529,840 of his founder's shares at approximately $2.00 per share. (b) Mr. Bloom, while Chairman and Chief Executive Officer gave 123,250 shares to Mr. Jay Goth, the former Director of Marketing and Vice President. (c) Mr. Bloom, while Chairman and Chief Executive Officer gave 214,890 shares to Mr. David Mensch, the former President. (d) In a negotiated accommodation, Mr. Bloom transferred to the Company 1,200,000 shares to be used to settle claims of former employees. Based on the above, Mr. Bloom and his trust own no shares in our company. In the event Mr. Bloom prevails in our legal action against him and all 8,000,000 shares of Common Stock that were previously registered in his name (or a portion in an amount other than as reflected in this Registration Statement) are held to be validly issued, then the earnings per share and other relevant information in this Registration Statement will be appropriately revised by amendment. 16 19 We settled a contested matter with the CPUC relating to Mr. Bloom's failure to disclose in the CPUC's updated Energy Service Provider application signed by Mr. Bloom in 1998, of the seven regulatory actions and the cease and desist sanctions filed against Mr. Bloom (see the list above). For Mr. Bloom's failure to disclose these sanctions, the CPUC required the imposition of a fine of $140,000. The CPUC also alleged that we, under the direction of Mr. Bloom, illegally supplemental billed approximately 20,200 customers in early 1999. While we contested this claim, we agreed, as part of the settlement, to return funds received from those customers who were billed, to pay an audit fee and to pay fines for 159 violations related to supplemental billing complaints that were documented by the Consumer Services Division ("CSD") of the CPUC. We have agreed to cooperate fully with any state or federal regulatory or law enforcement agency, in any investigation of the activities of Mr. Bloom during the period he served as an officer of our company. The settlement terms require that if Mr. Bloom returns in any capacity whatsoever as a director, officer, or employee, of Commonwealth or any of its subsidiaries at any time, we must immediately will file a formal application for re-registration under Code #394.1(a), disclosing the resumed relationship. The Administrative Law Judge recommended approval of the CSD's settlement and it was adopted by the CPUC on July 15, 2001. We settled a complaint filed by the Department of Corporations ("DOC") in an action entitled The People of the State of California v. Commonwealth Energy Corporation, Los Angeles Superior Court, case No. BC245014. The agreed judgment is in the form of an injunction and ancillary relief and was filed on February 13, 2001. The DOC's complaint was based upon activities that took place from September 1997 to October 1999, a period during which Mr. Bloom and other members of our former management were in charge of operations. The investigation that led to the complaint centered around the sale of our restricted securities. As part of the settlement, we agreed to cooperate with the Commissioner of Corporations and the DOC in connection with any further investigation arising out of the events described in the complaint, including any investigation of former officers, directors, or employees. We paid $150,000 in civil penalties as part of the DOC settlement in February, 2001. Thirteen former stock sales employees led by Mr. David James commenced a lawsuit against us on February 23, 2001 alleging that former management had agreed to issue deeply discounted stock options to them as additional compensation for stock sales but that we had not issued all of the stock options allegedly earned. We have reflected on our books the issuance of stock options covering 1,221,000 shares of Common Stock to these plaintiffs to which we believe they are entitled. The plaintiffs have not identified the basis for the number of respective shares under option they believe are owed to them and we, therefore, cannot estimate the impact on our capital structure should they succeed in their lawsuit. In our cross-complaint against these individuals, we have alleged that they committed breach of conduct, unfair business practices, misappropriation of trade secrets, intentional interference with prospective economic advantage, unjust enrichment, slander, and fraud. ITEM 9.MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) There is currently no established public trading market for any class of our equity securities. As of April 30, 2001, 10,489,592 shares of our Common Stock are reserved for the exercise of outstanding stock options, 100,000 shares of our Common Stock are reserved for the exercise of outstanding warrants, and 939,000 shares of our Common Stock are reserved for issuance upon conversion of currently outstanding shares of our Series A Convertible Preferred Stock and (ii) other than pursuant to an employee benefit plan or dividend reinvestment plan, we are not currently offering or proposing to offer any shares of our Common Stock for sale to the public. (b) As of June 30, 2001, there were approximately 2,572 holders of our Common Stock and 61 holders of our Series A Convertible Preferred Stock. (c) We have declared and paid cash dividends on our Series A Convertible Preferred Stock. We currently intend to retain future earnings for use in our business and do not anticipate declaring or paying any dividends on shares of our Common Stock in the foreseeable future. 17 20 ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES Since April 30, 1998, we have issued an aggregate of 19,595,962 shares of Common Stock. All sales of unregistered securities were made in reliance on one or more of the following: Section 3(a)(11) of the Securities Act of 1933, as amended (the "Securities Act"), Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, and Section 3(b) of the Securities Act and Rule 701 promulgated thereunder. All of the transactions were effected without the use of an underwriter. Each purchaser to whom such sales were made represented to us that the purchaser was a resident of the State of California and/or was an accredited investor as defined in Rule 501(a) and that the shares were being purchased for investment and not for resale other than as allowed under law. When issuing shares (or stock options exercisable for shares) in reliance on Rule 701, we met the conditions imposed under Rule 701(b). In addition, each person to whom we issued securities in reliance on Rule 701 met the conditions imposed by Rule 701(c). Each such issuance was made pursuant to a written compensatory benefit plan or a written compensatory benefit contract. Such offers and issuances of securities were made only to our employees, directors, officers, consultants or advisors who were employed by us or providing services to us at the time the securities were offered. Since April 30, 1998, we have issued unregistered securities as described below. As part of a private placement on or about May 1, 1998, we sold an aggregate of 987,332 shares of our Common Stock to 273 investors at a price per share of $5.25, receiving gross proceeds in the amount of $5,183,868. As part of a private placement on or about September 15, 1998, we sold an aggregate of 1,886,628 shares of our Common Stock to 484 investors at a price per share of $5.25, receiving gross proceeds in the amount of $9,905,216. As part of a private placement on or about November 1, 1998, we sold an aggregate of 1,962,443 shares of our Common Stock to 284 investors at a price per share of $3.75, receiving gross proceeds in the amount of $7,359,510. As part of a private placement on or about January 1, 1999, we sold an aggregate of 2,538,897 shares of our Common Stock to 499 investors at a price per share of $3.75, receiving gross proceeds in the amount of $9,520,837. As part of a private placement on or about May 15, 1999, we sold an aggregate of 2,678,084 shares of our Common Stock to 718 investors at a price per share of $5.50, receiving gross proceeds in the amount of $14,729,571. The foregoing is calculated without regard to an outstanding warrant held by Coast Business Credit to purchase 100,000 shares of our Common Stock. The proceeds of $27,437,232 from the sales of Common Stock, net of issuance costs, for the year ended July 31, 1999 was used primarily to fund operating activities of $19,448,666, which included an increase in accounts receivables. A total of $3,406,000 was pledged as collateral for letters of credit in connection with the agreements for the purchase of electric power. Additionally, proceeds were used to purchase property and equipment of $1,988,000 and intangible asset of $500,000. The proceeds of $12,868,856 from the sale of Common Stock, net of issuance costs, for the year of July 31, 2000 was used primarily to fund operating activities of $15,842,885, which included an increase in accounts receivables. ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED Common Stock All Shares of Common Stock entitle the holder thereof to: (i) one vote for each share held of record on all matters submitted to a vote of shareholders, (ii) to participate equally and to receive any and all such 18 21 dividends as may be declared by the Board of Directors out of funds legally available therefor; and (iii) to participate pro rata in any distribution of assets upon liquidation of our Company. Our shareholders have no preemptive rights to acquire additional shares of Common Stock or any other securities. The Common Stock is not subject to redemption and carries no subscription or conversion rights. All outstanding shares of Common Stock are fully paid and nonassessable. There are no provisions in our Articles of Incorporation or Bylaws that would delay, defer or prevent a change in control of the Company. ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS Article Five of our Articles of Incorporation contains a provision that eliminates the personal liability of a director for monetary damages to the fullest extent permissible under California law. We maintain policies of directors and officers insurance with National Union Fire Insurance Company in the aggregate amount of $20 million with a deductible of $75,000. ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the index included at "Item 15, Financial Statements and Exhibits". ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS (a)(1) Index to Consolidated Financial Statements: Report of Ernst & Young LLP, independent auditors........... F-1 Consolidated balance sheets at July 31, 1999 and 2000....... F-2 Consolidated statements of operations for the period from August 15, 1997 (date of incorporation) through July 31, 1998 and for the two years in the period ended July 31, 2000...................................................... F-3 Consolidated statements of shareholders' equity for the period from August 15, 1997 (date of incorporation) through July 31, 1998 and for the two years in the period ended July 31, 2000....................................... F-4 Consolidated statements of cash flows for the period from August 15, 1997 (date of incorporation) through July 31, 1998 and for the two years in the period ended July 31, 2000...................................................... F-5 Notes to consolidated financial statements.................. F-6
(a)(2) Index to Condensed Consolidated Interim Financial Statements (unaudited): Condensed consolidated balance sheet at April 30, 2001...... F-18 Condensed consolidated statements of operations for the nine months ended April 30, 2000 and 2001...................... F-19 Condensed consolidated statements of shareholders' equity for the nine months ended April 30, 2001.................. F-20 Condensed consolidated statements of cash flows for the nine months ended April 30, 2000 and 2001...................... F-21 Notes to condensed consolidated interim financial statements................................................ F-22
19 22 (a)(3) Schedule II -- Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (b) The following exhibits are attached hereto, as required by Item 601 of Regulation S-K:
EXHIBIT NUMBER TITLE OF EXHIBIT - ------- ---------------- 3.1 Articles of Incorporation of Commonwealth Energy Corporation dated August 14, 1997 and filed with the Secretary of State of the State of California on August 15, 1997 3.2 Certificate of Amendment of Articles of Incorporation of Commonwealth Energy Corporation dated December 31, 1998 and filed with the Secretary of State of the State of California on February 19, 1999 3.3 Bylaws of Commonwealth Energy Corporation, as amended 10.1 Power Purchase Agreement dated April 27, 1999, between Commonwealth Energy Corporation and Calpine Power Services Company 10.2 First Amendment to Power Purchase Agreement dated as of April 29, 1999 10.3 Second Amendment to Power Purchase Agreement dated as of May 28, 1999, between Commonwealth Energy Corporation and Calpine Power Services Company 10.4 Loan and Security Agreement dated June 28, 2000 between Commonwealth Energy Corporation, electricAmerica, Inc. and electric.com, Inc. and Coast Business Credit 10.5 Warrant dated June 28, 2000, issued by Commonwealth Energy Corporation in favor of Coast Business Credit. 10.6 Limited Liability Company Agreement of Summit Energy Ventures, LLC, as amended by the First Amendment to the Limited Liability Company Agreement of Summit Energy Ventures, LLC, dated August 2001 10.7 PECO Energy Company Confirmation Agreement dated January 30, 2001. 10.8 Exelon Generation Company, LLC Confirmation Agreement dated May 13, 2001 10.9 Standard Office Lease -- Gross dated April 1, 1997, for property located at 15941 Redhill Avenue, Suite 200, Tustin, California, together with Rules and Regulations and Work Letter attached thereto 10.10 Standard Sublease dated November 12, 1998, between Kurt Busch and Commonwealth Energy Corporation, for property located at 15991 Redhill Avenue, Suite 200, Tustin, California. 10.11 Severance Agreement dated June 1, 2000, among Commonwealth Energy Corporation, electricAmerica, Inc. and Frederick M. Bloom 10.12 Employment Agreement dated January 1, 2000, between Commonwealth Energy Corporation and Ian Carter, as modified by an Addendum to Employment Agreement dated as of November 1, 2000 10.13 Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and Richard Paulsen 10.14 Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and James Oliver 10.15 Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and John Barthrop 10.16 Commonwealth Energy Corporation 1999 Equity Incentive Plan for Employees 21.1 Subsidiaries of the Registrant
20 23 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors Commonwealth Energy Corporation We have audited the accompanying consolidated balance sheets of Commonwealth Energy Corporation as of July 31, 1999 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for the period from August 15, 1997 (date of incorporation) through July 31, 1998 and for the two years in the period ended July 31, 2000. Our audit also included the financial statement schedule listed in the index at Item 15(a)(3). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Commonwealth Energy Corporation at July 31, 1999 and 2000, and the consolidated results of its operations and its cash flows for the period from August 15, 1997 (date of incorporation) through July 31, 1998 and for the two years in the period ended July 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Orange County, California November 14, 2000 F-1 24 COMMONWEALTH ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
JULY 31, ---------------------------- 1999 2000 ------------ ------------ Current assets: Cash and cash equivalents................................. $ 6,338,013 $ 4,213,168 Accounts receivable: Billed................................................. 8,189,621 17,468,027 Unbilled............................................... 2,414,057 6,333,096 Green power credits.................................... 3,075,585 2,806,508 ------------ ------------ 13,679,263 26,607,631 Less allowance for doubtful accounts................... (612,909) (1,458,984) ------------ ------------ Net accounts receivable................................... 13,066,354 25,148,647 Inventory................................................. 524,119 111,894 Prepaid and other expenses................................ 457,697 683,645 ------------ ------------ Total current assets.............................. 20,386,183 30,157,354 Property and equipment, net................................. 2,243,938 3,316,877 Restricted cash............................................. 3,406,200 6,146,339 Other assets: Intangible assets......................................... 1,050,000 997,500 Deposits and investments.................................. 437,144 757,135 Performance bonds......................................... 335,000 215,000 ------------ ------------ Total other assets................................ 1,822,144 1,969,635 ------------ ------------ Total assets...................................... $ 27,858,465 $ 41,590,205 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 5,339,480 $ 8,148,848 Notes payable under line of credit........................ -- 5,281,272 Accrued liabilities....................................... 2,618,942 3,924,083 ------------ ------------ Total current liabilities......................... 7,958,422 17,354,203 Commitments and contingencies Shareholders' equity: Convertible preferred stock -- 10,000,000 shares authorized with no par value; 939,000 shares issued and outstanding............................................ 969,602 1,053,972 Common stock -- 50,000,000 shares authorized with no par value; 31,475,221 and 34,053,164 shares issued and outstanding in 1999 and 2000, respectively............. 45,758,101 58,740,149 Accumulated deficit....................................... (26,827,660) (35,558,119) ------------ ------------ Total shareholders' equity........................ 19,900,043 24,236,002 ------------ ------------ Total liabilities and shareholders' equity........ $ 27,858,465 $ 41,590,205 ============ ============
See accompanying notes. F-2 25 COMMONWEALTH ENERGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM AUGUST 15, 1997 YEARS ENDED JULY 31, THROUGH JULY 31, ---------------------------- 1998 1999 2000 ---------------- ------------ ------------ Net revenue..................................... $ 1,387,315 $ 39,124,049 $ 99,624,327 Direct energy costs............................. 3,735,092 38,728,563 86,731,876 ----------- ------------ ------------ Gross (negative) margin......................... (2,347,777) 395,486 12,892,451 Selling and marketing expenses, excluding stock-based compensation charges.............. 1,595,141 2,038,139 6,211,360 General and administrative expenses, excluding stock-based compensation charges.............. 3,869,526 10,746,650 12,651,426 Stock-based compensation charges................ 464,200 5,718,410 445,277 Other expenses, principally charges related to severance and customer termination costs...... -- 437,375 2,729,248 ----------- ------------ ------------ Loss from operations............................ (8,276,644) (18,545,088) (9,144,860) Interest income................................. 46,929 128,946 586,479 Interest expense................................ (27,616) (5,585) (87,708) ----------- ------------ ------------ Loss before provision for income taxes.......... (8,257,331) (18,421,727) (8,646,089) Provision for income taxes...................... -- -- -- ----------- ------------ ------------ Net loss........................................ $(8,257,331) $(18,421,727) $ (8,646,089) =========== ============ ============ Net loss per common share -- basic and diluted....................................... $ (.66) $ (.69) $ (.26) =========== ============ ============
See accompanying notes. F-3 26 COMMONWEALTH ENERGY CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE PERIOD FROM AUGUST 15, 1997 (DATE OF INCORPORATION) THROUGH JULY 31, 1998 AND THE YEARS ENDED JULY 31, 1999 AND 2000
COMMON STOCK CONVERTIBLE ------------------------- PREFERRED ACCUMULATED SHARES AMOUNT STOCK DEFICIT TOTAL ---------- ----------- ----------- ------------ ------------ Issuance of shares to founder..... 8,000,000 $ -- $ -- $ -- $ -- Proceeds from sales of common stock, net of issuance costs of $2,198,265...................... 12,709,526 9,906,668 -- -- 9,906,668 Proceeds from sale of 939,000 shares of convertible preferred stock........................... 939,000 -- 821,000 -- 821,000 Stock options granted included in issuance costs.................. -- 49,000 -- -- 49,000 Stock options granted for services received........................ -- 147,446 -- -- 147,446 Compensation charge related to stock options granted........... -- 464,200 -- -- 464,200 Cumulative unpaid dividends on convertible preferred stock..... -- -- 64,232 (64,232) -- Net loss.......................... -- -- -- (8,257,331) (8,257,331) ---------- ----------- ---------- ------------ ------------ Balance at July 31, 1998.......... 21,648,526 10,567,314 885,232 (8,321,563) 3,130,983 Proceeds from sales of common stock, net of issuance costs of $7,399,016...................... 9,686,945 24,382,626 -- -- 24,382,626 Stock options granted included in issuance costs.................. -- 3,869,606 -- -- 3,869,606 Stock options granted for services received........................ -- 669,347 -- -- 669,347 Compensation charge related to stock options granted........... -- 5,222,410 -- -- 5,222,410 Exercise of stock options......... 39,750 798 -- -- 798 Transfer of common stock from founder to officer.............. -- 496,000 -- -- 496,000 Common shares issued for acquisition of intangible assets.......................... 100,000 550,000 -- -- 550,000 Cumulative unpaid dividends on convertible preferred stock..... -- -- 84,370 (84,370) -- Net loss.......................... -- -- -- (18,421,727) (18,421,727) ---------- ----------- ---------- ------------ ------------ Balance at July 31, 1999.......... 31,475,221 45,758,101 969,602 (26,827,660) 19,900,043 Proceeds from sales of common stock, net of issuance costs of $1,828,665...................... 2,185,537 12,020,356 -- -- 12,020,356 Stock options granted included in issuance costs.................. -- 31,500 -- -- 31,500 Exercise of stock options......... 392,406 70,115 -- -- 70,115 Compensation charge related to stock options granted (including $414,800 of severance costs).... -- 436,577 -- -- 436,577 Transfer of common stock from founder to officer.............. -- 423,500 -- -- 423,500 Cumulative unpaid dividends on convertible preferred stock..... -- -- 84,370 (84,370) -- Net loss.......................... -- -- -- (8,646,089) (8,646,089) ---------- ----------- ---------- ------------ ------------ Balance at July 31, 2000.......... 34,053,164 $58,740,149 $1,053,972 $(35,558,119) $ 24,236,002 ========== =========== ========== ============ ============
See accompanying notes. F-4 27 COMMONWEALTH ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM AUGUST 15, 1997 YEARS ENDED JULY 31, THROUGH JULY 31, ---------------------------- 1998 1999 2000 ---------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss........................................ $(8,257,331) $(18,421,727) $ (8,646,089) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................. 53,033 251,566 739,625 Provision for doubtful accounts............... -- 612,909 846,075 Stock-based compensation charges.............. 464,200 5,718,410 445,277 Fair value of stock options issued for services received.......................... 147,446 669,347 -- Fair value of stock options issued as severance costs............................ -- -- 414,800 Changes in operating assets and liabilities: Billed accounts receivable................. (442,827) (7,746,794) (9,278,406) Unbilled accounts receivable............... (793,314) (1,620,743) (3,919,039) Green power credits receivable............. -- (3,075,585) 269,077 Inventory, prepaid expenses and other assets................................... (1,218,208) (535,752) (13,714) Accounts payable........................... 2,170,645 3,168,835 2,809,368 Accrued expenses........................... 1,903,075 715,868 1,305,141 ----------- ------------ ------------ Net cash used in operating activities........... (5,973,281) (20,263,666) (15,027,885) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment............. (560,442) (1,988,096) (1,760,064) Purchase of intangible assets................... -- (500,000) -- ----------- ------------ ------------ Net cash used in investing activities........... (560,442) (2,488,096) (1,760,064) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under line of credit................. -- -- 5,281,272 Increase in restricted cash..................... -- (3,406,200) (2,740,139) Proceeds from sales of common stock............. 9,955,668 28,252,232 12,051,856 Proceeds from sale of preferred stock........... 821,000 -- -- Proceeds from exercise of stock options......... -- 798 70,115 ----------- ------------ ------------ Net cash provided by financing activities....... 10,776,668 24,846,830 14,663,104 ----------- ------------ ------------ Increase (decrease) in cash and cash equivalents................................... 4,242,945 2,095,068 (2,124,845) Cash and cash equivalents at beginning of period........................................ -- 4,242,945 6,338,013 ----------- ------------ ------------ Cash and cash equivalents at end of period...... $ 4,242,945 $ 6,338,013 $ 4,213,168 =========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION The Company paid no cash for interest expense for the period ended July 31, 1998 and the year ended July 31, 1999. Cash paid for interest expense during the year ended July 31, 2000 was $67,675. The Company paid no cash for income taxes for the period ended July 31, 1998 and the years ended July 31, 1999 and 2000. During the year ended July 31, 1999, the Company issued 100,000 shares of common stock having a fair value of $550,000 for a portion of the purchase price of the intangible assets. See accompanying notes. F-5 28 COMMONWEALTH ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 31, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Commonwealth Energy Corporation (the "Company") was incorporated on August 15, 1997. The Company's primary business has been the sale of electric power to retail customers in California and, beginning January 2000, in Pennsylvania and the sale of electric power to wholesale customers in California. The Company is licensed by the Federal Energy Regulatory Commission (FERC) as a power marketer, by California as an Electric Service Provider and by Pennsylvania as an Electric Generation Supplier. The Company plans to enter new deregulated electric power markets in the future. The electric power sold by the Company to its retail customers is delivered to the Company's customers by Utility Distribution Companies (UDCs) in California and an Electric Distribution Company (EDC) in Pennsylvania, which measure electric power usage by the Company's customers and bill the customers on behalf of the Company. There are three UDCs in California and one in Pennsylvania, which conduct these activities on behalf of the Company. The Company's operations have been in one reportable segment, the domestic electricity distribution industry. Basis of Presentation The consolidated financial statements of the Company include the accounts of the Company's wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation. Estimates and Assumptions The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in the Company's consolidated financial statements relate to the allowance for doubtful accounts, unbilled receivables, legal claims and the useful lives of equipment. Actual results could differ from those estimates. Revenue and Cost Recognition Revenue from sales of electric power is recognized as the power is delivered to the Company's customers. Direct energy costs include electric power purchased, independent system operator fees and scheduling coordination fees. Common Stock Grant On January 20, 2000, the Board of Directors of the Company directed that, in consideration of the purchase price being paid in cash, the Company shall grant one share of common stock for each share of common stock and preferred stock outstanding as of January 19, 1999. All per share and common share amounts presented in these consolidated financial statements have been adjusted to reflect this stock grant which had the same effect as a stock split. Unbilled Receivables The Company's customers are billed monthly at various dates throughout the month. Unbilled receivables represent the amount of electric power delivered to customers as of the end of a period, but not yet billed. Through July 31, 2000, unbilled receivables from sales in California were estimated by the Company as F-6 29 COMMONWEALTH ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 the number of kilowatt hours delivered times 95% of the California Power Exchange ("PX") cost as published by Southern California Edison for residential customers. Cash and Cash Equivalents Cash and cash equivalents consist of cash and short-term investments with original maturities of three months or less. Inventory Inventory consists of products purchased by the Company and held for resale and are stated at lower of cost (as determined on a first-in first-out basis) or market. Property and Equipment Property and equipment are carried at cost. Depreciation of property and equipment is provided over their estimated useful lives, generally five to ten years, using the straight line method. Expenditures for maintenance, repairs and renewals are expensed as incurred. The Company capitalizes certain software development costs incurred on significant projects for internal use in accordance with the provisions of AICPA Statement of Position 98-1, Accounting for Software Costs. Qualifying internal and external costs, consisting primarily of third-party system development costs incurred during the application development stage are capitalized and amortized on the straight-line basis over five years. Income Taxes The Company utilizes the liability method of accounting for income taxes as set forth in FASB Statement No. 109, Accounting for Income Taxes. Under the liability method, deferred taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities using currently enacted tax rates. Through July 31, 2000, the Company has only paid minimum state franchise taxes which are included in general and administrative expenses. Advertising Costs Advertising costs, consisting primarily of media advertising, are expensed as incurred. Advertising costs were $1,595,100, $1,670,270 and $2,175,400 for 1998, 1999 and 2000, respectively. Stock-Based Compensation As permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) and FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, the Company accounts for stock options granted to its employees and outside directors using the intrinsic value method. Most of the Company's stock option grants were granted with exercise prices below the fair value of the Company's common stock as estimated by the Company's management for financial reporting purposes. In addition, since all stock option grants were vested at their dates of grant, the difference between the exercise prices and such estimated fair values was expensed as stock-based compensation charges as of the date of grant. Certain employees whose function was to sell shares of the Company's common stock received a portion of their commissions for such sales in the form of stock options. The intrinsic value of such stock options has been charged against the proceeds of such sales in the accompanying consolidated statements of shareholders' equity. F-7 30 COMMONWEALTH ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 Stock options were granted to certain service providers to the Company. These options were recorded at their fair values using the minimum value method, in accordance with SFAS No. 123. Concentration of Credit Risk The Company's concentration of credit risk with respect to accounts receivable is limited due to the large number of customers who are spread primarily throughout California. In addition, the Company maintains allowances for potential credit losses. No customer has accounted for more than 10% of net revenue in any period. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement was amended by SFAS No. 137 which deferred the effective date to all fiscal quarters of fiscal years beginning after June 15, 2000. Accordingly, SFAS No. 133 was effective as of August 1, 2000 for the Company and did not have an effect on the Company's financial position or results of operations. The Company has not entered into any derivative instruments or hedging contracts. The Company's long-term contracts for the purchase of electricity are considered "normal purchases" within the context of SFAS No. 133. Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash, billed and unbilled accounts receivable, accounts payable and notes payable. The carrying amounts of these financial instruments are reflected in the accompanying consolidated balance sheets at amounts considered by management to approximate their fair values due to their short-term nature. 2. MARKET AND REGULATORY RISKS Commitment to Purchase Electric Power The Company has entered into a contract, which expires on June 30, 2002, to acquire 2,400 MWH of electric power per day through December 31, 2000 and 3,000 MWH per day for the remainder of the contract. The Company is obligated to minimum electric purchases of $36.6 million and $32.3 million for the years ending July 31, 2001 and 2002, respectively under this commitment. The electric power acquired under this contract qualifies for the California "Green Power Credit" upon its resale to certain classes of customers. Since the price at which the Company can purchase this electric power is fixed, if the price at which the Company can resell this electric power falls below the contract purchase price plus distribution and scheduling costs, the Company would incur operating losses during such periods. See Note 12 for related events subsequent to July 31, 2000. Pennsylvania Operations During the year ended July 31, 2000, the Company began selling electric power in Pennsylvania. In accordance with its standard customer contract in Pennsylvania, the Company may only charge certain maximum rates for its sales of electric power which, at times, could be less than the Company's costs of acquiring, distributing and scheduling such electric power. See Note 12 for related events subsequent to July 31, 2000. F-8 31 COMMONWEALTH ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 California Green Power Credits The state of California enacted the Public Purpose Program which established a $540 million fund to provide overall incentives to suppliers of "green" power to initially reduce, among other things, the net costs of such power to certain consumers by 1.5 cents per KWH which as of July 31, 2000, is at a rate 1.0 cent per KWH. The Company received Green Power Credits of $3,540,405 in 1999 and $12,303,794 in 2000, which are included in the Company's net revenue. The benefit of these credits has been passed through to the Company's customers. The Public Purpose Program provides that this subsidy is available to suppliers of "green power" through March 31, 2002. 3. NET LOSS PER SHARE The amount of net loss used in the calculations of basic and diluted net loss per common share includes cumulative preferred dividend requirements of $64,232 in 1998, $84,370 in 1999 and $84,370 in 2000. Basic and diluted net loss per common share is based upon the average number of common shares outstanding during the periods: 12,560,571 in 1998, 26,625,210 in 1999 and 33,518,921 in 2000. The effects of potentially dilutive stock options and warrants and the assumed conversion of the convertible preferred stock have been excluded from the calculation of diluted earnings per share because the effect of their inclusion would be anti-dilutive. 4. PROPERTY AND EQUIPMENT, NET Property and equipment, net is comprised of the following:
JULY 31, ------------------------ 1999 2000 ---------- ---------- Office furniture and equipment.............................. $1,034,090 $1,237,053 Information technology equipment and systems................ 1,484,182 2,882,360 Leasehold improvements...................................... 30,265 172,356 ---------- ---------- 2,548,537 4,291,769 Less accumulated depreciation and amortization.............. (304,599) (974,892) ---------- ---------- $2,243,938 $3,316,877 ========== ==========
5. RESTRICTED CASH AND INTANGIBLE ASSETS Restricted Cash Restricted cash consists of short-term investments that have been pledged as collateral for letters of credit in connection with agreements for the purchase of electric power. The Company is required to pledge an amount equivalent to 45 days of energy purchases under the contracts. Intangible Assets The Company's intangible assets represent the costs of purchasing, in July 1999, the 1-800-Electric telephone number and the rights to eight internet domain names. Amortization expense for these intangible assets for the year ended July 31, 2000 was $52,500. 6. LINE OF CREDIT On June 29, 2000, the Company entered into a three-year, $15 million line of credit. Borrowings under the line of credit, which amounted to $5,281,272 at July 31, 2000, are collateralized by accounts receivable, F-9 32 COMMONWEALTH ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 inventory and other assets. In connection with obtaining the line of credit, the Company agreed to pay a closing fee of $300,000, one-half of which was paid at closing and the remainder to be paid incrementally at each annual renewal date. The Company also issued the lender a warrant expiring June 29, 2003 to purchase 100,000 shares of the Company's common stock at a price of $5.50 per share. Interest on borrowings is based on the lender's prime rate plus 1.75%. At July 31, 2000, the interest rate on borrowings under the line of credit was 11.25% and the average interest rate on borrowings outstanding during the year ended July 31, 2000 was 11.25%. The credit line is subject to certain financial covenants in the event the Company's net worth falls below $15 million or the Company operates with a negative gross profit. 7. SHAREHOLDERS' EQUITY Convertible Preferred Stock The convertible preferred stock provides for cumulative dividends which accrue at an annual rate of 10% and are payable at the discretion of the Company. Cumulative unpaid dividends were $232,972 as of July 31, 2000. Each convertible preferred share is convertible into one share of the Company's common stock at the shareholder's discretion and has full voting rights. In addition, preferred shareholders are entitled to preferential liquidation rights over common stock in the amount of $1.00 per share plus an amount equal to all declared but unpaid dividends. Common Stock The common stock of the Company has no conversion or preemptive shareholder rights as to any securities issued by the Company and are not liable for assessments and further calls. Each share of common stock is entitled to one vote on all matters voted on by shareholders, and is entitled to equal dividends when and as declared by the Board of Directors from funds legally available. The Company has sold shares of its common stock in a series of private placements. These sales of common shares were made by a specific group of employees within the Company who were employed by the Company at the time of the sales for this purpose. The sales commissions paid to these employees, both in the form of cash and stock options granted, have been charged against the proceeds of the common stock sales in the accompanying consolidated statements of shareholders' equity. The amount of the charge for the stock options granted represented the difference between the option exercise price and the fair value of the Company's common stock at the date of grant as estimated by the Company's management for financial reporting purposes. All other costs related to these employees were charged to expense. At July 31, 2000, the Company has reserved the following shares of its common stock for issuance upon conversion of the issued and outstanding shares of convertible preferred stock, exercise of warrants and exercise of stock options: Reserved for conversion of convertible preferred stock...... 939,000 Reserved for exercise of warrants........................... 100,000 Reserved for exercise of stock options...................... 9,249,892 ---------- 10,288,892 ==========
Founder's Shares The Company's corporate records state that the founder's shares of common stock were issued in exchange for the payment of $140,000 in the form of cash payments totaling $90,000 and personal property having a value of $50,000; however, the Company has not been able to obtain proof of the deposit of such F-10 33 COMMONWEALTH ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 funds in the Company's accounts or proof of the receipt of personal property amounting to this stated value. See Note 12 for related events subsequent to July 31, 2000. Stock Options The Company's Board of Directors has approved grants of options to acquire a total of 9,951,825 shares of the Company's common stock to the Company's employees, outside directors and service providers. As of July 31, 2000, 9,249,892 of these stock options were outstanding. The options were vested as of their date of grant and expire in December 2002 for the options granted prior to 2000 and expire in December 2004 for the options granted in 2000. Stock option activity is set forth below:
OPTIONS OUTSTANDING --------------------------------------------- WEIGHTED- NUMBER OF EXERCISE PRICE AVERAGE SHARES PER SHARE EXERCISE PRICE --------- -------------- -------------- Balance at August 15, 1997........................... -- -- -- Options granted...................................... 931,310 $ .01 - $ .05 $ .011 --------- ------------- ------ Balance at July 31, 1998............................. 931,310 $ .01 - $ .05 $ .011 Options granted...................................... 4,335,015 $ .01 - $3.75 $ .574 Options exercised.................................... (39,750) $ .01 - $ .05 $ .020 --------- ------------- ------ Balance at July 31, 1999............................. 5,226,575 $ .01 - $3.75 $ .482 Options granted...................................... 4,685,500 $1.00 - $2.50 $2.490 Options exercised.................................... (392,406) $ .01 - $1.00 $ .179 Options cancelled.................................... (269,777) $ .05 - $3.75 $1.902 --------- ------------- ------ Balance at July 31, 2000............................. 9,249,892 $ .01 - $3.75 $1.469 ========= ============= ======
The weighted average remaining contractual life and weighted average exercise price of options outstanding and of options exercisable as of July 31, 2000 were as follows:
AVERAGE NUMBER OF REMAINING WEIGHTED RANGE OF SHARES CONTRACTUAL SHARES AVERAGE EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE EXERCISE PRICE - --------------- ----------- ------------ ----------- -------------- $ .01 - $ .50 3,792,717 2.44 3,792,717 $0.09 $1.00 514,675 2.44 514,675 $1.00 $2.50 - $3.75 4,942,500 3.14 1,742,500 $2.71 --------- ---- --------- ----- Total 9,249,892 2.58 6,049,892 $ .92 ========= ==== ========= =====
The Company has granted 3,000,000 stock options to the Company's Chairman and Chief Executive Officer which are performance based and vest upon the occurrence of specific events. These options have an exercise price of $2.50 per share and expire on January 1, 2010. Stock-Based Compensation In connection with the granting of stock options to certain employees and the Company's outside directors, the amount of related compensation to be recognized was determined by the Company to be the difference between the option exercise price and the fair value of the Company's common stock at the date of grant as estimated by the Company's management for financial reporting purposes. Inasmuch as all options granted by the Company through July 31, 2000 were fully vested as of their date of grant, the related F-11 34 COMMONWEALTH ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 compensation was expensed as of the date of grant, except for the compensation related to options granted as commissions to employees for the sales of the Company's common stock which was charged against the proceeds of the common stock sales. The Company's founder and, at the time, its Chairman and Chief Executive Officer, gave a total of 248,000 and 123,500 shares of the Company's common stock owned by him to two officers of the Company in 1999 and 2000, respectively. In accordance with Staff Accounting Bulletin No. 79, Accounting for Expenses or Liabilities Paid by Principal Stockholder, the estimated fair value of such shares of $496,000 and $423,500 was included in stock-based compensation charges in 1999 and 2000, respectively. Stock-based compensation charges are comprised of the following components:
PERIOD FROM AUGUST 15, YEARS ENDED JULY 31, 1997 THROUGH ----------------------- JULY 31, 1998 1999 2000 ------------- ----------- -------- Stock options earned........................... $1,056,716 $ 8,548,500 $ 53,277 Gift of shares from founder to officers........ -- 496,000 423,500 ---------- ----------- -------- 1,056,716 9,044,500 476,777 Less amount related to commissions on sales of the Company's common stock................... (592,516) (3,326,090) (31,500) ---------- ----------- -------- $ 464,200 $ 5,718,410 $445,277 ========== =========== ========
Warrants As part of the $15 million credit line agreement dated June 29, 2000, the lender received warrants to purchase 100,000 shares of common stock. The warrants are exercisable at $5.50 per share and expire upon the maturity of the loan agreement on June 29, 2003. The fair value of the warrants was nominal at their date of issuance. Pro Forma Disclosures of the Effect of Stock-Based Compensation Plans Pro forma information regarding results of operations and net loss per common share is required by SFAS No. 123 for stock-based awards to employees as if the Company had accounted for such awards using a valuation method permitted under SFAS No. 123. In determining such pro forma information, stock-based awards to employees and outside directors were valued using the minimum value method, assuming no expected dividends, an average expected life through December 31, 2002, and a weighted-average risk-free interest rate of 6.0%. The minimum value method does not consider stock price volatility. For pro forma purposes, the estimated minimum value of the Company's stock-based awards to employees and outside directors is expensed at the date of grant of the stock options since the options were fully vested at date of grant. The results of applying Statement No. 123 to the Company's stock option grants to employees and outside directors on the assumptions described above approximate the Company's reported amounts of net loss and net loss per common share. F-12 35 COMMONWEALTH ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 8. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Net deferred income taxes consist of the following:
JULY 31, ---------------------------- 1999 2000 ------------ ------------ Deferred tax assets: Net operating loss carryforwards...................... $ 7,816,000 $ 10,429,000 Stock options......................................... 2,699,000 3,054,000 Allowance for doubtful accounts....................... 263,000 625,000 Reserves and accruals................................. 640,000 1,200,000 Depreciation and amortization......................... -- 218,000 Other................................................. 13,000 15,000 ------------ ------------ 11,431,000 15,541,000 Less valuation allowance.............................. (11,414,000) (15,541,000) ------------ ------------ 17,000 -- Deferred tax liabilities: Depreciation and amortization......................... (17,000) -- ------------ ------------ Net deferred income tax................................. $ -- $ -- ============ ============
A reconciliation of the federal statutory income tax rate to the Company's provision for income taxes as a percentage of loss before income taxes is as follows:
PERIOD FROM YEARS ENDED AUGUST 15, 1997 JULY 31, THROUGH -------------- JULY 31, 1998 1999 2000 --------------- ----- ----- Federal statutory income tax rate....................... 34.0% 34.0% 34.0% Valuation allowance recorded due to losses.............. (34.0) (34.0) (34.0) ----- ----- ----- Income tax rate per financial statements................ --% --% --% ===== ===== =====
A valuation allowance has been recorded in order to reflect the uncertainty of realization of the deferred tax asset. The valuation allowance increased by $3,533,000, $7,881,000 and $4,127,000 during 1998, 1999 and 2000, respectively. At July 31, 2000, the Company had net operating loss carryforwards of approximately $23,000,000 for federal and state income tax purposes that begin to expire in years 2018 and 2006, respectively. Due to the "change of ownership" provision of the Tax Reform Act of 1986, utilization of the Company's net operating loss carryforwards for federal income tax purposes may be subject to an annual limitation against taxable income in future periods. As a result of the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce future income tax liabilities. 9. OTHER EXPENSES Severance Arrangements The Company's founder and former chairman and Chief Executive Officer had an employment agreement with a subsidiary of the Company. He was asked to resign and he subsequently resigned from his positions with the subsidiary in consideration of a severance agreement effective June 1, 2000. Said severance F-13 36 COMMONWEALTH ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 agreement expressly waives any claim by him for any bonuses otherwise referenced in his previous five-year employment agreement with the subsidiary of the Company. The severance agreement also provides for monthly payments to him of $21,261 through December 31, 2004. The present value of $927,254 of this obligation to the Company's founder, based upon a discount rate of 10%, was recorded as of June 1, 2000 and is included in severance costs for 2000. See Note 12 for related events subsequent to July 31, 2000. In connection with the separation of the Company's former President, the Company granted him options to acquire 1,000,000 shares of the Company's common stock. The options were fully vested at their date of grant, have an exercise price of $2.50 per share and expire on December 31, 2002. The fair value of $414,800 of these stock options, as determined on the minimum value method, was included in severance costs for 2000. In addition, costs of $425,000 and $300,000 were recorded in 1999 and 2000, respectively, related to the severance of other employees. Customer Termination Costs The Company terminated certain California commercial and industrial accounts during June and July 2000. At July 31, 2000, an accrual of $681,270 was recorded to provide for the estimated costs of terminating these customers including meter lease termination settlement costs and settlement of terminated customer damage claims. 10. COMMITMENTS AND CONTINGENCIES Leasing Arrangements The Company is obligated under long-term leases for the rental of real estate and office equipment. The Company conducts its main operations from facilities that are leased under a five-year non-cancelable operating lease expiring on April 24, 2004. The Company also leases four other locations for its sales staff. The leases for certain locations contain escalation clauses relating to increases to real property taxes and maintenance costs. The following is a schedule of the future minimum rental payments required under the above operating leases: 2001............................................. $ 896,700 2002............................................. 841,100 2003............................................. 654,100 2004............................................. 372,306 ---------- $2,764,206 ==========
Rent expense for operating leases amounted to $133,700, $367,300 and $786,300 for the three years ended, July 31, 1998, 1999 and 2000. Purchase Commitments In April 1999, the Company entered into a contractual arrangement ending on June 30, 2002, for the purchase of electric power. The Company is obligated to minimum electric power purchases of $36.6 million and $32.3 million for the years ending July 31, 2001 and 2002, respectively, under this contract. See Note 12 for related events subsequent to July 31, 2000. F-14 37 COMMONWEALTH ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 Severance Contract See Note 9 for a description of a severance contract with the Company's founder and former Chairman and Chief Executive Officer. See Note 12 for related events subsequent to July 31, 2000. California Department of Corporations Investigation The California Department of Corporations ("DOC") initiated an investigation of the Company in 1999 regarding the manner and extent of the offers and sales of the Company's stock and whether or not said offers and sales conformed to the requirements of the California Securities laws or allowable exemptions to registration, and whether the Company's employees involved in such sales should have been licensed. Shortly after the initial inquiry, there was a change in management of the Company and all of such sales activities ceased, and the employment of all employees involved in such sales activities was terminated. The Company had entered into negotiations with the DOC to resolve this investigation and reached mutually agreeable terms of settlement, which include a payment of $150,000 by the Company to the DOC, which the Company accrued as of July 31, 2000, and an agreement to cooperate with the DOC in any further investigations which may arise related to these matters. See Note 12 for related events subsequent to July 31, 2000. California Public Utilities Commission Investigation In 1999, the Consumer Services Division of the California Public Utility Commission ("CPUC") ordered an investigation relating to non-disclosure by the former Chairman and Chief Executive Officer of cease and desist actions taken against him prior to his association with the Company and to a supplemental billing by the Company covering a six-month period during which the Company had under-billed its customers. The Company negotiated a settlement of all issues with the CPUC and both parties signed a settlement agreement on January 7, 2000. The terms included a payment of $100,000 by the Company to the CPUC and reimbursement by the Company of the amount of the supplemental billing to its customers through refunding amounts previously paid or issuing credits for unpaid amounts, and that the Company's Chief Executive Officer from July 1, 1997 through December 31, 1998 would not have any responsibility for the business practices, management or operation of the Company in California for a period of at least two years after the effective date of the settlement agreement. The Company has accrued for the financial impact of the January 7, 2000 settlement agreement during the year ended July 31, 2000. See Note 12 for related events subsequent to July 31, 2000. Litigation From time to time, the Company is involved in legal proceedings, claims, and litigation arising in the ordinary course of business. Management does not believe the outcome of these matters will have a material effect on the Company's consolidated financial condition or its consolidated results of operations. F-15 38 COMMONWEALTH ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
THREE MONTHS ENDED -------------------------------------------------- OCTOBER 31 JANUARY 31 APRIL 30 JULY 31 ---------- ---------- --------- --------- (IN THOUSANDS EXCEPT PER SHARE INFORMATION) Year ended July 31, 1999: Net revenue................................... $ 4,180.0 $ 9,436.1 $ 8,796.1 $16,711.9 Gross (negative) margin....................... (2,834.4) (531.9) (606.1) 4,367.9 Net income (loss)............................. (6,994.2) (8,004.3) (3,995.1) 571.9 Net income (loss) per common share: Basic and diluted........................... (0.31) (0.32) (0.14) 0.02 Year ended July 31, 2000: Net revenue................................... $20,169.4 $18,670.8 $17,950.0 $42,834.1 Gross margin.................................. 2,796.8 1,040.0 2,389.6 6,666.0 Net income (loss)............................. (2,137.8) (3,548.7) (3,305.1) 345.5 Net income (loss) per common share: Basic and diluted........................... (0.07) (0.10) (0.10) 0.01
12. EVENTS SUBSEQUENT TO JULY 31, 2000 (UNAUDITED) Electric Power Purchase Contracts For the Pennsylvania market, the Company has entered into various contractual arrangements for the purchase of electric power through May 2004. The Company is obligated to minimum electric power purchases of $11.6 million and $37.9 million for the years ending July 31, 2001 and 2002, respectively, and $51.9 million thereafter under these contracts. Founder's Shares and Related Litigation As more fully described in Note 7, the Company was unable to verify that all of the consideration indicated in the Company's corporate records that was to be paid by the Company's founder was actually paid to the Company. Accordingly, on February 23, 2001, the Company's Board of Directors instructed the Company's management to reflect on the corporate stock records that a portion of the shares previously standing in the founder's name continue to be reflected as valid. Based upon the evidence available to the board to the evidence that only a portion of the required consideration was paid by the founder for his shares, the board on an interim basis directed that only a similar portion of the shares issued the founder be recognized as validly issued. In connection with the action taken by the Company, the Company has sued the founder for various causes of action including fraud and breach of fiduciary duty. Based upon the founder's alleged failure to provide and pay the consideration required to issue the founder's shares, the Company is seeking court confirmation for rescission of said founder's shares. The Company is also seeking judgement against the founder for all actual, consequential and incidental damages as set forth in the causes of action against the founder. In December 2000, the Company ceased making severance payments to the founder under the agreement discussed in Note 9 pending the outcome of the litigation between the Company and its founder. F-16 39 COMMONWEALTH ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JULY 31, 2000 Settlement of California Department of Corporations Investigation In February, 2001, upon the payment of $150,000 by the Company to the DOC, this investigation as more fully described in Note 10 was closed. Settlement of California Public Utilities Commission Investigation In July 2001, the CPUC investigation as more fully described in Note 10 was ordered settled by the CPUC. The settlement provided for, among other things, the Company to pay a fine of $219,500 and audit costs of $37,000 plus reimbursement of the supplemental billings to its customers (which reimbursement had taken place in prior periods). California Deregulated Electricity Market California has been experiencing extreme fluctuations in the cost of wholesale energy since May 2000. In reaction to this crisis, FERC, the PUC, the State Legislature and the Governor have proposed a varying number of methods to help restore price stability to the California electricity marketplace. Some of the proposed solutions could affect the Company's ability to increase its customer base for a specific period of time or, perhaps, indefinitely. In addition to these risks, one of the incumbent utilities with which the Company interacts to conduct its business has filed for bankruptcy protection. This bankruptcy has not had a material impact on the Company's operations. Other utilities in California also could seek protection of bankruptcy in the future. Investment in Summit Energy Ventures, LLC In July 2001, the Company invested $15 million in Summit Energy Ventures, LLC ("Summit") and committed to invest an additional $10 million in Summit. Summit was formed to invest in energy and energy related companies. The Company has a 100% preferred membership in Summit. F-17 40 COMMONWEALTH ENERGY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET APRIL 30, 2001 (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 50,260,656 Accounts receivable: Billed................................................. 24,708,827 Unbilled............................................... 6,232,456 Green power credits.................................... 700,116 ------------ 31,641,399 Less allowance for doubtful accounts................... (2,345,862) ------------ Net accounts receivable................................... 29,295,537 Inventory................................................. 107,502 Prepaid and other expenses................................ 1,125,271 ------------ Total current assets.............................. 80,788,966 Property and equipment, net................................. 3,494,186 Restricted cash............................................. 10,797,500 Other assets: Intangible assets......................................... 958,125 Deposits and notes receivable............................. 409,400 Deferred tax asset........................................ 3,961,812 ------------ Total other assets................................ 5,329,337 ------------ Total assets...................................... $100,409,989 ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 10,025,152 Notes payable under line of credit........................ 5,199,539 Income taxes payable...................................... 3,362,311 Other current liabilities................................. 2,732,754 ------------ Total current liabilities......................... 21,319,756 Commitments and contingencies Shareholders' equity: Convertible preferred stock -- 10,000,000 shares authorized with no par value; 939,000 shares issued and outstanding............................................ 1,116,297 Common stock -- 50,000,000 shares authorized with no par value; 28,255,303 shares issued and outstanding........ 59,460,502 Retained earnings......................................... 18,513,434 ------------ Total shareholders' equity........................ 79,090,233 ------------ Total liabilities and shareholders' equity........ $100,409,989 ============
See accompanying notes. F-18 41 COMMONWEALTH ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED APRIL 30, --------------------------- 2000 2001 ----------- ------------ Net revenue................................................. $56,790,279 $144,037,630 Direct energy costs......................................... 50,563,923 55,619,547 ----------- ------------ Gross margin................................................ 6,226,356 88,418,083 Selling and marketing expenses, excluding stock-based compensation charges...................................... 4,883,142 2,891,431 General and administrative expenses, excluding stock-based compensation charges...................................... 8,690,032 11,695,470 Stock-based compensation charges............................ 445,277 575,000 Other expenses, principally charges related to severance and customer termination costs................................ 1,731,100 98,995 ----------- ------------ Income (loss) from operations............................... (9,523,195) 73,157,187 Interest income............................................. 546,491 1,627,083 Interest expense............................................ (14,828) (581,430) ----------- ------------ Income (loss) before provision for income taxes............. (8,991,532) 74,202,840 Provision for income taxes.................................. -- 20,068,962 ----------- ------------ Net income (loss)........................................... $(8,991,532) $ 54,133,878 =========== ============ Net income(loss) per common share -- basic.................. $ (.27) $ 1.71 =========== ============ Net income(loss) per common share -- diluted................ $ (.27) $ 1.49 =========== ============
See accompanying notes. F-19 42 COMMONWEALTH ENERGY CORPORATION CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED APRIL 30, 2001 (UNAUDITED)
COMMON STOCK CONVERTIBLE RETAINED ------------------------ PREFERRED EARNINGS SHARES AMOUNT STOCK (DEFICIT) TOTAL ---------- ----------- ----------- ------------ ----------- Balance at July 31, 2000......... 34,053,164 $58,740,149 $1,053,972 $(35,558,119) $24,236,002 Cancellation of founder's shares of common stock................ (5,895,160) -- -- -- -- Exercise of stock options........ 97,299 5,628 -- -- 5,628 Compensation charge related to employee stock option settlements.................... -- 139,725 -- -- 139,725 Compensation charge related to performance based stock options........................ -- 575,000 -- -- 575,000 Cumulative unpaid dividends on convertible preferred stock.... -- -- 62,325 (62,325) -- Net income....................... -- -- -- 54,133,878 54,133,878 ---------- ----------- ---------- ------------ ----------- Balance at April 30, 2001........ 28,255,303 $59,460,502 $1,116,297 $ 18,513,434 $79,090,233 ========== =========== ========== ============ ===========
See accompanying notes. F-20 43 COMMONWEALTH ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED APRIL 30, ---------------------------- 2000 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)........................................... $(8,991,532) $54,133,878 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization............................. 482,572 634,004 Provision for doubtful accounts........................... 482,301 886,878 Stock-based compensation charges.......................... 445,277 575,000 Fair value of stock options issued as severance costs..... 414,800 -- Deferred income taxes..................................... -- (3,962,000) Changes in operating assets and liabilities: Billed accounts receivable............................. 844,849 (7,240,800) Unbilled accounts receivable........................... 295,871 100,640 Green power credits receivable......................... 317,947 2,106,392 Inventory, prepaid expenses and other assets........... (1,673,361) 125,501 Accounts payable....................................... (1,614,249) 1,876,304 Income taxes payable................................... -- 3,362,312 Accrued expenses....................................... (938,700) (1,051,439) ----------- ----------- Net cash provided by (used in) operating activities......... (9,934,225) 51,546,670 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment......................... (1,415,108) (771,915) ----------- ----------- Net cash used in investing activities....................... (1,415,108) (771,915) CASH FLOWS FROM FINANCING ACTIVITIES Replacement of borrowings under line of credit.............. -- (81,733) Increase in restricted cash................................. (2,374,298) (4,651,162) Proceeds from sales of common stock......................... 12,854,872 -- Proceeds from exercise of stock options..................... 44,950 5,628 ----------- ----------- Net cash provided by (used in) financing activities......... 10,525,524 (4,727,267) ----------- ----------- Increase (decrease) in cash and cash equivalents............ (823,809) 46,047,488 Cash and cash equivalents at beginning of period............ 6,338,013 4,213,168 ----------- ----------- Cash and cash equivalents at end of period.................. $ 5,514,204 $50,260,656 =========== =========== Supplemental disclosure of cash flow information: CASH PAID FOR: Interest expense............................................ $ 422 $ 581,430 =========== =========== Income taxes................................................ $ -- $20,068,962 =========== ===========
See accompanying notes. F-21 44 COMMONWEALTH ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS APRIL 30, 2001 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Commonwealth Energy Corporation (the "Company") was incorporated on August 15, 1997. The Company's primary business has been the sale of electric power to retail customers in California and, beginning January 2000, in Pennsylvania and the sale of electric power to wholesale customers in California. The Company is licensed by the Federal Energy Regulatory Commission (FERC) as a power marketer, by California as an Electric Service Provider and by Pennsylvania as an Electric Generation Supplier. The Company plans to enter new deregulated electric power markets in the future. The electric power sold by the Company to its retail customers is delivered to the Company's customers by Utility Distribution Companies (UDCs) in California and an Electric Distribution Company (EDC) in Pennsylvania, which measure electric power usage by the Company's customers and bill the customers on behalf of the Company. There are three UDCs in California and one EDC in Pennsylvania which conduct these activities on behalf of the Company. The Company's operations have been in one reportable segment, the domestic electricity distribution industry. Basis of Presentation The condensed consolidated interim financial statements of the Company include the accounts of the Company's wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation. The condensed consolidated interim financial statements as of April 30, 2001 and for the nine-month periods ended April 30, 2000 and 2001 are unaudited but, in the opinion of management, have been prepared on the same basis as the audited financial statements and reflect all adjustments, consisting of normal recurring accruals necessary for a fair presentation of the information set forth therein. The results of operations for the nine-month period ended April 30, 2001 are not necessarily indicative of the operating results to be expected for the full year or any other period. These financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements of the Company for the year ended July 31, 2000. Estimates and Assumptions The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in the Company's consolidated financial statements relate to the allowance for doubtful accounts, unbilled receivables, legal claims and the useful lives of equipment. Actual results could differ from those estimates. Revenue and Cost Recognition Revenue from sales of electric power is recognized as the power is delivered to the Company's customers. Direct energy costs include electric power purchased, independent system operator fees and scheduling coordination fees. F-22 45 COMMONWEALTH ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED) APRIL 30, 2001 (UNAUDITED) The Company's net revenue is derived from sales to the following class of customers:
NINE MONTHS ENDED APRIL 30, --------------------------- 2000 2001 ----------- ------------ Retail........................................... $56,790,279 $ 88,394,024 Wholesale........................................ -- 55,643,606 ----------- ------------ Total.................................. $56,790,279 $144,037,630 =========== ============
Unbilled Receivables The Company's customers are billed monthly at various dates throughout the month. Unbilled receivables represent the amount of electric power delivered to customers at the end of a period, but not yet billed. Unbilled receivables from sales in California through January 19, 2001 were estimated by the Company as the number of kilowatt hours delivered times 95% of the California Power Exchange ("PX") cost as published by Southern California Edison for residential customers. On January 20, 2001, the PX ceased operations and the Company replaced the PX cost amount with the individual Utility Purchased Energy cost as published by each individual utility. Stock-Based Compensation As permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) and FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, the Company accounts for stock options granted to its employees and outside directors using the intrinsic value method. Most of the Company's stock option grants were granted with exercise prices below the fair value of the Company's common stock as estimated by the Company's management for financial reporting purposes. In addition, since most stock option grants were vested at their dates of grant, the difference between the exercise prices and such estimated fair values was expensed as stock-based compensation charges as of the date of grant. Concentration of Credit Risk The Company's concentration of credit risk with respect to accounts receivable is limited due to the large number of customers who are spread primarily throughout California. In addition, the Company maintains allowances for potential credit losses. During the nine months ended April 30, 2001, the Company began selling excess energy on a wholesale basis to the California Department of Water Resources ("CDWR") after the Company stopped selling to the PX which ceased operations in January 2001. Sales during that period to the PX, and to the CDWR each represented approximately 14% of total net revenue. Payment terms of these energy sales are net 15 days of the invoice date. During the nine months ended April 30, 2001, no other customer represented over 10% of the Company's net revenue. During the nine months ended April 30, 2000, no customer accounted for more than 10% of the Company's net revenue. 2. MARKET AND REGULATORY RISKS California Deregulated Electric Power Markets California has been experiencing extreme fluctuations in the cost of wholesale energy since May 2000. In reaction to this crisis, FERC, the PUC, the State Legislature and the Governor have proposed a varying number of methods to help restore price stability to the California electricity marketplace. Some of the F-23 46 COMMONWEALTH ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED) APRIL 30, 2001 (UNAUDITED) proposed solutions could affect the Company's ability to increase its customer base for a specific period of time or, perhaps, indefinitely. In addition to these risks, one of the incumbent utilities with which the Company interacts to conduct its business has filed for bankruptcy protection. This bankruptcy has not had a material impact on the Company's operations. Other utilities in California also could seek protection of bankruptcy in the future. Commitments to Purchase Electric Power For the California market, the Company has entered into a contract, which expires on June 30, 2002, to acquire 2,400 MWH of electric power per day through December 31, 2000 and 3,000 MWH per day for the remainder of the contract. The Company is obligated to minimum electric purchases of $36.6 million and $32.3 million for the years ending July 31, 2001 and 2002, respectively, under this commitment. The electric power acquired under this contract qualifies for the California "Green Power Credit" upon its resale to certain classes of customers. For the Pennsylvania market, the Company has entered into various contractual arrangements for the purchase of electric power through May 2004. The Company is obligated to minimum electric power purchases of $11.6 million and $37.9 million for the years ending July 31, 2001 and 2002, respectively, and $51.9 million thereafter under these contracts. Since the price at which the Company can purchase this electric power is fixed, if the price at which the Company can resell this electric power falls below the contract purchase price plus distribution and scheduling costs, the Company would incur operating losses during such periods. Pennsylvania Operations During the nine months ended April 30, 2000, the Company began selling electric power in Pennsylvania. In accordance with its standard customer contract in Pennsylvania, the Company may only charge certain maximum rates for its sales of electric power which, at times, could be less than the Company's costs of acquiring, distributing and scheduling such electric power. California Green Power Credits The state of California enacted the Public Purpose Program which established a $540 million fund to provide overall incentives to suppliers of "green" power to initially reduce, among other things, the net costs of such power to certain consumers by 1.5 cents per KWH which as of July 31, 2000, is at a rate 1.0 cent per KWH. The Company has received Green Power Credits of $8,806,170 for the nine months ended April 30, 2000 and $2,907,985 for the nine months ended April 30, 2001, which are included in the Company's net revenue. The benefit of these credits has been passed through to the Company's customers. The Public Purpose Program provides that this subsidy is available to suppliers of "green power" through March 31, 2002. 3. PER SHARE INFORMATION The amount of net income (loss) used in the calculations of basic and diluted net income (loss) per common share includes cumulative preferred dividend requirements of $63,711 for the nine months ended April 30, 2000 and $62,325 for the nine months ended April 30, 2001. F-24 47 COMMONWEALTH ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED) APRIL 30, 2001 (UNAUDITED) Basic and diluted net income (loss) per common share is computed as follows:
NINE MONTHS ENDED APRIL 30, ---------------------------- 2000 2001 ------------ ------------ NUMERATOR: Net income (loss)......................................... $(8,991,532) $54,133,878 Preferred stock dividend.................................. (63,711) (62,325) ----------- ----------- Income (loss) applicable to common stock -- Basic......... (9,055,243) 54,071,553 Assumed conversion of preferred stock..................... -- 62,325 ----------- ----------- Net income (loss) -- Dilutive............................. $(9,055,243) $54,133,878 =========== =========== DENOMINATOR: Average outstanding shares -- Basic....................... 33,365,148 31,587,478 Dilutive shares: Exercise of stock options............................... -- 3,764,306 Conversion of preferred stock into common stock......... -- 939,000 ----------- ----------- Average outstanding shares --Dilutive..................... 33,365,148 36,290,784 =========== ===========
For the nine months ended April 30, 2000, the effects of the exercise of all stock options and warrants and the assumed conversion of preferred stock into common stock are anti-dilutive and have been excluded from the calculation of dilutive earnings per share information. For the nine months ended April 30, 2001, the effects of stock options with exercise prices in excess of the estimated fair value of the Company's common stock and of the exercise of warrants have been excluded from the calculation of diluted earnings per share because the effect of their inclusion would be anti-dilutive. The average outstanding shares for the nine months ended April 30, 2001 reflects the rescission on February 23, 2001 of the founder's common shares described more fully in Note 7. 4. OTHER CURRENT LIABILITIES Other current liabilities is comprised of the following at April 30, 2001: Payroll and related......................................... $ 416,524 Severance costs............................................. 1,078,128 Legal accruals.............................................. 1,155,400 Other....................................................... 82,702 ---------- $2,732,754 ==========
5. PROPERTY AND EQUIPMENT, NET Property and equipment, net is comprised of the following at April 30, 2001: Office furniture and equipment.............................. $ 3,719,379 Information technology equipment and systems................ 1,224,707 Leasehold improvements...................................... 119,629 ----------- 5,063,715 Less accumulated depreciation and amortization.............. (1,569,529) ----------- $ 3,494,186 ===========
F-25 48 COMMONWEALTH ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED) APRIL 30, 2001 (UNAUDITED) 6. LINE OF CREDIT On June 29, 2000, the Company entered into a three-year, $15 million line of credit. Borrowings under the line of credit, which amounted to $5,199,539 at April 30, 2001, are collateralized by accounts receivable, inventory and other assets. In connection with obtaining the line of credit, the Company agreed to pay a closing fee of $300,000, one-half of which was paid at closing and the remainder to be paid incrementally at each annual renewal date. The Company also issued the lender a warrant expiring June 29, 2003 to purchase 100,000 shares of the Company's common stock at a price of $5.50 per share. Interest on borrowings is based on the lender's prime rate plus 1.75%. At April 30, 2001, the interest rate on borrowings under the line of credit was 9.235%. The credit line is subject to certain financial covenants in the event the Company's net worth falls below $15 million or the Company operates with a negative gross profit. 7. SHAREHOLDERS' EQUITY Convertible Preferred Stock The convertible preferred stock provides cumulative dividends which accrue at an annual rate of 10% and are payable at the discretion of the Company. Cumulative unpaid dividends were $295,297 as of April 30, 2001. Each convertible preferred share is convertible into one share of the Company's common stock at the shareholder's discretion and has full voting rights. In addition, preferred shareholders are entitled to preferential liquidation rights over common stock in the amount of $1.00 per share plus an amount equal to all declared but unpaid dividends. Common Stock At April 30, 2001, the Company has reserved the following shares of its common stock for issuance upon conversion of the issued and outstanding shares of convertible preferred stock, exercise of warrants and exercise of outstanding stock options: Reserved for conversion of convertible preferred stock...... 939,000 Reserved for exercise of common stock warrants.............. 100,000 Reserved for exercise of outstanding stock options.......... 10,489,592 ---------- 11,528,592 ==========
Founder's Shares The Company's corporate records state that the founder's shares of common stock were issued in exchange for the payment of $140,000 in the form of cash payments totaling $90,000 and personal property having a value of $50,000; however, the Company has not been able to obtain proof of the deposit of such funds in the Company's accounts or proof of the receipt of personal property amounting to this stated value. The Company was unable to verify that all of the consideration indicated in the Company's records that was to be paid by the Company's founder was actually paid to the Company. Accordingly, the Company's Board of Directors, on February 23, 2001, instructed the Company's management to reflect on the corporate records that 5,895,160 shares that the founder had previously registered in his name be stricken from the stock record books. Reflecting any such shares as being outstanding even on an interim basis, was done by the Company for matters of administrative convenience and without admission that any of such shares were validly issued. In connection with the action taken by the Company, the Company has sued the founder for various causes of action including fraud and breach of fiduciary duty. Based upon the founder's alleged failure to provide and pay the consideration required to issue the founder's shares, the Company is seeking court F-26 49 COMMONWEALTH ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED) APRIL 30, 2001 (UNAUDITED) confirmation for rescission of said founder's shares. The Company is also seeking judgement against the founder for all actual, consequential and incidental damages as set forth in the causes of action against the founder. Stock Options The Company's Board of Directors has approved grants of options to acquire a total of 12,901,825 shares of the Company's common stock to the Company's employees, outside directors and service providers. As of April 30, 2001, 10,489,592 of these stock options were outstanding. The options granted in November 2001, have either a four year vesting period or are dependent on certain events occurring after the grant date. Stock option activity is set forth below:
OPTIONS OUTSTANDING --------------------------------------------- EXERCISE WEIGHTED- NUMBER PRICE AVERAGE OF SHARES PER SHARE EXERCISE PRICE ---------- ------------- -------------- Balance at July 31, 2000.................... 9,249,892 $ .01 - $3.75 $1.469 Options granted............................. 2,950,000 $2.50 - $2.75 $2.725 Options exercised........................... (60,800) $ .01 - $1.00 $ .077 Options cancelled........................... (1,649,500) $ .01 - $3.75 $1.629 ---------- ------------- ------ Balance at April 30, 2001................... 10,489,592 $ .01 - $3.75 $1.805 ========== ============= ======
The Company has granted 3,000,000 stock options to the Company's Chairman and Chief Executive Officer which are performance based and will vest upon the occurrence of certain events. These options have an exercise price of $2.50 per share and expire on January 1, 2010. During the nine months ended April 30, 2001, stock-based compensation charges of $575,000, computed on a variable basis, were recorded related these options and 1,950,000 of these options vested based upon the occurrence of certain events. Stock-Based Compensation Stock-based compensation charges are comprised of the following components:
NINE MONTHS ENDED APRIL 30, -------------------- 2000 2001 -------- -------- Stock options earned........................................ $ 53,277 $ -- Gift of shares from founder to officer...................... 423,500 -- Performance based stock options............................. -- 575,000 -------- -------- 476,777 575,000 Less amount related to commissions on sales of the Company's common stock.............................................. (31,500) -- -------- -------- $445,277 $575,000 ======== ========
Warrants As part of the $15 million credit line agreement dated June 29, 2000, the lender received warrants to purchase 100,000 shares of common stock. The warrants are exercisable at $5.50 per share and expire upon the maturity of the loan agreement on June 29, 2003. The fair value of the warrants was nominal at their date of issuance. F-27 50 COMMONWEALTH ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED) APRIL 30, 2001 (UNAUDITED) 8. INCOME TAXES For the nine months ended April 30, 2001, the Company's provision for income taxes was comprised of the following:
CURRENT DEFERRED TOTAL ----------- ----------- ----------- Federal..................................... $19,073,000 $(3,310,000) $15,763,000 State....................................... 4,958,000 (652,000) 4,306,000 ----------- ----------- ----------- Total....................................... $24,031,000 $(3,962,000) $20,069,000 =========== =========== ===========
There was no provision for income taxes for the nine months ended April 30, 2000. The Company's net deferred tax asset as of April 30, 2001 was $3,962,000 and is net of a valuation allowance of $2,551,000. During the nine months ended April 30, 2000, the valuation allowance was reduced by $12,990,000. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has available for federal and state income tax purposes a net operating loss carry forward of approximately $500,000, which will begin to expire in 2018 and 2006, respectively, if not sooner utilized. The Company has experienced an ownership change under federal and state income tax law. Accordingly, the amount of the Company's taxable income which may be offset by losses generated prior to the ownership change is limited. The Company's effective tax rate differs from the federal statutory rate for the nine months ended April 30, 2001, primarily due to utilization of previously unbenefitted net operating losses of $22,000,000 to offset both federal and state taxable income in the current period. 9. OTHER EXPENSES Severance Arrangements In connection with the separation of the Company's former President, the Company granted him options to acquire 1,000,000 shares of the Company's common stock. The options were fully vested at their date of grant, have an exercise price of $2.50 per share and expire on December 31, 2002. The fair value of $414,800 of these stock options, as determined on the minimum value method, was included in severance costs for 2000. In April 2001, a settlement and release agreement, subject to a confidentiality agreement with the former President, was entered into that provided for cancellation all of his stock options and release of all claims. 10. COMMITMENTS AND CONTINGENCIES Severance Agreement and Litigation with Company's Founder The Company's founder and former chairman and Chief Executive Officer had an employment agreement with a subsidiary of the Company. He was asked to resign and he subsequently resigned from his positions with the subsidiary in consideration of a severance agreement effective June 1, 2000. Said severance agreement expressly waives any claims by him for any bonuses otherwise referenced in his previous five-year employment agreement with the subsidiary of the Company. The severance agreement also provides for monthly payments to him for $21,261 through December 31, 2004. The present value of $927,254 of this obligation to the Company's former chairman and Chief Executive Officer, based upon a discount rate of 10%, was recorded as of June 1, 2000. In December 2000, the Company ceased making severance payments under F-28 51 COMMONWEALTH ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED) APRIL 30, 2001 (UNAUDITED) this arrangement pending the outcome of litigation between the Company and its founder as more fully described in Note 7. California Department of Corporations Investigation The California Department of Corporations ("DOC") initiated an investigation of the Company in 1999 regarding the manner and extent of the offers and sales of the Company's stock and whether or not said offers and sales conformed to the requirements of the California Securities law or allowable exemptions to registration, and whether the Company's employees involved in such sales should have been licensed. Shortly after the initial inquiry, there was a change in management of the Company and all of such sales activities ceased, and the employment of all employees involved in such sales activities was terminated. During the year ended July 31, 2000, the Company has entered into negotiations with the DOC to resolve this investigation and has reached mutually agreeable terms of settlement, which include a payment of $150,000 by the Company to the DOC, which the Company accrued as of July 31, 2000, and an agreement to cooperate with the DOC in any further investigations which may arise related to these matters. In February 2001, upon the payment of $150,000 by the Company to the DOC, this investigation was closed. California Public Utilities Commission Investigation In 1999, the Consumer Services Division of the California Public Utility Commission ("CPUC") ordered an investigation relating to non-disclosure by the Company's former Chairman and Chief Executive Officer of cease and desist actions taken against him prior to his association with the Company and to a supplemental billing by the Company covering a six-month period during which the Company had under-billed its customers. The Company negotiated a settlement of all issues with the CPUC and both parties signed a settlement agreement on January 7, 2000. The terms included a payment of $100,000 by the Company to the CPUC and reimbursement by the Company of the amount of the supplemental billing to its customers through refunding amounts previously paid or issuing credits for unpaid amounts, and that the Chief Executive Officer in office from July 1, 1997 through December 31, 1998 would not have any responsibility for the business practices, management or operation of Commonwealth in California for a period of at least two years after the effective date of the settlement agreement. The Company had accrued for the financial impact of the January 7, 2000 settlement agreement during the year ended July 31, 2000. In July 2001, the CPUC investigation was ordered settled by the CPUC. The settlement provided for among other things, the Company to pay a fine of $219,500 and audit costs of $37,000 plus reimbursement of the supplemental billings to its customers (which reimbursement had taken place in prior periods). Litigation From time to time, the Company is involved in legal proceedings, claims, and litigation arising in the ordinary course of business. Management does not believe the outcome of these matters will have a material effect on the Company's financial condition or its results of operations. F-29 52 COMMONWEALTH ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED) APRIL 30, 2001 (UNAUDITED) 11. QUARTERLY FINANCIAL INFORMATION
THREE MONTHS ENDED --------------------------------------- OCTOBER 31, JANUARY 31, APRIL 30, 2000 2001 2001 ----------- ----------- --------- (IN THOUSANDS EXCEPT PER SHARE INFORMATION) Net revenue........................................ $43,106 $52,659 $48,273 Gross margin....................................... 18,833 41,154 28,431 Net income......................................... 11,759 27,865 14,510 Net income per share: Basic............................................ .35 .86 .51 Diluted.......................................... .30 .75 .44
12. EVENT SUBSEQUENT TO APRIL 30, 2001 In July 2001, the Company invested $15 million in Summit Energy Ventures, LLC ("Summit") and committed to invest an additional $10 million in Summit. Summit was formed to invest in energy and energy related companies. The Company has a 100% preferred membership in Summit. F-30 53 SCHEDULE II COMMONWEALTH ENERGY CORPORATION VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
COLUMN B COLUMN A CHARGED TO COLUMN D BEGINNING COSTS AND COLUMN C BALANCE AT OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD ---------- ------------ ---------- ------------- Nine months ended April 30, 2001 (unaudited): Allowance for Bad Debts....................... $1,458,984 $886,878 $ -- $2,345,862 Year ended July 31, 2000: Allowance for Bad Debts....................... 612,909 846,075 -- 1,458,984 Year ended July 31, 1999: Allowance for Bad Debts....................... -- 612,909 -- 612,909 Period ended July 31, 1998: Allowance for Bad Debts....................... -- -- -- --
F-31 54 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 9, 2001 COMMONWEALTH ENERGY CORPORATION By: /s/ IAN B. CARTER -------------------------------------- Name: Ian B. Carter Title: Chief Executive Officer 55 EXHIBIT INDEX
EXHIBIT NUMBER TITLE OF EXHIBIT - ------- ---------------- 3.1 Articles of Incorporation of Commonwealth Energy Corporation dated August 14, 1997 and filed with the Secretary of State of the State of California on August 15, 1997 3.2 Certificate of Amendment of Articles of Incorporation of Commonwealth Energy Corporation dated December 31, 1998 and filed with the Secretary of State of the State of California on February 19, 1999 3.3 Bylaws of Commonwealth Energy Corporation, as amended 10.1 Power Purchase Agreement dated April 27, 1999, between Commonwealth Energy Corporation and Calpine Power Services Company 10.2 First Amendment to Power Purchase Agreement dated as of April 29, 1999 10.3 Second Amendment to Power Purchase Agreement dated as of May 28, 1999, between Commonwealth Energy Corporation and Calpine Power Services Company 10.4 Loan and Security Agreement dated June 28, 2000 between Commonwealth Energy Corporation, electricAmerica, Inc. and electric.com, Inc. and Coast Business Credit 10.5 Warrant dated June 28, 2000, issued by Commonwealth Energy Corporation in favor of Coast Business Credit. 10.6 Limited Liability Company Agreement of Summit Energy Ventures, LLC, as amended by the First Amendment to the Limited Liability Company Agreement of Summit Energy Ventures, LLC, dated August 2001 10.7 PECO Energy Company Confirmation Agreement dated January 30, 2001. 10.8 Exelon Generation Company, LLC Confirmation Agreement dated May 13, 2001 10.9 Standard Office Lease -- Gross dated April 1, 1997, for property located at 15941 Redhill Avenue, Suite 200, Tustin, California, together with Rules and Regulations and Work Letter attached thereto 10.10 Standard Sublease dated November 12, 1998, between Kurt Busch and Commonwealth Energy Corporation, for property located at 15991 Redhill Avenue, Suite 200, Tustin, California. 10.11 Severance Agreement dated June 1, 2000, among Commonwealth Energy Corporation, electricAmerica, Inc. and Frederick M. Bloom 10.12 Employment Agreement dated January 1, 2000, between Commonwealth Energy Corporation and Ian Carter, as modified by an Addendum to Employment Agreement dated as of November 1, 2000 10.13 Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and Richard Paulsen 10.14 Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and James Oliver 10.15 Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and John Barthrop 10.16 Commonwealth Energy Corporation 1999 Equity Incentive Plan for Employees 21.1 Subsidiaries of the Registrant
EX-3.1 3 a74807gex3-1.txt EXHIBIT 3.1 1 EXHIBIT 3.1 ARTICLES OF INCORPORATION ARTICLES OF INCORPORATION OF COMMONWEALTH ENERGY CORPORATION ARTICLE ONE The name of this corporation is: COMMONWEALTH ENERGY CORPORATION ARTICLE TWO The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California, other than the banking business, trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE THREE The name and address in the State of California of this Corporation's initial service of process is: GARY C. WYKIDAL 245 Fischer Ave., Ste. A-1 Costa Mesa, CA 92626 ARTICLE FOUR This corporation is authorized to issue two classes of shares which shall be designated "common" shares and "preferred" shares. The total amount of common shares that may be issued is fifty million (50,000.000). The total number of preferred shares that this corporation shall have the authority to issue is one million (1,000,000). Said preferred shares shall have the rights, privileges and preferences as determined by the Board of Directors from time to time. ARTICLE FIVE The liability of the Directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. ARTICLE SIX This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) for breach of duty to the corporation and its shareholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification expressly permitted by Section 317 of the California Corporations Code, subject to the limits of such excess indemnification set forth in Section 204 of the Corporation Code. DATED: August 14, 1997 /s/ Sheryl Douglas ---------------------------------------- Sheryl Douglas, Incorporator EX-3.2 4 a74807gex3-2.txt EXHIBIT 3.2 1 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF COMMONWEALTH ENERGY CORPORATION The undersigned certify that: 1. They are the president and secretary, respectively of COMMONWEALTH ENERGY CORPORATION, a California corporation. 2. Article Four of the Articles of Incorporation of this corporation is amended to read as follows: This corporation is authorized to issue two classes of shares which shall be designated "common" shares and "preferred" shares. The total amount of common shares that may be issued is fifty million (50,000,000). The total number of preferred shares that this corporation shall have the authority to issue is ten million (10,000.000). Said preferred shares shall have the rights, privileges and preferences as determined by the board of directors from time to time. 3. The foregoing amendment of Articles of Incorporation has been duly approved by the board of directors. 4. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 and Section 903, California Corporations Code. The total number of outstanding common shares of the corporation is 10,939.931. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. The total number of outstanding preferred shares of the corporation is 919,000. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: December 31, 1998 /s/ David Mensch --------------------------------------- David Mensch, President /s/ Donnie E. Price - ------------------------------- Donnie E. Price, Secretary EX-3.3 5 a74807gex3-3.txt EXHIBIT 3.3 1 EXHIBIT 3.3 BYLAWS BY-LAWS of COMMONWEALTH ENERGY CORPORATION a California corporation ARTICLE I DIRECTORS; MANAGEMENT Section 1. a. Powers. Subject to the provisions of the General Corporation Law of California, effective January 1, 1977 (to which the various Section numbers quoted herein relate) and subject to any limitation in the Articles of Incorporation and the By-Laws relating to action required to be approved by the Shareholders (Sec. 153) or by the outstanding shares (Sec. 152), the business and affairs of this corporation shall be managed by and all corporate powers shall be exercised by or under direction of the Board of Directors. b. Standard of Care. Each Director shall exercise such powers and otherwise perform such duties in good faith, in the manner such Director believes to be in the best interests of the corporation, and with such care, including reasonable inquiry, using ordinary prudence, as a person in a like position would use under similar circumstances. (Sec. 309) c. Exception for Close Corporation. Notwithstanding the provisions of Section 1, in the event that this corporation shall elect to become a close corporation as defined in Sec. 158, its Shareholders may enter into a Shareholders' Agreement as provided in Sec. 300 (b). Said agreement may provide for the exercise of corporate powers an the management of the business and affairs of this corporation by the Shareholders, provided however such agreement shall, to the extent and so long as the discretion or the powers of the Board in its management of corporate affairs is controlled by such agreement, impose upon each Shareholder who is a party thereof, liability for managerial acts performed or omitted by such person pursuant thereto otherwise imposed upon Directors as provided in Sec. 300 (d). Section 2. Number and Qualification. The authorized number of Directors of the corporation shall be no less than the minimum number of shareholders and no more than seven (7). This number may be changed by amendment to the Articles of Incorporation or by an amendment to this Section 2, ARTICLE 1, of these By-Laws, adopted by the vote or written assent of the Shareholders entitled to exercise majority voting power as provided in Sec. 212. 1 2 Section 3. Election and Tenure of Office. The Directors shall be elected by ballot at the annual meeting of the Shareholders, to serve for one year or until their successors are elected and have qualified. Their term of office shall begin immediately after election. Section 4. Vacancies. Vacancies in the Board of Directors may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, and each Director so elected shall hold office until his successor is elected at an annual meeting of Shareholders or at a special meeting called for that purpose. The Shareholders may at any time elect a Director to fill any vacancy not filled by the Directors, and may elect the additional Directors at the meeting at which an amendment of the By-Laws is voted authorizing an increase in the number of Directors. A vacancy or vacancies shall be deemed to exist in case of the death, resignation or removal of any Director, or if the Shareholders shall increase the authorized number of Directors but shall fail at the meeting at which such increase is authorized, or at an adjournment thereof, to elect the additional Director so provided for, or in case the Shareholders fail at any time to elect the full number of authorized Directors. If the Board of Directors accepts the resignation of a Director tendered to take effect at a future time, the Board, or the Shareholders, shall have power to elect a successor to take office when the resignation shall become effective. No reduction of the number of Directors shall have the effect of removing any Director prior to the expiration of his term of office. Section 5. Removal of Directors. The entire Board of Directors or any individual Director may be removed from office as provided by secs. 302, 303 and 304 of the Corporations Code of the State of California. In such case, the remaining Board members may elect a successor Director to fill such vacancy for the remaining unexpired term of the Director so removed. Section 6. Notice, Place and Manner of Meetings. Meetings of the Board of Directors may be called by the Chairman of the Board, or the President, or any Vice President, or the Secretary, or any two (2) Directors and shall be held at the principal executive office of the corporation in the State of California, unless some other place is designated in the notice of the meeting. No notice need be given of organization meetings or regular meetings held at the corporate offices at the time and date set forth herein. Notice shall be given of other meetings as herein provided. Members of the Board may participate in a meeting through use of a conference telephone or similar communications equipment so long as all members participating in such a meeting can hear one another. Accurate minutes of any meeting of the Board, or any committee thereof, shall be maintained as required by Sec. 1500 of the Code by the Secretary or other Officer designated for that purpose. Section 7. Organization Meetings - Regular Meetings. The organization meetings of the newly elected Board of Directors shall be held immediately following the adjournment of the annual meetings of the Shareholders. Other Regular Meetings. Regular meetings of the Board of Directors shall be held at the corporate offices, or such other place as may be designated by the Board of Directors, as follows: 2 3 Time of Regular Meeting: 11:00 a.m. Date of Regular Meeting: First Monday in August If said day shall fall upon a holiday, such meetings shall be held on the next succeeding business day thereafter. Section 8. Special Meetings - Notices. Special meetings of the Board may be called at any time by the President or, if he is absent or unable or refuses to act, by any Vice President or the Secretary or by any two Directors, or by one Director if only one is provided. At least forty-eight (48) hours notice of the time and place of special meetings shall be delivered personally to the Directors or personally communicated to them by a corporate Officer by telephone or telegraph. If the notice is sent to a Director by letter, it shall be addressed to him at his address as it is shown upon the records of the corporation, (or if it is not so shown on such records or is not readily ascertainable, at the place in which the meetings of the Directors are regularly held). In case such notice is mailed, it shall be deposited in the United States mail, postage prepaid, in the place in which the principal executive office of the corporation is located at least four (4) days prior to the time of the holding of the meeting. Such mailing, telegraphing, telephoning or delivery as above provided shall be due, legal and personal notice to such Director. Section 9. Waivers. When (i) all of the Directors are present at any organizational, regular or special meeting, however called or noticed, and sign a written consent thereto on the records of such meeting, or, (ii) if a majority of the Directors are present and if those not present sign a waiver of notice of such meeting or a consent to holding the meeting or an approval of the minutes thereof, whether prior to or after the holding of such meeting, which said waiver, consent or approval shall be filed with the corporate records or made a part of the minutes of the meeting or (iii) if a Director attends a meeting without notice but without protesting, prior thereto or at its commencement, the lack of notice to him, then the transactions thereof are as valid as if had at. a meeting regularly called and noticed. Section 10. Sole Director Provided by Articles of Incorporation. In the event only one Director is required by the By-Laws or Articles of Incorporation, then any reference herein to notices, waivers, consents, meetings or other actions by a majority or quorum of the Directors shall be deemed to refer to such notice, waiver, etc., by such sole Director, who shall have all the rights and duties and shall be entitled to exercise all the powers and shall assume all the responsibilities otherwise herein described as given to a Board of Directors. Section 11. Directors Acting by Unanimous Written Consent. Any action required or permitted to be taken by the board of Directors may be taken without a meeting and with the same force and effect as if taken by a unanimous vote of Directors, if authorized by a writing signed individually or collectively by all members of the Board. Such consent shall be filed with the regular minutes of the Board. Section 12. Quorum. A majority of the number of Directors as fixed by the Articles of Incorporation or By-Laws shall be necessary to constitute a quorum for the transaction of business, and the action of a majority of the Directors present at any meeting at which there is a quorum, when duly assembled, is valid as a corporate act; provided that a minority of the Directors, in the absence of a quorum, may adjourn from time to time, but may not 3 4 transact any business. A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of Directors, if any action taken is approved by a majority of the required quorum for such meeting. Section 13. Notice of Adjournment. Notice of the time and place of holding an adjourned meeting need not be given to absent Directors if the time and place be fixed at the meeting adjourned and held within twenty-four (24) hours, but if adjourned more than twenty-four (24) hours, notice shall be given to all Directors not present at the time of the adjournment. Section 14. Compensation of Directors. Directors, as such, shall not receive any stated salary for their services, but by resolution of the Board a fixed sum and expense of attendance, if any, may be allowed for attendance at each regular and special meeting of the Board; provided that nothing herein contained shall be construed to preclude any Director from serving the company in any other capacity and receiving compensation therefor. Section 15. Committees. Committees of the Board may be appointed by resolution passed by a majority of the whole Board. Committees shall be composed of two or more members of the Board, and shall have such powers of the Board as may be expressly delegated to it by resolution of the Board of Directors, except those powers expressly made non-delegable by Sec. 311. Section 16. Advisory Directors. The Board of Directors from time to time may elect one or more persons to be Advisory Directors who shall not by such appointment be members of the Board of Directors. Advisory Directors shall be available from time to time to perform special assignments specified by the President, to attend meetings of the Board of Directors upon invitation and to furnish consultation to the Board. The period during which the title shall be held may be prescribed by the Board of Directors. If no period is prescribed, the title shall be held at the pleasure of the Board. Section 17. Resignations. Any Director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. ARTICLE II OFFICERS Section 1. Officers. The Officers of the corporation shall be a Chairman of the Board or a President or both, a Secretary and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, one or more Vice Presidents, one or more Assistant Secretaries and such other Officers as may be appointed in accordance with the provisions of Section 3 of this Article. One person may hold two or more offices. 4 5 Section 2. Election. The Officers of the corporation, except such Officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article shall be chosen annually by the Board of Directors, and each shall hold his office until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be elected and qualified. Section 3. Subordinate Officers, Etc. The Board of Directors may appoint such other Officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the By-Laws or as the Board of Directors may from time to time determine. Section 4. Removal and Resignation. Any Officer may be removed, either with or without cause, by a majority of the Directors at the time in office, at any regular or special meeting of the Board, or, except in case of an Officer chosen by the Board of Directors, by any Officer upon whom such power of removal may be conferred by the Board of Directors. Any Officer may resign at any time by giving written notice to the Board of Directors, or to the President, or to the Secretary of the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the By-Laws for regular appointments to such office. Section 6. Chairman of the Board. The Chairman of the Board, if there shall be such an Officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the By-Laws. Section 7. President. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman or the Board, if there be such an Officer, the President shall be the Chief Executive Officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and Officers of the corporation. He shall preside at all meetings of the Shareholders and in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall be ex officio a member of all the standing committees, including the Executive Committee, if any, and shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the By-Laws. Section 8. Vice President. In the absence or disability of the President, the Vice Presidents, in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to, all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the By-Laws. 5 6 Section 9. Secretary. The Secretary shall keep, or cause to be kept, a book of minutes at the principal office or such other place as the Board of Directors may order, of all meetings of Directors and Shareholders, with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at Directors' meetings, the number of shares present or represented at Shareholders' meetings and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal office or at the office of the corporation's transfer agent, a share register, or duplicate share register, showing the names of the Shareholders and their addresses; the number and classes of shares held by each; the number and date of certificates issued for the same; and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the Shareholders and of the Board of Directors required by the By-Laws or by law to be given, and he shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the board of Directors or by the By-Laws. Section 10. Chief Financial Officer. This Officer shall keep and maintain, or cause to be kept and maintained in accordance with generally accepted accounting principles, adequate and correct accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, earnings (or surplus) and shares. The books of account shall at all reasonable times be open to inspection by any Director. This Officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and Directors, whenever they request it, an account of all of his transactions and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors of the By-Laws. ARTICLE III SHAREHOLDERS' MEETINGS Section 1. Place of Meetings. Meetings of the Shareholders shall be held at the principal executive office of the corporation, in the State of California, unless some other appropriate and convenient location be designated for that purpose from time to time by the Board of Directs. Section 2. Annual Meeting. The annual meetings of the shareholders shall be held, each year, at the time and on the day following: Time of Meeting: 10:00 a.m. Date of Meeting: First Monday in August If this day shall be a legal holiday, then the meeting shall be held on the next succeeding business day, at the same hour. At the annual meeting, the Shareholders shall elect a Board of Directors, consider reports of the affairs of the corporation and transact such other business as may be properly brought before the meeting. 6 7 Section 3. Special Meetings. Special meetings of the Shareholders may be called at any time by the Board of Directors, the Chairman of the Board, Shareholders holding not less than one-tenth (1/10) of the voting power of the corporation. Except as next provided, notice shall be given as for the annual meeting. Upon receipt of a written request addressed to the Chairman, President, Vice President, or Secretary, mailed or delivered personally to such Officer by any person (other than the Board) entitled to call a special meeting of Shareholders, such Officer shall cause notice to be given, to the Shareholders by the person or persons calling the meeting, not less than 35 nor more than 60 days after the receipt of such request. If such notice is not given within 20 days after receipt of such request, the persons calling the meeting may give notice thereof in the manner provided by these By-Laws or apply to the Superior Court as provided in Sec. 305 (c). Section 4. Notice of Meeting - Reports. Notice of meetings, annual or special, shall be given in writing not less than ten nor more than sixty days before the date of the meeting, to Shareholders entitled to vote thereat by the Secretary or the Assistant Secretary, or if there be no such Officer, or in the case of his neglect or refusal, by any Director or Shareholder. Such notices or any reports shall be given personally or by mail or other means of written communication as provided in Sec. 601 of the Code and shall be sent to the Shareholder's address appearing on the books of the corporation, or supplied by him to the corporation for the purpose of notice, and in the absence thereof, as provided in Sec. 601 of the Code. Notice of any meeting of Shareholders shall specify the place, the day and the hour of meeting, and (1) in case of a special meeting, the general nature of the business to be transacted and no other business may be transacted, or (2) in the case of an annual meeting, those matters which the Board at date of mailing, intends to present for action by the Shareholders. At any meetings where Directors are to be elected, notice shall include the names of the nominees, if any, intended at date of Notice to be presented by management for election. If a Shareholder supplies no address, notice shall be deemed to have been given to him if mailed to the place where the principal executive office of the company, in California, is situated, or published at least once in some newspaper of general circulation in the County of said principal office. Notice shall be deemed given at the time it is delivered personally or deposited in the mail or sent by other means of written communication. The Officer giving such notice or report shall prepare and file an affidavit or declaration thereof. When a meeting is adjourned for forty-five days or more, notice of the adjourned meeting shall be given as in case of to give any notice of adjournment or of the business to be transacted at an adjourned meeting other than by announcement at the meeting at which such adjournment is taken. Section 5. Validation of Shareholders' Meetings. The transactions of any meeting of Shareholders, however called and noticed, shall be valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the Shareholders entitled to vote, not present in person or by proxy, sign a written waiver of notice, or a consent to the holding of such meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance shall constitute a waiver of notice, unless objection shall be made a provided in Sec. 601 (e). 7 8 Section 6. Shareholders Acting Without A Meeting - Directors. Any action which may be taken at a meeting of the Shareholders may be taken without a meeting or notice of meeting if authorized by a writing signed by all of the Shareholders entitled to vote at a meeting for such purpose and filed with the Secretary of the corporation, provided further that while ordinarily Directors can only be elected by unanimous written consent under Sec. 603 (d), as to vacancy created by death, resignation or other causes, if the Directors fail to fill a vacancy, then a Director to fill that vacancy may be elected by the written consent of persons holding a majority of shares entitled to vote for the election of Directors. Section 7. Other Actions Without A Meeting. Unless otherwise provided in the GCL or the Articles, any action which may be taken at any annual or special meeting of Shareholders may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless the consents of all Shareholders entitled to vote have been solicited in writing, (1) Notice of any Shareholder approval pursuant to Secs. 310, 317, 1201 or 2007 without a meeting by less than unanimous written consent shall be given at least 10 days before the consummation of the action authorized by such approval, and (2) Prompt notice shall be given of the taking of any other corporate action approved by Shareholders without a meeting by less than unanimous written consent, to each of those Shareholders entitled to vote who have not consented in writing. Any Shareholder giving a written consent, or the Shareholder's proxyholders, or a transferee of the shares of a personal representative of the Shareholder or their respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary. Section 8. Quorum. The holders of a majority of the shares entitled to vote thereat, present in person, or represented by proxy, shall constitute a quorum at all meetings of the Shareholders for the transaction of business except as otherwise provided by law, by the Articles of Incorporation, or by these By-Laws. If, however, such majority shall not be present or represented at any meeting of the Shareholders, the Shareholders entitled to vote thereat, present in person, or by proxy, shall have the power to adjourn the meeting from time to time, until the requisite amount of voting shares shall be present. At such adjourned meeting at which the requisite amount of voting shares shall be represented, any business may be transacted which might have been transacted at a meeting as originally notified. If a quorum be initially present, the Shareholders may continue to transact business until adjournment, notwithstanding the withdrawal of enough Shareholders to leave less than a quorum, if any action taken is approved by a majority of the Shareholders required to initially constitute a quorum. Section 9. Voting Rights, Cumulative Voting. Only persons in whose names shares entitled to vote stand on the stock records of the corporation on the day of any meeting of Shareholders, unless some other day be fixed by the Board of Directors for the determination of Shareholders of record, and then on such other day, shall be entitled to vote at such meeting. Provided the candidate's names has been placed in nomination prior to the voting and one or more Shareholders has given notice at the meeting prior to the voting of the Shareholder's intent to cumulate the Shareholder's votes, every Shareholder entitled to vote at any election for Directors of any corporation for profit may cumulate his votes and give one candidate a number of votes equal to the number of Directors to 8 9 be elected multiplied by the number of votes to which his shares are entitled, or distribute his votes of the same principle among as many candidates as he thinks fit. The candidates receiving the highest number of votes up to the number of Directors to be elected are elected. The Board of Directors may fix a time in the future not exceeding sixty days preceding the date of any meeting of Shareholders or the date fixed for the payment of any dividend or distribution, or for the allotment of rights, or when any change or conversion or exchange of shares shall go into effect , as a notice of and to vote at any such meeting, or entitled to receive any such dividend or distribution, or any allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. In such case only Shareholders of record on the date so fixed shall be entitled to notice of and to vote at such meeting, or to receive such dividends, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any share on the books of the company after any record date fixed as aforesaid. The Board of Directors may close the books of the company against transfers of shares during the whole or any part of such period. Section 10. Proxies. Every Shareholder entitled to vote, or to execute consents, may do so, either in person or by written proxy, executed in accordance with the provisions of Secs. 604 and 705 of the Code and filed with the Secretary of the corporation. Section 11. Organization. The President, or in the absence of the President, any Vice President, shall call the meeting of the Shareholders to order, and shall act as chairman of the meeting. In the absence of the President and all of the Vice Presidents, Shareholders shall appoint a chairman for such meeting. The Secretary of the company shall act as Secretary of all meetings of the Shareholders, but in the absence of the Secretary at any meeting of the Shareholders, the presiding Officer may appoint any person to act as Secretary of the meeting. Section 12. Inspectors of Election. In advance of any meeting of Shareholders the Board of Directors may, if they so elect, appoint inspectors of election to act at such meeting or any adjournments thereof. If inspectors of election be not so appointed, the chairman of any such meeting may, and on the request of any Shareholder or his proxy shall, make such appointment at the meeting in which case the number of inspectors shall be either one or three as determined by a majority of the Shareholders represented at the meeting. Section 13. Shareholders' Agreements. Notwithstanding the above provisions in the event this corporation elects to become a close corporation, an agreement between two or more Shareholders thereof, if in writing and signed by the parties thereof, may provide that in exercising any voting rights the shares held by them shall be voted as provided therein or in Sec. 706, and may otherwise modify these provisions as to Shareholders' meetings and actions. ARTICLE IV CERTIFICATES AND TRANSFER OF SHARES Section 1. Certificate for Shares. Certificate for shares shall be of such form and device as the Board of Directors may designate and shall state the name of the record holder of the shares represented thereby; its number; date of issuance; the number of shares for which it is issued; a statement of the rights, privileges, preferences and restrictions, if 9 10 any; a statement as to the redemption or conversion, if any; a statement of liens or restrictions upon transfer or voting, if any; if the shares be assessable or, if assessments are collectible by personal action, a plain statement of such facts. Every certificate for shares must be signed by the President or a Vice-President and the Secretary or an Assistant Secretary or must be authenticated by facsimiles of the signatures of the President and Secretary or by a facsimile of the signature of its President and the written signature of its Secretary or an Assistant Secretary. Before it becomes effective every certificate for shares authenticated by a facsimile of a signature must be countersigned by a transfer agent or transfer clerk and must be registered by an incorporated bank or trust company, either domestic or foreign, as registrar of transfers. Section 2. Transfer on the Books. Upon surrender to the Secretary or transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 3. Lost or Destroyed Certificates. Any person claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact and shall if the Directors so require give the corporation a bond of indemnity, in form and with one or more sureties satisfactory to the Board, in at lest double the value of the stock represented by said certificate, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to be lost or destroyed. Section 4. Transfer Agents and Registrars. The Board of Directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, which shall be an incorporated bank or trust company - either domestic or foreign, who shall be appointed at such times and places as the requirements of the corporation may necessitate and the Board of Directors may designate. Section 5. Closing Stock Transfer Books - Record Date. In order that the corporation may determine the Shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty nor less than ten days prior to the date of such meeting nor more than sixty days prior to any other action. If no record date is fixed: The record date for determining Shareholders entitled to notice of or to vote at a meeting of Shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. The record date for determining Shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board is necessary, shall be the day on which the first written consent is given. The record date for determining Shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. 10 11 Section 6. Legend Condition. In the event any shares of this corporation are issued pursuant to a permit or exemption therefrom requiring the imposition of a legend condition the person or persons issuing or transferring said shares shall make sure said legend appears on the certificate and on the stub relating thereto in the stock record book and shall not be required to transfer any shares free of such legend unless an amendment to such permit or a new permit be first issued so authorizing such a deletion. Section 7. Close Corporation Certificates. All certificates representing shares of this corporation, in the event it shall elect to become a close corporation, shall contain the legend required by Sec. 418 c. ARTICLE V CORPORATE RECORDS AND REPORTS - INSPECTION Section 1. Records. The corporation shall maintain, in accordance with generally accepted accounting principles, adequate and correct accounts, books and records of its business and properties. All of such books, records and accounts shall be kept at its principal executive office in the State of California, as fixed be the Board of Directors from time to time. Section 2. Inspection of Books and Records. All books and records provided for in Sec. 1500 shall be open to inspection of the Directors and Shareholders from time to time and in the manner provided in said Sec. 1600 -1602. Section 3. Certification and Inspection of By-Laws. The original or a copy of these By-Laws, as amended or otherwise altered to date, certified by the Secretary, shall be kept at the corporation's principal executive office and shall be open to inspection by the Shareholders of the company, at all reasonable times during office hours, as provided in Sec. 213 of the Corporations Code. Section 4. Checks, Drafts, Etc. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as shall be determined from time to time by resolution of the Board of Directors. Section 5. Contracts, Etc. - How Executed. The Board of Directors, except as in the By-Laws otherwise provided, may authorize any Officer or Officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation. Such authority may be general or confined to specific instances. Unless so authorized by the Board of Directors, no Officer, agent or employee shall have any power or authority to bind the corporation by any contract or agreement, or to pledge its credit, or to render it liable for any purpose or to any amount, except as provided in Sec. 313 of the Corporations Code. 11 12 ARTICLE VI ANNUAL REPORTS Section 1. Due Date, Contents. The Board of Directors shall cause an annual report or statement to be sent to the Shareholders of this corporation not later than 120 days after the close of the fiscal or calendar year in accordance with the provisions of Secs. 1500 - 1501. Such report shall be sent to Shareholders at least fifteen days prior to the annual meeting of Shareholders. Such report shall contain a balance sheet as of the end of the fiscal year, an income statement and a statement of changes in financial position for such fiscal year, accompanied by any report, a certificate of the Chief Financial Officer or President that such statements were prepared without audit from the books and records of the corporation. Section 2. Waiver. The foregoing requirement of an annual report may be waived by the Board so long as this corporation shall have less than 100 Shareholders. ARTICLE VII AMENDMENTS TO BY-LAWS Section 1. By Shareholders. New By-Laws may be adopted or these By-Laws may be repealed or amended at their annual meeting, or at any other meeting of the Shareholders called for that purpose, by a vote of Shareholders entitled to exercise a majority of the voting power of the corporation, or by written assent of such Shareholders. Section 2. Powers of Directors. Subject to the right of the Shareholders to adopt, amend or repeal By-Laws, as provided in Section 1 of this Article VII, and the limitations of Sec. 204 (a) (5) and Sec. 212, the Board of Directors may adopt, amend or repeal any of these By-Laws other than a By-Law or amendment thereof changing the authorized number of Directors. Section 3. Record of Amendments. Whenever an amendment or new By-Law is adopted, it shall be copied in the book of Bylaws with original By-Laws, in the appropriate place. If any By-Laws; is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or written assent was filed shall he stated in said book. ARTICLE VIII MISCELLANEOUS Section 1. References to Code Sections. "Sec." references herein refer to the equivalent Sections of the General Corporation Law effective January 1, 1977, as amended. Section 2. Effect of Shareholders' Agreement. Any Shareholders' Agreement authorized by Sec. 300 (b), shall only be effective to modify the terms of these By-Laws if this corporation elects to become a close corporation with appropriate filing of or amendment to its Articles as required by Sec. 202 and shall terminate when this corporation ceases to be a close corporation. Such an agreement cannot waive or alter Secs. 158, (defining close corporations), 202 (requirements, of Articles of Incorporation), 500 and 501 relative to distributions, 111 (merger), 1201 (c) 12 13 (reorganization) or Chapters 15 (Records and Reports), 16 (Rights of Inspection), 18 (Involuntary Dissolution) or 22 (Crimes and Penalties). Any other provisions of the Code or these By-Laws may be altered or waived thereby, but to the extent they are not so altered or waived, these By-Laws shall be applicable. Section 3. Representation of Shares in Other Corporations. Except as provided in Sec, 703, shares of other corporations standing in the name of this corporation may be voted or represented and all incidents thereto may be exercised on behalf of the corporation by the Chairman of the Board, the President or any Vice President and the Secretary or an Assistant Secretary. Section 4. Subsidiary Corporations. Shares of this corporation owned by a subsidiary shall not be entitled to vote on any matter. A subsidiary for these purposes is defined in Sec. 189 (a) and (b). Section 5. Indemnity. The corporation may indemnify any Director, Officer, agent or employee as to those liabilities and on those terms and conditions as are specified in Sec. 317. In any event, the corporation shall have the right to purchase and maintain insurance on behalf of any such persons whether or not the corporation would have the power to indemnify such person against the liability insured against. 13 14 CERTIFICATE OF SECRETARY OF COMMONWEALTH ENERGY CORPORATION I, the undersigned, do hereby certify: 1. That I am the duly elected Secretary of COMMONWEALTH ENERGY CORPORATION, a California corporation; and 2. That the foregoing Bylaws, comprising eighteen (18) pages, constitute the Bylaws of said Corporation as duly adopted by unanimous written consent of the Board of Directors at the Organizational Meeting on August 15, 1997. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of said Corporation on August 15, 1997. /s/ David Mensch ----------------------- David Mensch, Secretary 15 CERTIFICATE OF SECRETARY OF COMMONWEALTH ENERGY CORPORATION I, DONNIE PRICE, the undersigned, do hereby certify: 1. That I am the duly elected Secretary of COMMONWEALTH ENERGY CORPORATION, a California corporation (the "Company"); and 2. That the attached Amendment to Bylaws adopted by unanimous consent of the Board of Directors of the Company, dated October 7, 1998, and ratified in writing by a majority of the shareholders of the Company, does represent a true and correct reflection of such Amendment to Bylaws. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of said Corporation this 7th day of December, 1998. /s/ Donnie Price ----------------------- DONNIE PRICE, Secretary 16 AMENDMENT TO BYLAWS OF COMMONWEALTH ENERGY CORPORATION DATED DECEMBER 7, 1998 Article I, Section 2 of the Bylaws of COMMONWEALTH ENERGY CORPORATION, a California corporation, is amended to read in full as follows: " Section 2. The authorized number of directors constituting the Board of Directors until further changed shall be nine (9); provided, however, the authorized number of directors constituting the Board shall be at least three (3). Subject to the foregoing provisions, the number of directors may be changed from time to time by an amendment of these Bylaws adopted by approval of the outstanding shares. No decrease in the authorized number of directors shall have the effect of shortening the term of any incumbent director. " 17 AMENDMENT TO BYLAWS OF COMMONWEALTH ENERGY CORPORATION Article 1, Section 2 of the Bylaws of Commonwealth Energy Corporation, a California corporation, is amended to read in full as follows: Section 2. The authorized number of directors constituting the board of directors until further change shall be five. Subject to the foregoing provisions, the number of directors may be changed from time to time by an amendment of these Bylaws adopted by approval of the Board of Directors. No decrease in the authorized number of directors shall have the effect of shortening the term of any incumbent director. Dated: November 28, 2000 /s/ John A. Barthrop ------------------------------------- John A. Barthop, Secretary EX-10.1 6 a74807gex10-1.txt EXHIBIT 10.1 1 EXHIBIT 10.1 POWER PURCHASE AGREEMENT EXECUTION ORIGINAL POWER PURCHASE AGREEMENT BETWEEN COMMONWEALTH ENERGY CORPORATION AND CALPINE POWER SERVICES COMPANY FOR POWER FROM THE GEYSERS UNITS 5/07/99-6/30/02 2 POWER PURCHASE AGREEMENT This Power Purchase Agreement ("Agreement") is made and entered into as of April ___, 1999, by and between the Commonwealth Energy Corporation, a California corporation ("Commonwealth"), and Calpine Power Services Company, a California corporation ("Calpine"), and sets forth the terms and conditions for the purchase and sale of power from certain electrical generating power plants located within "The Geysers" Known Geothermal Resource Area in Sonoma and Lake Counties, California, which is powered by geothermal steam (said plants are commonly known collectively as the "Geysers Units"). RECITALS A. The electricity generated from certain units at the Geysers is classified as in-state renewable electricity generation technology within the meaning of the California Public Utilities Code Section 383.5(a)(1) ("Renewable Energy") because the fuel source for the units is geothermal steam. Commonwealth wants its total electric energy portfolio to be Renewable Energy. Accordingly, Commonwealth desires to purchase energy generated Geysers Units which is certified to be Renewable Energy and therefore is eligible to be matched with retail customers to be eligible for the receipt of funds from the Consumer Credit program administered by the California Energy Commission ("CEC"). The Geysers Units are controlled and operated by affiliates of Calpine, and Calpine has the right to sell energy generated at the Geysers Units. B. Commonwealth and Calpine have negotiated the terms, provisions, covenants and conditions for a power purchase agreement, and wish to reduce their agreement to writing. NOW, THEREFORE, the parties agree as set forth below. 1. DEFINITIONS. The following terms when used in this Agreement or in attachments to this Agreement with initial capitalized letters or all capitalized letters, as applicable, shall have the meanings set forth below in this Section 1. The definitions are equally applicable to both the singular and plural forms of the terms defined. 1.1 Day. "Day" or "day" means a calendar day, beginning and ending at twelve o'clock midnight. 1.2 Delivery Points. "Delivery Points" means the electric energy delivery points identified in Schedule III hereto. 1.3 Green Tickets. "Green Tickets" means the certification, document or other identification supplied by Calpine's Scheduling Coordinator or other authorized person that indicates that a unit of electric energy was produced by an in-state renewable electricity generation source in connection with which application may be made for credit or reimbursement from the CEC's Customer Credit Sub-account. 1.4 ISO. "ISO" means the California Independent System Operator. 1.5 Participating Buyer. "Participating Buyer shall have the meaning provided in Appendix A to the ISO Tariff as amended from time to time. The current ISO Tariff definition is: a Direct Access End-User or a wholesale buyer of energy or ancillary services through Scheduling Coordinators. 1.6 Participating Generator. "Participating Generator shall have the meaning provided in Appendix A to the ISO Tariff as amended from time to time. The current ISO Tariff definition is: a generator or other seller of energy or ancillary services through a Scheduling Coordinator over the ISO Controlled Grid and which has undertaken to be bound by the terms of the ISO Tariff. 1.7 PG&E. "PG&E" means Pacific Gas and Electric Company. -1- 3 1.8 Renewable Energy. "Renewable Energy" shall have the meaning set forth in Recital A. 1.9 Scheduling Coordinator. "Scheduling Coordinator" shall have the meaning provided in Appendix A to the ISO Tariff as amended from time to time. The current ISO Tariff definition is: an entity certified by the ISO for the purposes of undertaking the functions specified in Section 2.2.6 of the ISO Tariff. 1.10 Commonwealth Analyst. "Commonwealth Analyst" shall have the meaning provided in Section 11.1. 1.11 Commonwealth Operator. "Commonwealth Operator" shall have the meaning provided in Section 13.1. 1.12 Commonwealth Scheduler. "Commonwealth Scheduler" shall have the meaning provided in Section 13.1. 1.13 Uncontrollable Force. "Uncontrollable Force" shall have the meaning as provided in Section 16. 1.14 WSCC. "WSCC" means the Western Systems Coordinating Council. 2. CONTRACT TERM. The term of this Agreement shall commence at 0001 hour on the date that is the later of (i) the 7th day of May, 1999 or (ii) the first day after the day Calpine's affiliates complete their acquisition of the Geysers Units, and such term shall continue until the hour ending 2400 on June 30, 2002. 3. COMMONWEALTH PURCHASE OBLIGATIONS. Commencing on the first minute of the term and continuing during the term of this Agreement, Calpine shall deliver to Commonwealth (at various Delivery Points in accordance with Section 6) electric energy in the amounts set forth in Section 4, and Commonwealth shall accept delivery of such electric energy at the Delivery Points and shall pay Calpine for such electric energy at the rates set forth in Section 5. 4. QUANTITY OF POWER. Unless otherwise agreed to by the parties from time to time in writing, during each hour of each day during the term hereof, Calpine shall deliver and Commonwealth shall purchase the following amounts of electric energy: [CONFIDENTIAL TREATMENT REQUESTED]* The parties further agree to implement such procedures whereby from time to time at the election of Commonwealth, in its sole discretion, Commonwealth may request delivery of electric energy in amounts greater than the foregoing, and Calpine, in its sole discretion, may agree to deliver such greater amounts. 5. PRICE CHARGED FOR POWER. Commonwealth shall pay Calpine the following amounts for the electric energy delivered hereunder: [CONFIDENTIAL TREATMENT REQUESTED]* 6. DELIVERY POINTS: TITLE TRANSFER: INDEMNITY. - -------- * The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Rule 406. -2- 4 6.1 Delivery Points. Calpine shall cause electric energy sold hereunder to be delivered to any one or more of the Delivery Points in accordance with Section 10. The specific Delivery Points to be used at any given time and from time to time shall be determined by Calpine in its sole discretion. 6.2 Title Transfer and Indemnity. As between the parties, Calpine shall be deemed to be in exclusive control (and responsible for any damages or injury caused thereby) of electric energy prior to delivery to the Delivery Points, and Commonwealth shall be deemed to be in exclusive control (and responsible for any damages or injury caused thereby) of electric energy at and from the Delivery Points. Title to and risk of loss related to electric energy shall transfer from Calpine to Commonwealth upon delivery thereof at the Delivery Points. Each party (a "First Party") shall indemnify, defend and hold harmless the other party from any and all claims, actions, damages, losses and other liabilities involving personal injury or property damage arising out of or relating to any act or incident involving electric energy on the First Party's side of the Delivery Points. 7. SOURCE OF POWER. Calpine shall provide Commonwealth with electric energy produced from the Geyers Units, except that Commonwealth and Calpine acknowledge and agree that since the ISO requires scheduled deliveries of electric energy to be deemed delivered with an imbalance process mandating the purchase of electric energy from the ISO to account for Under-deliveries of scheduled electric energy, Calpine may substitute imbalance energy provided by the ISO for scheduled energy Calpine fails to deliver hereunder, and any such imbalance energy so delivered shall be deemed to satisfy Calpine's obligations hereunder. Calpine shall provide Commonwealth with Green Tickets in respect of any such imbalance energy, at no additional charge to Commonwealth. 8. OPERATION OF THE GEYSERS UNITS. Calpine will cause the delivery of all electric energy hereunder in a manner consistent with PG&E transmission interconnection requirements, as well as ISO, WSCC and North America Electric Reliability Council requirements. 9. LIMITATION ON DAMAGES. If either party fails to perform under this Agreement, and such failure is not otherwise excused under the provisions of Section 16, damages shall be limited as follows: 9.1 If Commonwealth fails to purchase any quantity of electric energy hereunder, Calpine's sole remedy shall be to receive from Commonwealth a payment equal to the amount. If any, by which the aggregate purchase price for such quantity here under exceeds the aggregate amount actually received by Calpine from any alternative buyer of such quantity of electric energy. Calpine shall exercise good faith efforts to notify Commonwealth before entering into such alternative sale and to sell such power at the highest reasonable price available. 9.2 If Calpine is unable during any period to deliver the required amount of electric energy from the Geysers Units hereunder, and such performance is not rectified by the ISOs provision of imbalance energy and Calpine's supply of Green Tickets as described in Section 7 above, then Calpine's exclusive obligations and liabilities, and Commonwealth's exclusive remedies, shall be at Commonwealth's election, to obtain an alternate supply for such quantity of energy (either with alternate Renewable Energy or non-Renewable Energy) to cover such quantity of electric energy not delivered by Calpine, and in the event that the purchase price for such alternative electric energy is greater than the contract price for such electric energy in this Agreement. Calpine shall reimburse Commonwealth for such difference. In any such event, Commonwealth shall exercise good faith efforts to notify Calpine before purchasing electric energy to replace that which Calpine failed to supply and to purchase such alternative electric energy at the lowest cost available, subject to ensuring that the alternative power satisfies Commonwealth's reliability, quality and delivery requirements. 9.3 Both Commonwealth and Calpine acknowledge and agree that any remedies and/or damages that might otherwise be available to either of them arising from an unexcused failure to purchase or deliver electric energy hereunder, in addition to the remedies expressly set forth in Section 9.1 and 9.2, are waived, and that Section 9.1 and 9.2 are the exclusive remedies and damages of the parties arising out of or in -3- 5 connection with nay such unexcused failure. Without limiting the foregoing, neither party shall in any event be liable to the other party for any indirect, consequential or punitive damages. 9.4 If Commonwealth is in default or any of its obligations hereunder (including its obligation to maintain a Letter of Credit under Section 11.6), then Calpine may immediately cease, and shall be excused from, delivering any further electric energy hereunder. 10. ISO CHARGES. 10.1 The parties understand that the Geysers Units and all associated transmission facilities are located in the control area of the ISO. Calpine and Commonwealth shall carry out all their activities hereunder in compliance with all applicable ISO tariffs, protocols and procedures, Calpine in its capacity as a Participating Generator, and Commonwealth in its capacity as a Participating Buyer. Calpine (or its affiliates) will be responsible for any requirements that the ISO imposes on the Geysers Units, including metering enhancements and telecommunications. 10.2 Calpine will be solely responsible for arranging, managing and paying all costs necessary for Calpine to deliver electric energy to the Delivery Points (including all ISO charging or Scheduling Coordinator charges incurred by Calpine in scheduling the sale of power to Commonwealth at the Delivery Points), and Commonwealth shall be responsible for arranging, managing and paying all costs necessary for Commonwealth to accept electric energy at the Delivery Points (including all Scheduling Coordinator charges, and all ISO charges, including charges for transmission, grid management, line losses and similar charges). 10.3 Calpine shall be responsible for any and all charges or penalties imposed on or associated with imbalances in the delivery of electric power which are caused by Calpine. Commonwealth shall be responsible for any and all charges or penalties imposed on or associated with imbalances in the delivery of electric power which are caused by Commonwealth. The parties will cooperate to minimize or avoid any such imbalance charges. 11. BILLING AND PAYMENT. 11.1 Monthly Bills. On or before the fifteenth (15th) day of each calendar month Calpine shall render to Commonwealth a bill for power delivery to Commonwealth during the prior calendar month, the amount of which will be calculated at the price set forth in Section 5. A bill shall be deemed to have been rendered if sent via first class mail, fax or overnight courier to the Commonwealth Power System Analyst ("Commonwealth Analyst"), address as provided in the contact information attached as Schedule I. Such bill shall include supporting detail showing the amount of power supplied during all hours on a daily basis, and the price for such power for all hours on a daily basis. 11.2 Estimate. If charges under this Agreement cannot be determined accurately for preparing a monthly bill, Calpine may use its best estimate in preparing the monthly bill and such estimated monthly bill shall be paid by Commonwealth in accordance with Section 11.3. Calpine's estimate will be based on reasonably available information including, but not limited to, records of historical usage, physical condition of the metering facility, and available meter readings. When final and complete information becomes available and the estimated charges can be determined more accurately, Calpine shall promptly prepare and submit, to the extent necessary, an adjusted monthly bill to Commonwealth. Any additional payment or refund, including any applicable interest at the rate provided in Section 11.4. shall be made as appropriate. 11.3 Payment. Commonwealth shall pay all bills rendered pursuant to this Section by separate check or electronic transfer within fifteen (15) days after such bills are received by Commonwealth. 11.4 Interest. Interest shall accrue on any portion of the bill for which payment has not been received by the due date specified in Section 11.3, prorated by calendar day. Such interest will accrue at an -4- 6 annual rate of interest equal to the prime rate of interest quoted by Nations Bank from time to time, plus two percent (2%), or the maximum rate of interest allowed under applicable law, whichever is less. 11.5 Disputed Bills. If any portion of any bill is disputed by Commonwealth in good faith pursuant to Section 26, Commonwealth shall pay to Calpine the undisputed portion of the bill by the due date specified in Section 11.3. If the protested portion of the bill is found to have been correct, Commonwealth shall pay to Calpine the disputed portion which was withheld from payment plus interest, at the rate specified in Section 11.4, prorated by calendar day, for the period from the day such disputed payment was due pursuant to Section 11.3 to the day such payment is received by Calpine. 11.6 Letter of Credit. As security for its obligations under this Agreement, Commonwealth shall obtain and maintain during the term hereof for the benefit of Calpine a Letter of Credit (the "LOC") in the form of Exhibit A hereto in the applicable amounts specified by Schedule IV, as amended with respect to the amounts, and at the dates, as specified by Schedule IV. Commonwealth shall cause the LOC to be issued by a bank reasonably acceptable to Calpine and delivered to Calpine five working days before the term of this Agreement commences under Section 2. Calpine may draw down on the LOC at any time and from time to time in accordance with the terms thereof in the event that (i) Commonwealth is in default of any of its obligations under this Agreement or (ii) if at any time during the term of this Agreement, Commonwealth has failed to cause the LOC to be renewed, maintained or extended as provided herein and in a manner such that there is never less than ten days remaining prior to the expiration date thereof. In the event that Calpine makes any draw under the LOC, Commonwealth shall cause the principal amount of the LOC to be increased to the applicable amount specified in Section IV or otherwise re-issued to the applicable amount specified in Schedule IV, within five days after the date of such draw. 11.7 ISO Accounting. The accounting of actual deliveries of power from Calpine to Commonwealth pursuant to this Agreement shall be based upon final ISO actual deliveries as provided by Commonwealth's and Calpine's respective ISO Schedule Coordinators. 11.8 Taxes. Commonwealth shall be responsible for and shall pay, caused to be paid, or reimburse Calpine if Calpine is required to pay, any and all sales, use, excise, energy or other taxes, assessments or other similar governmental charges, whether federal, state or local, applicable to the sale or purchase of electric energy and the other transactions hereunder. 12. AUDITS. Each of Commonwealth and Calpine shall have the right to audit and to examine any cost, payment, settlement or supporting documentation related to any billing associated with any item set forth in this Agreement. Any such audit shall be at the requesting party's expense and undertaken by such party or its representatives at reasonable times and in conformance with generally accepted auditing standards. The right to audit a bill shall extend for a period of twelve (12) months following the receipt of the bill and shall survive the termination of this Agreement. Each party shall retain all necessary records or documentation for the entire length of the audit period and shall take all steps reasonably available to assure the confidentiality of the other party's accounting records and supporting documents. Any bill as to which no exception has been taken within twelve (12) months after receipt by the party receiving the same shall conclusively be true and correct. 13. ROUTINE NOTIFICATION TO BE REGULARLY PROVIDED BY CALPINE TO COMMONWEALTH. Calpine shall provide notification to Commonwealth as set forth in this Section 13. 13.1 Weekly Notification. On a weekly basis, Calpine will inform the Commonwealth Power System Scheduler ("Commonwealth Scheduler") of Calpine's plans regarding electric energy deliveries hereunder during the following calendar week (i.e., commencing on the following Monday). The information shall include; (1) specification of those days upon which generation is expected to take place; (2) the expected power to be delivered for Commonwealth in MW reported for each hour of the day; and (3) any special circumstance, such as testing, outages, etc., that might impact the delivery of power to Commonwealth at the Delivery Points. The information described in this Section shall be provided to the Commonwealth Scheduler by Calpine on the Thursday prior to the affected week and shall be transmitted -5- 7 via facsimile, or electronically, the receipt of which shall be confirmed by phone. The contact information for the Commonwealth Scheduler is provided in Scheduler I. 13.2 Prescheduling. Prescheduled days are those days upon which the Commonwealth Scheduler plans for the resources and generation necessary to serve the Commonwealth load for a day or number of days subsequent to the day of prescheduling. The following is the current typical prescheduling pattern followed by Commonwealth Schedulers: Monday is the prescheduling day for Tuesday, Tuesday is the prescheduling day for Wednesday, Wednesday is the prescheduling day for Thursday, Thursday is the prescheduling day for Friday and Saturday, and Friday is the prescheduling day for Sunday and Monday. The pattern will change periodically to accommodate WSCC designated holidays, and may change due to changes in ISO scheduling practices or scheduling protocols. No later than 0600, Pacific time, Calpine will provide the Commonwealth Scheduler with a schedule or schedules of hourly expected power to be delivered to Commonwealth for the day or days being prescheduled. A sample schedule is included in Schedule II. Calpine shall transmit the information described in this Section to the Commonwealth Scheduler via facsimile, or electronically, the receipt of which shall be confirmed by phone. The contact information for the Commonwealth Scheduler is provider in Schedule I. Both Commonwealth and Calpine will submit daily schedules to their respective ISO Scheduling Coordinators in a manner such that daily schedules are included in the ISO's Day-Ahead Market for bilateral transactions. 13.3 Dispatching. Calpine shall provide to the Commonwealth Power Systems Operator ("Commonwealth Operator") notification of variations from the prescheduled power provided pursuant to Section 13.2 to the extent notice of such variation is provided to the ISO in accordance with ISO tariff and scheduling protocols. The contact information for the Commonwealth Operator is provided in Schedule I. 13.4 Revisions. The parties will modify the deadlines for submission of the various schedules provided for in this Section 13 to the extent such modification becomes necessary as a result of future changes to the ISO tariff and to Calpine's interconnection agreements and arrangements with PG&E. 14. NOTICES. 14.1 Notice of Routing Operational Issues. Any routine operational issue shall be communicated to the applicable individuals listed in the contact list provided as Schedule I. 14.2 Notice Of Issues Which Are Not Routine Operational Issues. Notification of an issue which is not and does not relate to a routine operational issue should be provided in writing and shall be deemed properly served, given or made if delivered in person or sent by facsimile, or sent by registered or certified mail, addressed as set forth below: (i) If to Commonwealth: Commonwealth Energy Corporation c/o Chief Executive Officer 15991 Redhill Avenue, Suite 201 Tustin, California 92780 FAX (714) 258-0480 A copy should be sent to the Commonwealth contact persons listed in Attachment L. (ii) If to Calpine: Calpine Corporation Attn: General Counsel 50 West San Fernando Street Fifth Floor San Jose, CA 95113 Fax: (408) 975-4648 A copy should be sent to the Calpine contact persons listed in Scheduler I. -6- 8 Any party may designate different persons or different addresses for the giving of notices for purposes of this Agreement by giving the other party written notice of the new address or different designee in the manner set forth in this Section. 15. THE RIGHTS OF THE PARTIES AT TERMINATION. On the date of termination of this Agreement, all rights to services provided under this agreement and any rates the incorporate this Agreement shall cease, and neither party shall claim or assert any continuing right to such services under this Agreement. However, termination of this Agreement shall not after rights and obligations incurred but not satisfied or any obligation to pay moneys for transactions occurring prior to determination of this Agreement. 16. UNCONTROLLABLE FORCE. Neither party shall be considered to be in default in the performance of any of its obligations under this Agreement when a failure of performance, including any temporary curtailment or interruption of service by Calpine, shall be due to an Uncontrollable Force. An Uncontrollable Force is any act, event or cause beyond the reasonable control of a party which adversely affects the ability of that party to perform, which could not reasonably have been avoided by such party through the exercise of due diligence, and which such party has been unable to avoid by the exercise of due diligence, including failure of or threat of failure of facilities (including breakage or accident to, or the necessity for making reasonable repairs to or reconditioning, the Geyser Units and related equipment, wells, machinery, equipment or lines of pipe), flood, earthquake, storm, fire, pestilence, lightning or other natural catastrophes, epidemic, famine, war, riot, civil disturbance or disobedience, labor dispute, strike, labor or material shortage, sabotage, government priorities, restraint by court order or public authority, and after a good faith effort by the affected party to so obtain, action or nonaction by inability to obtain necessary authorizations or approvals from any governmental agency or authority. Additionally, Uncontrollable Force shall in any event include shortfalls in steam production from the wells providing steam to the Geyser Units, and neither Calpine nor its affiliates shall have any obligation here under to rework or redrill any existing steam wells or to drill new steam wells to maintain an adequate quantity of steam to maintain any level of electric energy output. In the event a party is rendered unable to fulfill any of its obligations under this Agreement by reason of an Uncontrollable Force, such party shall give prompt written notice of such fact to the other party. A party rendered unable to fulfill any of its obligations under this Agreement by reason of an Uncontrollable Force shall exercise due diligence to remove such inability with all reasonable dispatch. Nothing contained herein shall be construed so as to require a party to settle any strike or labor dispute in which it may be involved nor to relieve a party from an obligation to pay amounts otherwise owned pursuant to this Agreement. 17. EFFECT OF SECTION HEADINGS. Section headings appearing in this Agreement are inserted for convenience and only shall not be construed as interpretations of text. 18. NO DEDICATION OF FACILITIES. Any undertaking by either party to the other party under this Agreement shall not constitute the dedication of the electrical system, facilities, or any portion thereof, of that party to the public or to the other party's electronic system, nor affect the status of that party as an independent company or entity. Any such undertaking by the parties under this Agreement shall automatically cease upon the termination of this agreement. 19. RELATIONSHIP OF PARTIES. The covenants, obligations and liabilities of Commonwealth and Calpine as set forth in this Agreement are intended to be several and nothing contained in this Agreement shall ever be construed to create an association, joint venture, trust or partnership, or to impose a trust or partnership covenant, obligation or liability on either party. Neither Commonwealth nor Calpine shall be deemed to be under the control of or to control the other. Neither Commonwealth nor Calpine shall be deemed to be the agent of or have a right to power to bind the other without the express written consent of the other. Each of Commonwealth and Calpine shall be responsible only for its own obligations as provided in this Agreement. 20. ASSIGNMENT. Neither party shall assign this Agreement without the prior written consent of the other party, except that (i) such consent in the case of a proposed assignment by either party to an -7- 9 affiliate shall not be unreasonably withheld by either party and (ii) such consent shall not be required in the case of any assignment by Calpine to a lender or other party providing Calpine or its affiliates with financing. 21. NO THIRD PARTY BENEFICIARIES. This Agreement is for the benefit of Commonwealth and Calpine. Nothing in this Agreement whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement upon any person or entity other than Commonwealth and Calpine and each of their respective successors and assigns. Furthermore, nothing in this Agreement is intended to relieve or discharge any obligation of liability owned to either Commonwealth or Calpine by any person or entity not a party to this agreement, nor shall any provision give any person or entity not a party to this Agreement any right of subrogation or action against either Commonwealth or Calpine. 22. GOVERNING LAW. The validity, interpretation and effect of this Agreement shall be governed exclusively by the laws of the State of California 23. MEANING OF CERTAIN WORDS. Unless otherwise stated, any reference in this Agreement to a Section, Schedule, Exhibit or similar term refers to a Section, Schedule, Exhibit or similar term of this Agreement, as the case may be. Unless otherwise stated, a reference to a Section includes that Section and all of its Subsections. The words "include," "includes" and "including" when used in this Agreement shall be deemed in each case to be followed by the words "without limitation." 24. ENTIRE AGREEMENT, MODIFICATION AND WAIVER. This Agreement constitutes the entire understanding and agreement between Commonwealth and Calpine with respect to the subject matter hereof, and supersedes all negotiations, representations, warrantees, commitments, offers, contracts and writings prior to the execution date of this agreement, written or oral. Now waiver, supplement, modification, or amendment of any provision of this Agreement shall be binding unless specifically made in writing and duly executed by both Commonwealth and Calpine. 25. DUE AUTHORIZATION. Each of Commonwealth and Calpine represents to the pother that the execution of this agreement by such party has been duly authorized by all requisite corporate, partnership, Board or other applicable authority as required for such party to enter into this Agreement. 26. DISPUTE RESOLUTION. should a dispute arise between the parties as to the interpretation or enforcement of this Agreement either party may, by written notice to the other, require that a member of senior management of each of the parties (a Corporate officer or higher from Commonwealth, and a Vice President of higher from Calpine) meet and attempt in good faith to resolve the dispute within a period of twenty (20) days following receipt of the notice requesting such resolution. If the senior management of the parties cannot resolve the dispute within such twenty (20) day period, either party may elect within ten (10) days of the end of such initial twenty ()20) day period, by written notice to the other party, to submit such dispute to final resolution by arbitration before a single arbitrator to be appointed by the San Francisco office of the American Arbitration Association ("AAA") in accordance with the commercial arbitration rules of the AAA. Discovery shall be permitted in any such arbitration, but may be permitted in the discretion of the appointed arbitrator. 27. DEFAULT BANKRUPTCY. Should either party default in the performance of its obligations under this Agreement and fail to remedy such default within a period of fifteen (15) days following receipt of a written notice of such default from the other party (or fail to commence and thereafter diligently pursue the cure of a default not reasonably susceptible to cure within such fifteen (15) day period), then, in addition to any other remedies, the aggrieved party may terminate this Agreement by written notice of termination to the party in default. Should either party become Bankrupt, the other party may terminate this Agreement by written notice of termination to the Bankrupt party. For purposes hereof, a party shall be deemed "Bankrupt" if such party (i) makes an assignment or any general arrangement for the benefit of creditors; (ii) files a petition or otherwise commences, authorizes or acquiesces in the commencement of a proceeding or cause of action under any bankruptcy or similar law for the protection of creditors, or has such petition filed against it and such petition is not withdrawn or dismissed for sixty (60) -8- 10 days after such filing, (iii) otherwise becomes bankrupt or insolvent (however evidenced) under any bankruptcy or insolvency related law, or (iv) is unable to pay it debts as they fall due. 28. PRESS RELEASES; PUBLIC ANNOUNCEMENTS. Each party shall hold as confidential and not disclose to any person (which term shall be broadly considered to include any partnership, corporation company, other entity or individual) without the prior written consent of the other party any information (including, but not limited to, the other parties' name, reference to the Geysers Units, the terms and conditions of this Agreement) regarding this Agreement or the transactions contemplated hereby, except as necessary to carry out the terms and conditions of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the date set forth under their respective signatures. COMMONWEALTH ENERGY CORPORATION Date: 4-27-99 By: /s/ Frederick M. Bloom ----------------------------------- Frederick M. Bloom Title: Chief Executive Officer CALPINE POWER SERVICES COMPANY Date: 4/27/99 By: /s/ Peter Cartwright ----------------------------------- Peter Cartwright Title: President -9- EX-10.2 7 a74807gex10-2.txt EXHIBIT 10.2 1 EXHIBIT 10.2 FIRST AMENDMENT TO POWER PURCHASE AGREEMENT FIRST AMENDMENT TO THE POWER PURCHASE AGREEMENT BETWEEN COMMONWEALTH ENERGY CORPORATION AND CALPINE POWER SERVICES COMPANY FOR POWER FROM THE GEYSERS UNITS 5/07/99 - 6/30/02 2 The above referenced Power Purchase Agreement (PPA) is hereby amended with respect to the following Sections (as to quantity of power sold, price charged for power sold and the amount of the Letter of Credit, all for the period of the PPA in 1999) which replace in entirety the corresponding provisions in the original Power Purchase Agreement: 4. QUANTITY OF POWER. Unless otherwise agreed by the parties from time to time in writing, during each hour of each day during the term hereof, Calpine shall deliver and Commonwealth shall purchase the following amounts of electric energy: [CONFIDENTIAL TREATMENT REQUESTED]* The parties further agree to implement such procedures whereby from time to time at the election of Commonwealth, in its sole discretion, Commonwealth may request delivery of electric energy in amounts greater than the foregoing, and Calpine, in its sole discretion, may agree to deliver such greater amounts. 5. PRICE CHARGED FOR POWER. Commonwealth shall pay Calpine the following amounts for the electric energy delivered hereunder: [CONFIDENTIAL TREATMENT REQUESTED]* - ----------- * The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Rule 406. 3 IN WITNESS WHEREOF, the parties have caused this amendment to the original Power Purchase Agreement to be executed on the date set forth under their respective signatures. COMMONWEALTH ENERGY CORPORATION Date: 4-29-99 By: /s/ Frederick M. Bloom ------------------------------ Frederick M. Bloom Title: Chief Executive Officer CALPINE POWER SERVICES Date: By: /s/ Peter Cartwright ------------------------------ Peter Cartwright Title: President EX-10.3 8 a74807gex10-3.txt EXHIBIT 10.3 1 EXHIBIT 10.3 SECOND AMENDMENT TO POWER PURCHASE AGREEMENT SECOND AMENDMENT TO THE POWER PURCHASE AGREEMENT BETWEEN COMMONWEALTH ENERGY CORPORATION AND CALPINE POWER SERVICES COMPANY FOR POWER FROM THE GEYSERS UNITS 5/07/99 - 6/30/02 (ADDITIONAL 25 MW PURCHASE IN JUNE 1999) 2 The above referenced Power Purchase Agreement (PPA) is hereby amended as of May 28, 1999 with respect to the following Section 4 (as to quantity of power sold) which replaces in entirety the corresponding provisions in the original Power Purchase Agreement: 4. QUANTITY OF POWER. Unless otherwise agreed by the parties from time to time in writing, during each hour of each day during the term hereof, Calpine shall deliver and Commonwealth shall purchase the following amounts of electric energy: [CONFIDENTIAL TREATMENT REQUESTED]* The parties further agree to implement such procedures whereby from time to time at the election of Commonwealth, in its sole discretion, Commonwealth may request delivery of electric energy in amounts greater than the foregoing, and Calpine, in its sole discretion, may agree to deliver such greater amounts. Additionally, the parties agree to add the following Section 11.9 (to address the payment for the purchase of 25 mw of the 100 mw of energy delivered in June, 1999): 11.9 Pre-billing and Payment for 25 mw in June, 1999. The amount of [CONFIDENTIAL TREATMENT REQUESTED]*will be billed by Calpine on June 7, 1999, in advance of the complete delivery of the power for June, 1999. Commonwealth will pay as required under Section 11.3. Failure to pay [CONFIDENTIAL TREATMENT REQUESTED]*by June 22, 1999 will constitute a default of Commonwealth's obligations as referenced in Section 11.6, Letter of Credit. Furthermore, Commonwealth will cause Union Bank to reissue the Letter of Credit by June 4, 1999 with the phrase "as amended from time to time" in Paragraph #4, 1st Line after the word "agreement". All other sections of the original executed agreement (as amended by amendment #1) shall remain unchanged and in full force. - ---------------- * The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Rule 406. 3 IN WITNESS WHEREOF, the parties have caused this amendment #2 to the original Power Purchase Agreement to be executed on the date set forth under their respective signatures. COMMONWEALTH ENERGY CORPORATION Date: May 27, 1999 By: /s/ Frederick M. Bloom -------------------------------- Frederick M. Bloom Title: Chief Executive Officer CALPINE POWER SERVICES Date: May 28, 1999 By:/s/ Jacob M. Rudisill -------------------------------- Jacob M. Rudisill Title: Vice President EX-10.4 9 a74807gex10-4.txt EXHIBIT 10.4 1 EXHIBIT 10.4 LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- LOAN AND SECURITY AGREEMENT BY AND BETWEEN COMMONWEALTH ENERGY CORPORATION, ELECTRICAMERICA, INC. AND ELECTRIC.COM, INC. AND COAST BUSINESS CREDIT, A DIVISION OF SOUTHERN PACIFIC BANK DATED AS OF JUNE 28, 2000 - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE - ----------------------------------------------------------------------------------- 1. DEFINITIONS......................................................... 1 2. CREDIT FACILITIES................................................... 7 2.1 Loans........................................................ 7 - ----------------------------------------------------------------------------------- 3. INTEREST AND FEES................................................... 7 3.1 Interest..................................................... 7 3.2 Fees......................................................... 7 - ----------------------------------------------------------------------------------- 4. SECURITY INTEREST................................................... 7 5. CONDITIONS PRECEDENT................................................ 7 5.1 Status of Accounts at Closing................................ 8 5.2 Minimum Availability......................................... 8 5.3 Landlord Waiver.............................................. 8 5.4 Real Property................................................ 8 5.5 Executed Agreement........................................... 8 5.6 Opinion of Borrower's Counsel................................ 8 5.7 Priority of Coast's Liens.................................... 8 5.8 Insurance.................................................... 8 5.9 Borrower's Existence......................................... 9 5.10 Organizational Documents..................................... 9 5.11 Taxes........................................................ 9 5.12 Due Diligence................................................ 9 5.13 Other Documents and Agreements............................... 9 - ----------------------------------------------------------------------------------- 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.......................................................... 9 6.1 Existence and Authority...................................... 9 6.2 Name; Trade Names and Styles................................. 10 6.3 Place of Business; Location of Collateral.................... 10 6.4 Title to Collateral, Permitted Liens......................... 10 6.5 Maintenance of Collateral.................................... 10 6.6 Books and Records............................................ 10 6.7 Financial Condition, Statements and Reports.................. 11 6.8 Tax Returns and Payments; Pension Contributions.............. 11 6.9 Compliance with Law.......................................... 11 6.10 Litigation................................................... 11 6.11 Use of Proceeds.............................................. 11 - ----------------------------------------------------------------------------------- 7. RECEIVABLES and COLLECTIONS......................................... 12 7.1 Representations Relating to Receivables and Collections...... 12 7.2 Representations Relating to Documents and Legal Compliance... 12 7.3 Schedules and Documents relating to Receivables.............. 12 7.4 Collection of Receivables.................................... 12 7.5 Remittance of Proceeds....................................... 13 7.6 Verification................................................. 13 7.7 No Liability................................................. 13 - ----------------------------------------------------------------------------------- 8. ADDITIONAL DUTIES OF THE BORROWER................................... 13
-i- 3 TABLE OF CONTENTS (continued)
PAGE - ----------------------------------------------------------------------------------- 8.1 Financial and Other Covenants................................ 13 8.2 Insurance.................................................... 13 8.3 Reports...................................................... 14 8.4 Access to Collateral, Books and Records...................... 14 8.5 Negative Covenants........................................... 14 8.6 Litigation Cooperation....................................... 15 8.7 Further Assurances........................................... 15 - ----------------------------------------------------------------------------------- 9. TERM................................................................ 15 9.1 Maturity Date................................................ 15 9.2 Early Termination............................................ 16 9.3 Payment of Obligations....................................... 16 - ----------------------------------------------------------------------------------- 10. EVENTS OF DEFAULT AND REMEDIES...................................... 16 10.1 Events of Default............................................ 16 10.2 Remedies..................................................... 18 10.3 Standards for Determining Commercial Reasonableness.......... 20 10.4 Power of Attorney............................................ 20 10.5 Application of Proceeds...................................... 22 10.6 Remedies Cumulative.......................................... 22 - ----------------------------------------------------------------------------------- 11. GENERAL PROVISIONS.................................................. 22 11.1 Interest Computation......................................... 22 11.2 Application of Payments...................................... 23 11.3 Charges to Accounts.......................................... 23 11.4 Monthly Accountings.......................................... 23 11.5 Notices...................................................... 23 11.6 Severability................................................. 23 11.7 Integration.................................................. 23 11.8 Waivers...................................................... 23 11.9 No Liability for Ordinary Negligence......................... 24 11.10 Amendment.................................................... 24 11.11 Time of Essence.............................................. 24 11.12 Attorneys Fees, Costs and Charges............................ 24 11.13 Benefit of Agreement......................................... 24 11.14 Publicity.................................................... 25 11.15 Paragraph Headings, Construction............................. 25 11.16 Governing Law; Jurisdiction; Venue........................... 25
-ii- 4 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT Borrower: Commonwealth Energy Corporation Address: 15901 Red Hill, Suite 100 Tustin, California 92870 Borrower: electricAMERICA, Inc. Address: 15901 Red Hill, Suite 100 Tustin, California 92870 Borrower: electric.com, Inc. Address: 15901 Red Hill, Suite 100 Tustin, California 92870 Date: June 28, 2000 THIS LOAN AND SECURITY AGREEMENT ("Agreement") is entered into on the above date between COAST BUSINESS CREDIT, a division of Southern Pacific Bank ("Coast"), a California corporation, with offices at 12121 Wilshire Boulevard, Suite 1400, Los Angeles, California 90025, and the borrower(s) named above Jointly and severally, the "Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall for all purposes be deemed to be a part of this Agreement, and the same is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 1 below.) 1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Account Debtor" means the obligor on a Receivable or General Intangible. "Affiliate" means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. "Audit" means to inspect, audit and copy Borrower's books and records and the Collateral. "Borrower" has the meaning set forth in the introduction to this Agreement. "Borrower's Address" has the meaning set forth in the introduction to this Agreement. "Business Day" means a day on which Coast is open for business. "Change of Control" shall be deemed to have occurred at such time as a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) (other than the current holders of the ownership interests in any Borrower) becomes the "beneficial owner" (as defined in Rule l3d-3 under the Securities Exchange Act of 1934), directly or indirectly, as a result of any single transaction, of more than twenty percent (20%) of the total voting power of all classes of stock or other ownership interests then outstanding of any Borrower normally entitled to vote in the election of directors or analogous governing body. "Closing Date" means the date of the initial funding under this Agreement. "Coast" has the meaning set forth in the introduction to this Agreement. 1 5 "Code" means the Uniform Commercial Code as adopted and in effect in the State of California from time to time. "Collateral" has the meaning set forth in Section 4 hereof. "Collection Loans" means the Loans described in Section 2(a) of the Schedule. "Collections" means the amount of Dollars actually received by Borrower in immediately available funds without any claim of off-set, set-off, credit or reduction or deduction of any kind or nature. "Consolidated Tangible Net Worth" means consolidated Borrower's equity plus subordinated debt otherwise permitted hereunder, less, goodwill, patents, trademarks, copyrights, franchises, formulas, leasehold interests, leasehold improvements, non-compete agreements, engineering plans, deferred tax benefits, organization costs, prepaid items, and any other assets of Borrower that would be treated as intangible assets on Borrower's balance sheet prepared in accordance with GAAP. "Credit Limit" means the maximum amount of Loans that Coast may make to Borrower pursuant to the amounts and percentages shown on the Schedule. "Debt" means, as of the date of determination, the sum, but without duplication, of any and all of Borrower's: (i) indebtedness heretofore or hereafter created, issued, incurred or assumed by such Borrower (directly or indirectly) for or in respect of money borrowed: (ii) obligations for the deferred purchase price of property or services. "Debt Service Coverage Ratio" means the ratio, in any fiscal quarter, whose numerator is EBITDA minus cash capital expenditures minus cash tax expenses, and whose denominator is all principal payments on Debt plus all interest payments on Debt plus all capital lease payments. "Default" means any event which with notice or passage of time or both, would constitute an Event of Default. "Deposit Account" has the meaning set forth in Section 9105 of the Code. "Dollars or $" means United States dollars. "Early Termination Fee" means the amount set forth on the Schedule that Borrower must pay Coast if this Agreement is terminated by Borrower or Coast pursuant to Section 9.2 hereof. "EBIT" means, in any fiscal period, Borrower's consolidated net income or net loss (other than extraordinary or non-recurring gains of Borrower for such period), plus (i) the amount of all interest expense and income tax expense of Borrower for such period, on a consolidated basis, and plus or minus (as the case may be) (ii) any other non-cash charges which have been added or subtracted, as the case may be, in calculating Borrower's consolidated net income or net loss for such period. "EBITDA" means, in any fiscal period, Borrower's consolidated net income or net loss (other than extraordinary or non-recurring gains of Borrower for such period), plus (i) the amount of all interest expense, income tax expense, depreciation expense and amortization expense of Borrower for such period, on a consolidated basis, and plus or minus (as the case may be) (ii) any other non-cash charges which have been added or subtracted, as the case may be, in calculating Borrower's consolidated net income or net loss for such period. "Eligible Collections" means Collections received in the ordinary course of Borrower's business from the sale of goods or rendition of services, which Coast, in its sole judgment, shall deem eligible for borrowing, based on such considerations as Coast may from time to time deem appropriate. Eligible Collections may include Green-e rebates unless excluded pursuant to Section 8.1 paragraphs 1 and/or 13 of the Schedule but shall not include Customer deposits and other non-recurring revenue. 2 6 "Equipment" means all of Borrower's present and hereafter acquired machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and other goods (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located. "Event of Default" means any of the events set forth in Section 10.1 of this Agreement. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangible" means all general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, Deposit Accounts, investment property, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against Coast, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). "Inventory" means all of Borrower's now owned and hereafter acquired goods, merchandise or other personal property, wherever located, to be furnished under any contract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit, and including without limitation all farm products), and all materials and supplies of every kind, nature and description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or furnishing of such goods, merchandise or other personal property, and all warehouse receipts, documents of title and other documents representing any of the foregoing. "Investment Property" has the meaning set forth in Section 9115 of the Code as in effect as of the date hereof. "Loan Documents" means this Agreement, the agreements and documents listed on Section 5 of the Schedule, and any other agreement, instrument or document executed in connection herewith or therewith. "Loans" has the meaning set forth in Section 2.1 hereof "Material Adverse Effect" means a material adverse effect on (i) the business, assets, condition (financial or otherwise) or results of operations of Borrower or any subsidiary of Borrower or any guarantor of any of the Obligations, (ii) the ability of Borrower or any guarantor of any of the Obligations to perform its obligations under this Agreement (including, without limitation, repayment of the Obligations as they come due) or (iii) the validity or enforceability of this Agreement or any other agreement or document entered into by any party in connection herewith, or the rights or remedies of Coast hereunder or thereunder. "Maturity Date" means the date that this Agreement shall cease to be effective, as set forth on the Schedule, subject to the provisions of Section 9.1 and 9.2 hereof. "Maximum Dollar Amount" has the meaning set forth in Section 2 of the Schedule. "Minimum Monthly Interest" has the meaning set forth in Section 3 of the Schedule. 3 7 "Net Worth" means Borrower's equity plus subordinated debt otherwise permitted hereunder. "Obligations" means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Coast, whether evidenced by this Agreement or any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Coast in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorneys' fees (including attorneys' fees and expenses incurred in bankruptcy), expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agreement between Borrower and Coast. "Permitted Liens" means the following: (a) purchase money security interests in specific items of Equipment; (b) leases of specific items of Equipment; (c) liens for taxes not yet payable; (d) additional security interests and liens consented to in writing by Coast, which consent shall not be unreasonably withheld; (e) security interests being terminated substantially concurrently with this Agreement; (f) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent; (g) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (a) or (b) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; or (h) liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods. Coast will have the right to require, as a condition to its consent under subparagraph (d) above, that the holder of the additional security interest or lien sign an intercreditor agreement on Coast's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of Coast, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement, "Person" means any individual, sole proprietorship, general partnership, limited partnership, limited liability partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. "Prime Rate" means the actual "Reference Rate" or the substitute therefor of the Bank of America NT & SA whether or not that rate is the lowest interest rate charged by said bank. If the Prime Rate, as defined, is unavailable, "Prime Rate" shall mean the highest of the prime rates published in the Wall Street Journal on the first business day of the applicable month, as the base rate on corporate loans at large U.S. money center commercial banks. 4 8 "Real Property" means Borrower's real property located in 15901 Red Hill, Tustin, California 92870. "Receivables" means all of Borrower's now owned and hereafter acquired accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, documents, securities accounts, security entitlements, commodity contracts, commodity accounts, investment property and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party. "Renewal Date" shall mean the Maturity Date if this Agreement is renewed pursuant to Section 9.1 hereof, and each anniversary thereafter that this Agreement is renewed pursuant to Section 9.1 hereof "Renewal Fee" means the fee that Borrower must pay Coast upon renewal of this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the Schedule. "Solvent" means, with respect to any Person on a Coast Business Credit particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Tangible Net Worth" means Borrower's equity plus subordinated debt otherwise permitted hereunder, less, goodwill, patents, trademarks, copyrights, franchises, formulas, lease hold interests, leasehold improvements, non-compete agreements, engineering plans, deferred tax benefits, organization costs, prepaid items, and any other assets of Borrower that would be treated as intangible assets on Borrower's balance sheet prepared in accordance with GAAP. "Term" means the period of time between the Closing Date and Maturity Date of this Agreement. "Other Terms" All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with GAAP. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 2. CREDIT FACILITIES. 2.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts and in percentages to be determined by Coast in its good faith discretion, up to the Credit Limit, provided no Default or Event of Default has occurred and is continuing. In addition, Coast may create reserves against or reduce its advance rates based upon Eligible Receivables or Eligible Inventory without declaring a Default or an Event of Default if it determines that there has occurred a Material Adverse Effect. 3. INTEREST AND FEES. 3.1 INTEREST. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on 5 9 the last day of the month. Interest may, in Coast's discretion, be charged to Borrower's loan account, and the same shall thereafter bear interest at the same rate as the other Loans. Regardless of the amount of Obligations that may be outstanding from time to time, Borrower shall pay Coast Minimum Monthly Interest during the term of this Agreement with respect to the Collection Loans in the amount set forth on the Schedule. 3.2 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule, which are in addition to ail interest and other sums payable to Coast and are deemed fully earned and are nonrefundable. 4. SECURITY INTEREST. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to Coast a security interest in all of Borrower's interest in the following, whether now owned or hereafter acquired, and wherever located: All Receivables, Inventory, Equipment, Investment Property, and General Intangibles, including, without limitation, Borrower's domain and/or URL name, patents, trademarks and copyrights, all of Borrower's Deposit Accounts, and all money, and all property now or at any time in the future in Coast's possession (including claims and credit balances), and all proceeds of any of the foregoing (including proceeds of any insurance policies, proceeds of proceeds, and claims against third parties), all products of any of the foregoing, and all books and records related to any of the foregoing (all of the foregoing, together with all other property in which Coast may now or in the future be granted a lien or security interest, is referred to herein, collectively, as the "Collateral"). 5. CONDITIONS PRECEDENT. The obligation of Coast to make the Loans is subject to the satisfaction, in the sole discretion of Coast, at or prior to the first advance of funds hereunder, of each, every and all of the following conditions: 5.1 STATUS OF ACCOUNTS AT CLOSING. No account payable shall be due and unpaid ninety (90) days past its invoice date except for such accounts payable being contested in good faith in appropriate proceedings and for which adequate reserves have been provided. 5.2 MINIMUM AVAILABILITY. Borrower shall have minimum availability immediately following the initial funding in the amount set forth on the Schedule. 5.3 LANDLORD WAIVER. Coast shall have received duly executed 5.4 landlord waivers and access agreements in form and substance satisfactory to Coast, in Coast's sole and absolute discretion, and, when deemed appropriate by Coast, in form for recording in the appropriate recording office, with respect to all leased locations where Borrower maintains any inventory or equipment. 5.5 mortgagee waivers in form and substance satisfactory to Coast, in Coast's sole and absolute discretion, and when deemed appropriate by Coast, in form for recording in the appropriate recording office, with respect to all mortgaged locations where Borrower maintains any inventory or equipment. 5.6 warehouse waivers in form and substance satisfactory to Coast, in Coast's sole and absolute discretion, and when deemed appropriate by Coast, in form for recording in the appropriate recording office, with respect to all warehouse locations where Borrower maintains any inventory or equipment. 5.7 REAL PROPERTY. Coast shall have received duly executed mortgages and/or deeds of trust in form and substance satisfactory to Coast, in Coasts sole and absolute discretion, in form for recording in the appropriate recording office, with respect any real property owned by Borrower. 5.8 EXECUTED AGREEMENT. Coast shall have received this Agreement duly executed and in form and substance satisfactory to Coast in its sole and absolute discretion. 6 10 5.9 OPINION OF BORROWER'S COUNSEL. Coast shall have received an opinion of Borrower's counsel, in form and substance satisfactory to Coast in its sole and absolute discretion. 5.10 PRIORITY OF COAST'S LIENS. Coast shall have received the results of "of record" searches satisfactory to Coast in its sole and absolute discretion, reflecting its Uniform Commercial Code filings against Borrower indicating that Coast has a perfected, first priority lien in and upon all of the Collateral, subject only to Permitted Liens. 5.11 INSURANCE. Coast shall have received copies of the insurance binders or certificates evidencing Borrower's compliance with Section 8.2 hereof, including lender's loss payee endorsements. 5.12 BORROWER'S EXISTENCE. Coast shall have received copies of Borrower's articles or certificate of incorporation and all amendments thereto, and a Certificate of Good Standing, each certified by the Secretary of State of the state of Borrower's organization, and dated a recent date prior to the Closing Date, and Coast shall have received Certificates of Foreign Qualification for Borrower from the Secretary of State of each state wherein the failure to be so qualified could have a Material Adverse Effect. 5.13 ORGANIZATIONAL DOCUMENTS. Coast shall have received copies of Borrower's By-laws and all amendments thereto, and Coast shall have received copies of the resolutions of the board of directors of Borrower, authorizing the execution and delivery of this Agreement and the other documents contemplated hereby, and authorizing the transactions contemplated hereunder and thereunder, and authorizing specific officers of Borrower to execute the same on behalf of Borrower, in each case certified by the Secretary or other acceptable officer of Borrower as of the Closing Date. 5.14 TAXES. Coast shall have received evidence from Borrower that Borrower has complied with all tax withholding and Internal Revenue Service regulations, in form and substance satisfactory to Coast in its sole and absolute discretion. 5.15 DUE DILIGENCE. Coast shall have completed its due diligence with respect to Borrower. 5.16 OTHER DOCUMENTS AND AGREEMENTS. Coast shall have received such other agreements, instruments and documents as Coast may require in connection with the transactions contemplated hereby, all in form and substance satisfactory to Coast in Coast's sole and absolute discretion, and in form for filing in the appropriate filing office, including, but not limited to, those documents listed in Section 5 of the Schedule. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER In order to induce Coast to enter into this Agreement and to make Loans, Borrower represents and warrants to Coast as follows, and Borrower covenants that the following representations will continue to be true, and that Borrower will at all times comply with all of the following covenants: 6.1 EXISTENCE AND AUTHORITY. Borrower is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a Material Adverse Effect. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (a) have been duly and validly authorized, (b) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), and (c) do not violate Borrower's articles or certificate of incorporation, or Borrower's by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (d) do not constitute grounds for acceleration of any material indebtedness or obligation under any material agreement or instrument which is binding upon Borrower or its property. 6.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed on the Schedule are all prior names of Borrower and all of Borrower's present and prior 7 11 trade names. Borrower shall give Coast thirty (30) days' prior written notice before changing, its name or doing business under any other name. Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name. 6.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Borrower will give Coast at least thirty (30) days' prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower's Address or one of the locations set forth on the Schedule. 6.4 TITLE TO COLLATERAL, PERMITTED LIENS. Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased by Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Coast now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Coast and the Collateral against all claims of others. None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever requested by Coast, use its best efforts to cause such third party to execute and deliver to Coast, in form acceptable to Coast, such waivers and subordinations as Coast shall specify, so as to ensure that Coast's rights in the Collateral are, and will continue to be, superior to the rights of any such third party. Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. 6.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good working condition, and Borrower will not use the Collateral for any unlawful purpose. Borrower shall file a patent application on all patentable material and register any trademarks, copyrights and copyrightable material which comprises the Collateral and advise Coast of the acquisition, existence, filing and/or registration thereof. Borrower will immediately advise Coast in writing of any material loss or damage to the Collateral. 6.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with GAAP. 6.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now or in the future delivered to Coast have been, and will be, prepared in conformity with GAAP (except, in the case of unaudited financial statements, for the absence of footnotes and subject to normal year-end adjustments) and now and in the future will fairly reflect the financial condition of Borrower, at the times and for the periods therein stated. Between the last date covered by any such statement provided to Coast and the date hereof, there has been no Material Adverse Effect. Borrower is now and will continue to be Solvent. 6.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state and local law, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Coast in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. As of the date hereof, Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, including any liability to the 8 12 Pension Benefit Guaranty Corporation or its successors or any other governmental agency. Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic deposit of all payroll taxes payable by Borrower. 6.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all material respects, with all provisions of all material foreign, federal, state and local laws and regulations relating to Borrower, including, but not limited to, the Fair Labor Standards Act, and those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business and environmental matters. 6.10 LITIGATION. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which may result, either separately or in the aggregate, in a Material Adverse Effect. Borrower will promptly inform Coast in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving an amount set forth on the Schedule. 6.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for lawful business purposes. Borrower is not purchasing or carrying any "margin stock" (as defined in Regulation U of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any "margin stock" or to extend credit to others for the purpose of purchasing or carrying any "margin stock." 7. RECEIVABLES and COLLECTIONS. 7.1 REPRESENTATIONS RELATING TO RECEIVABLES AND COLLECTIONS. Borrower represents and warrants to Coast as follows: All Collections with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, represent receipt of payment of an undisputed bona fide existing unconditional obligation of the Account Debtor created by the sale, delivery and acceptance of goods or the rendition of services in the ordinary course of Borrower's business. 7.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower represents and warrants to Coast as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables and/or Collections are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower's books and records are and shall be genuine and in all respects what they purport to be. All sales and other transactions underlying or giving rise to each Receivable and/or Collections are and shall be Account Debtors that Coast has been granted a security genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms. 7.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver to Coast via facsimile, unless otherwise directed by Coast, at such locations and at such intervals as Coast may request, transaction reports and loan requests, schedules of Receivables, and schedules of Collections, all on Coast's standard forms; provided, however, that Borrower's failure to execute and deliver the same shall not affect or limit Coast's security interest and other rights in all of Borrower's Receivables or Collections, nor shall Coast's failure to advance or lend against a specific Receivable affect or limit Coast's security interest and other rights therein. Loan requests received after 10:30 A.M. Los Angeles, California time, will not be considered by Coast until the next Business Day. Together with each such schedule, or later if requested by Coast, Borrower shall furnish Coast with copies (or, at Coast's request, originals) of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to Coast an aged accounts receivable trial balance in such form and at such intervals as Coast shall request. In addition, Borrower shall deliver to Coast the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables and/or Collections, upon receipt thereof and in the same form as received, with all necessary endorsements, all of which shall be with recourse. Borrower shall also provide Coast with copies of all credit memos as and when requested by Coast. 9 13 7.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all Receivables, unless and until an Event of Default has occurred. Borrower shall hold all payments on, and proceeds of, Receivables in trust for Coast, and Borrower shall deliver all such payments and proceeds to Coast within one (1) Business Day after receipt by Borrower, in their original form, duly endorsed to Coast, to be applied to the Obligations in such order as Coast shall determine. Coast may, in its discretion, require that all proceeds of Collateral be deposited by, Borrower into a lockbox account, or such other "blocked account" as Coast may specify, pursuant to a blocked account agreement in such form as Coast may specify. Coast or its designee may, at any time, notify Account Debtors that Coast has been granted a security interest in the Receivables. 7.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of any Collateral shall be delivered to Coast within one (1) Business Day after receipt by Borrower, in their original form, duly endorsed to Coast, to be applied to the Obligations in such order as Coast shall determine. Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower's other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Coast. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. 7.6 VERIFICATION. Coast may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of Borrower or Coast or such other name as Coast may choose. 7.7 NO LIABILITY. Coast shall not under any circumstances be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall Coast be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to a Receivable. Nothing herein shall, however, relieve Coast from liability for its own gross negligence or willful misconduct. 8. ADDITIONAL DUTIES OF THE BORROWER. 8.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule. 8.2 INSURANCE. Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Coast, in such form and amounts as Coast may reasonably require, and Borrower shall provide evidence of such insurance to Coast, so that Coast is satisfied that such insurance is, at all times, in full force and effect. All liability insurance policies of Borrower shall name Coast as an additional insured, and all property casualty and related insurance policies of Borrower shall name Coast as a loss payee thereon and Borrower shall cause a lender's loss payee endorsement in form reasonably acceptable to Coast. Upon receipt of the proceeds of any such insurance, Coast shall apply such proceeds in reduction of the Obligations as Coast shall determine in its sole discretion, except that, provided no Default or Event of Default has occurred and is continuing, Coast shall release to Borrower insurance proceeds with respect to Equipment totaling less than the amount set forth in Section 8 of the Schedule, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the insurance proceeds were paid. Coast may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, Coast may, but is not obligated to, obtain the same at Borrower's expense. Borrower shall promptly deliver to Coast copies of all reports made to insurance companies, 8.3 REPORTS. Borrower, at its expense, shall provide Coast with the written reports set forth in Section 8 of the Schedule, and ' such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as Coast shall from time to time reasonably specify. 8.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times but not less frequently than quarterly and on one (1) Business Day's notice, Coast, or its agents, shall have the right to perform Audits. Coast shall take reasonable steps to keep confidential all confidential information obtained in any Audit, but Coast shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any 10 14 subpoena or other legal process. The Audits shall be at Borrower's expense and the charge for the Audits shall be Seven Hundred Fifty Dollars (S750) per person per day (or such higher amount as shall represent Coast's then current standard charge for the same), plus reasonable out-of-pocket expenses. Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower's books or records at any location other than Borrower's Address, without first notifying Coast of the same and obtaining the written agreement from such accounting firm, service bureau or other third party to give Coast the same, rights with respect to access to books' and records and related rights as Coast has under this Loan Agreement. Borrower shall also take all necessary steps to assure that this material accounting and software systems and applications, and those of its accounting firm, service bureau or any other third party vendor or supplier, will, on a timely basis, adequately and completely address the Year 2000 Problem in all material respects. 8.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior written consent, do any of the following: 8.6 merge or consolidate with another entity, except in a transaction in which (i) the owners of the Borrower hold at least fifty percent (50%) of the ownership interest in the surviving entity immediately after such merger or consolidation, and (ii) the Borrower is the surviving entity; 8.7 acquire any assets, except (i) in the ordinary course of business, or (ii) in a transaction or a series of transactions not involving the payment of an aggregate amount in excess of the amount set forth in Section 8 of the Schedule; 8.8 enter into any other transaction outside the ordinary course of business; 8.9 sell or transfer any Collateral, except for the sale of finished Inventory in the ordinary course of Borrower's business" and except for the sale of obsolete or unneeded Equipment in the ordinary course of business; 8.10 store any Inventory or other Collateral with any warehouseman or other third party; 8.11 sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; 8.12 make any loans of any money or other assets, except (i) advances to customers or suppliers in the ordinary course of business, (ii) travel advances, employee relocation loans and other employee loans and advances 'in the ordinary course of business, and (iii) loans to employees, officers and directors for the purpose of purchasing equity securities of the Borrower, 8.13 incur any debts, outside the ordinary course of business, which would have a Material Adverse Effect; 8.14 guarantee or otherwise become liable with respect to the obligations of another party or entity; 8.15 pay or declare any dividends or distributions on the ownership interests in Borrower (except for dividends or distributions payable solely in stock form of ownership interests in Borrower); 8.16 make any change in Borrower's capital structure which would have a Material Adverse Effect; or 8.17 dissolve or elect to dissolve. Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default is continuing, or would occur as a result of such transaction. 8.18 LITIGATION COOPERATION. Should any third-party suit or proceeding be instituted by or against Coast with respect to any Collateral or relating to Borrower, Borrower shall, without expense to Coast, make available Borrower and its officers, employees and agents and Borrower's books and records, to the extent that Coast may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 11 15 8.19 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by Coast, to execute all documents and take all actions, as Coast, may deem reasonably necessary or useful in order to perfect and maintain Coast's perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement. 9. TERM. 9.1 MATURITY DATE. This Agreement shall continue in effect until the Maturity Date; provided that the Maturity Date shall automatically be extended, and this Agreement shall automatically and continuously renew, for successive additional terms of one year each, unless one party gives written notice to the other, not less than one hundred twenty (120) days prior to the Maturity Date or the next Renewal Date, that such party elects to terminate this Agreement effective on the Maturity Date or such next Renewal Date. If this Agreement is renewed under this Section 9.1, Borrower shall pay to Coast a Renewal Fee in the amount shown in Section 3 of the Schedule. The Renewal Fee shall be due and payable on the Renewal Date and thereafter shall bear interest at a rate equal to the rate applicable to the Receivable Loans. 9.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity Date as follows: (a) by Borrower, effective three (3) Business Days after written notice of termination is given to Coast; or (b) by Coast at any time after the occurrence of an Event of Default, without notice, effective immediately. If this Agreement is terminated by Borrower or by Coast under this Section 9.2, Borrower shall pay to Coast an Early Termination Fee in the amount shown in Section 3 of the Schedule. The Early Termination Fee shall be due and payable on the effective date of termination and thereafter shall bear interest at a rate equal to the rate applicable to the Collection Loans. 9.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Notwithstanding any termination of this Agreement, all of Coast's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that, without limiting the fact that Loans are subject to the discretion of Coast, Coast may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Coast, nor shall any such termination relieve Borrower of any Obligation to Coast, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, Coast shall promptly deliver to Borrower termination statements, requests for reconveyances and such other documents as may be required to fully terminate Coast's security interests. 10. EVENTS OF DEFAULT AND REMEDIES. 10.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and Borrower shall give Coast immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Coast by Borrower or any of Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading and results in a Material Adverse Effect; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit; or (d) Borrower shall fail to deliver the proceeds of Collateral to Coast as provided in Section 7.5 above, or shall fail to give Coast access to its books and records or Collateral as provided in Section 8.4 above, or shall breach any negative covenant set forth in Section 8.5 above; or 12 16 (e) Borrower shall fail to comply with the financial covenants (if any) set forth in the Schedule or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured; or (f) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within five (5) Business Days after the date due; or (g) Any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within ten (10) days after the occurrence of the same; or (h) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (i) Borrower breaches any material contract or obligation, which has or may reasonably be expected to have a Material Adverse Effect; or (j) Dissolution, termination of existence, insolvency or business failure of Borrower or any guarantor of any of the Obligations; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (k) the commencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is (i) not timely controverted, or (ii) not cured by the dismissal thereof within thirty (30) days after the date commenced; or (l) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (m) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (n) Borrower or any guarantor of any of the Obligations makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations, other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (o) Except as permitted under Section 8.5(a), Borrower shall suffer or experience any Change of Control without Coast's prior written consent, which consent shall be in the discretion of Coast in the exercise of its reasonable business judgment; or] (p) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (q) Borrower shall fail to file a patent application on any patentable material or register any trademark, copyright or copyrightable material which is part of the Collateral or advise Coast of the acquisition, creation, existence, filing on or registration of any such Collateral. (r) there shall be any Material Adverse Effect. 13 17 Coast may cease making any Loans or extending any credit hereunder during any of the above cure periods. 10.2 REMEDIES. Upon the occurrence, and during the continuance, of any Event of Default, Coast, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending any credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Coast without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store or remove any of the Collateral. and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as Coast deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Coast seek to take possession of any of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Coast retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Coast at places designated by Coast which are reasonably convenient to Coast and Borrower, and to remove the Collateral to such locations as Coast may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Coast shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge. Coast is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Coast's benefit; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time Coast obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Coast shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as Coast deems reasonable, or on Coast's premises, or elsewhere and the Collateral need not be located at the place of disposition. Coast may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes Coast to endorse or sign Borrower's name on all 14 18 collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Coast's sole discretion, to grant extensions of time to pay, compromise claims and settle Receivables and the like for less than face value; and (h) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All attorneys' fees, expenses, costs, liabilities and obligations incurred by Coast (including attorneys' fees and expenses incurred in connection with bankruptcy) with respect to the foregoing shall be due from the Borrower to Coast on demand. Coast may charge the same to Borrower's loan account, and the same shall thereafter bear interest at the same rate as is applicable to the Receivable Loans. Without limiting any of Coast's rights and remedies, from and after the occurrence of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional three percent per annum. 10.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and Coast agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (a) Notice of the sale is given to Borrower at least seven (7) days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven (7) days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (b) Notice of the sale describes the collateral in general, non-specific terms; (c) The sale is conducted at a place designated by Coast, with or without the Collateral being present: (d) The sale commences at any time between 8:00 a.m. and 6:00 p.m. Los Angeles, California time; (e) Payment of the purchase price in cash or by cashier's check or wire transfer is required; and (f) With respect to any sale of any of the Collateral, Coast may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. Coast shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. 10.4 POWER OF ATTORNEY. Borrower grants to Coast an irrevocable power of attorney coupled with an interest, authorizing and permitting Coast (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but Coast agrees to exercise the following powers in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that Coast may, in its sole discretion, deem advisable in order to perfect and maintain Coast's security interest in the Collateral, or in order to exercise a right of Borrower or Coast, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements; (b) Execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Coast' s Collateral or in which Coast has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; 15 19 (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Coast' s possession; (e) Endorse all checks and other forms of remittances received by Coast; (f) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) Grant extensions of time to pay, compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give Coast the same rights of access and other rights with respect thereto as Coast has under this Agreement; and (k) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other present or future agreements. Any and all sums paid and any and all costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast (including attorneys' fees and expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be added to and become part of the Obligations, and shall be payable on demand. Coast may charge the foregoing to Borrower's loan account and the foregoing shall thereafter bear interest at the same rate applicable to the Receivable Loans. In no event shall Coast's rights under the foregoing power of attorney or any of Coast's other rights under this Agreement be deemed to indicate that Coast is in control of the business, management or properties of Borrower. Borrower shall pay, indemnify, defend, and hold Coast and each of its officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits , actions, investigations, proceedings, and damages, and all attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein, and with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). Borrower shall have no obligation to any Indemnified Person hereunder with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. 10.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale of the Collateral shall be applied by Coast first to the costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Coast shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Coast for any deficiency. If, Coast, in its sole discretion, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Coast shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Coast of the cash therefor. 16 20 10.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Agreement, Coast shall have all the other rights and remedies accorded a secured party in equity, under the Code, and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Coast and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Coast of one or more of its rights or remedies shall not be deemed an election, nor bar Coast from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Coast to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been indefeasibly paid and performed. 11. GENERAL PROVISIONS. 11.1 INTEREST COMPUTATION. In computing interest on the Obligations, all checks, wire transfers and other items of payment received by Coast (including proceeds of Receivables and payment of the Obligations in full) shall be deemed applied by Coast on account of the Obligations three (3) Business Days after receipt by Coast of immediately available funds, and, for purposes of the foregoing, any such funds received after 10:30 AM Los Angeles, California time, on any day shall be deemed received on the next Business Day. Coast shall be entitled to charge Borrower's account for such three (3) Business Days of "clearance" or "float" at the rate(s) set forth in Section 3 of the Schedule on all checks., wire transfers and other items received by Coast, regardless of whether such three (3) Business Days of "clearance" or "float" actually occur, and shall be deemed to be the equivalent of charging three (3) Business Days of interest on such collections. This across-the-board three (3) Business Day clearance or float charge on all collections is acknowledged by the parties to constitute an integral aspect of the pricing of Coast's financing of Borrower. Coast shall not, however, be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to Coast in its sole discretion, and Coast may charge Borrower's loan account for the amount of any item of payment which is returned to Coast unpaid. 11.2 APPLICATION OF PAYMENTS. Subject to Section 10.5 hereof, all payments with respect to the Obligations may be applied, and in Coast's sole discretion reversed and re-applied, to the Obligations, in such order and manner as Coast shall determine in its sole discretion. 11.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's Loan account, in which event they will bear interest from the date due to the date paid at the same rate applicable to the Loans. 11.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by Coast), unless Borrower notifies Coast in writing to the contrary within thirty (30) days after each account is rendered, describing the nature of any alleged errors or omissions. 11.5 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, facsimile or certified mail return receipt requested, addressed to Coast or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. Notices to Coast shall be directed to the Commercial Finance Division, to the attention of the Division Manager or the Division Credit Manager. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, faxed (at time of confirmation of transmission), or at the expiration of one (1) Business Day following delivery to the private delivery service, or two (2) Business Days following the deposit thereof in the United States mail, with postage prepaid. 11.6 SEVERABILITY. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 11.7 INTEGRATION. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and Coast and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between 17 21 the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith. 11.8 WAIVERS. The failure of Coast at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between Borrower and Coast shall not waive or diminish any right of Coast later to demand and receive strict compliance therewith. Any waiver of any Default shall not waive or affect any other Default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to Coast shall be deemed to have been waived by any act or knowledge of Coast or its agents or employees, but only by a specific written waiver signed by an authorized officer of Coast and delivered to Borrower. Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Coast on which Borrower is or may in any way be liable, and notice of any action taken by Coast, unless expressly required by this Agreement. 11.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Coast shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of Coast, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Coast, but nothing herein shall relieve Coast from liability for its own gross negligence or willful misconduct. 11.10 AMENDMENT. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of Coast. 11.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement. 11.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse Coast for all attorneys' fees (including attorneys' fees and expenses incurred pursuant to bankruptcy) and all filing, recording, search, title insurance, appraisal, audit, and other costs incurred by Coast, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any attorneys' fees and costs (including attorneys' fees and expenses incurred pursuant to bankruptcy) Coast incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Coast's security interest in, the Collateral; and otherwise represent Coast in any litigation relating to Borrower. If either Coast or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its costs and attorneys' fees (including attorneys' fees and expenses incurred pursuant to bankruptcy), including (but not limited to) attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. Borrower shall also pay Coast's standard charges for returned checks and for wire transfers, in effect from time to time. All attorneys' fees, costs and charges (including attorneys' fees and expenses incurred pursuant to bankruptcy) and other fees, costs and charges to which Coast may be entitled pursuant to this Agreement may be charged by Coast to Borrower's loan account and shall thereafter bear interest at the same rate as the Receivable Loans. 11.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Coast; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Coast, and any prohibited assignment shall be void. No consent by Coast to any assignment shall release Borrower from its liability for the Obligations. Coast may assign its rights and delegate its duties hereunder by the sale of assignment or participation interests, all without the consent of Borrower. Coast reserves the right to syndicate all or a portion of the transaction created herein or sell, assign transfer, negotiate, or grant participation's in 18 22 all or any part of, or any interest in Coast's rights and benefits hereunder. In connection with any such syndication., assignment or participation, Coast may disclose all documents and information which Coast now or hereafter may have relating to Borrower or Borrower's business. To the extent that Coast assigns its rights and obligations hereunder to a third Person, Coast thereafter shall be released from such assigned rights and obligations to Borrower. 11.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue appropriate press releases and to cause a tombstone to be published announcing the consummation of this transaction and the aggregate amount thereof. 11.15 PARAGRAPH HEADINGS, CONSTRUCTION. Paragraph headings are only used in this Agreement for convenience. Borrower and Coast acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. The term "including", whenever used in this Agreement, shall mean "including (but not limited to)". This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Coast or Borrower under any rule of construction or otherwise. 11.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all rights and obligations of Coast and Borrower shall be governed by the internal laws of the State of California, without regard to its conflicts of law principles. As a material part of the consideration to Coast to enter into this Agreement, Borrower: (a) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at Coast's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Los Angeles, and that the exclusive venue therefor shall be Los Angeles County; (b) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (c) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 11.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PARENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWER: Commonwealth Energy Corporation By: /s/ James L. Oliver ----------------------------------- Name: James L. Oliver Title: Chief Financial Officer And by: /s/ John A. Barthrop ----------------------------------- Name: John A. Barthrop Title: Secretary electricAMERICA, Inc. By: /s/ James L. Oliver ----------------------------------- Name: James L. Oliver Title: Chief Financial Officer And by: /s/ John A. Barthrop ----------------------------------- Name: John A. Barthrop Title: Secretary 19 23 Electric.com, Inc. By: /s/ James L. Oliver ----------------------------------- Name: James L. Oliver Title: Chief Financial Officer And by: /s/ John A. Barthrop ----------------------------------- Name: John A. Barthrop Title: Secretary COAST: Coast Business Credit, a division of Southern Pacific Bank By: /s/ Robert D. Peters ----------------------------------- Name: Robert D. Peters Title: Vice President 20 24 SCHEDULE TO LOAN AND SECURITY AGREEMENT Borrower: Commonwealth Energy Corporation Address: 15901 Red Hill, Suite 100 Tustin, California 92870 Borrower: electricAMERICA, Inc. Address: 15901 Red Hill, Suite 100 Tustin, California 92870 Borrower: electric.com, Inc. Address: 15901 Red Hill, Suite 100 Tustin, California 92870 Date: June 30, 2000 This Schedule forms an integral part of the Loan and Security Agreement between Coast Business Credit, a division of Southern Pacific Bank, and the above-borrower of even date. SECTION 2 - CREDIT FACILITIES SECTION 2.1 - CREDIT LIMIT: Loans in a total amount at any time outstanding not to exceed the lesser of a total of FIFTEEN MILLION DOLLARS ($15,000,000.00) ("Maximum Dollar Amount"), or the total sum outstanding under (a)(i) or (a)(ii) below: (a) Collection Loans in an amount not to exceed the lesser of (i) One (1.0) times the total monthly Eligible Collections, during the months October through April, measured monthly on a rolling three (3) month moving average, or (ii) One and one-half (1.5) times the total monthly Eligible Collections, during the months May through September, measured monthly on a rolling three (3) month moving average. The increase in the Collections multiple from one (1) to one and one-half (1.5) during the months May through September shall not be permitted until Coast has received and approved Borrower's final July 31, 1998 and July 3 1, 1999 fiscal year end audited financial statements. In the event quarterly Eligible Collections based on a rolling twelve (12) month average drop twenty percent (20%) or more, Coast shall have the right, in its sole and absolute discretion, to adjust the Collections multiples set forth above. SECTION 3 - INTEREST AND FEES SECTION 3.1 - INTEREST RATE: A rate equal to the Prime Rate plus 1.75% per annum, calculated on the basis of a 360-day year for the actual number of days elapsed. The interest rate applicable to all Loans shall be adjusted monthly effective as of the first day of each month, and the interest to be charged for each month shall be based on the highest Prime Rate in effect during the prior month, but in no event shall the rate of interest charged on any Loans in any month be less than 9.00% per annum. SECTION 3.1 - MINIMUM MONTHLY INTEREST: An amount equal to the Interest Rate described above charged against an outstanding daily loan balance equal to thirty-five percent (35%) of the Maximum Dollar Amount. 1 25 SECTION 3.2 - LOAN FEE: Three Hundred Thousand Dollars ($300,000.00), such amount being fully earned on the Closing Date, and payable One Hundred Fifty Thousand Dollars ($150,000.00), on the Closing Date, and Seventy-five Thousand Dollars ($75,000.00) on each of the first two (2) anniversaries of the Closing Date thereafter. SECTION 9.1 - RENEWAL FEE: 0.50% of the Maximum Dollar Amount per year. SECTION 9.2 - EARLY TERMINATION FEE: An amount equal to one percent (1%) of the Maximum Dollar Amount (as defined in the Schedule) if early termination occurs. SECTION 5 - CONDITIONS PRECEDENT SECTION 5.2 - MINIMUM AVAILABILITY: One Million Dollars ($1,000,000.00) at funding SECTION 5.13 - OTHER DOCUMENTS AND AGREEMENTS: 1. Joint and Several Borrower Rider; 2. Validity Agreements from Ian Carter, James Oliver and Borrower's Chief Operating Officer within 30 days of appointment; 3. UCC-1 financing statements, fixture filings and termination statements; 4. Security Agreements (including those covering domain name, copyrights, patents and trademarks); 5. Warrants; and 6. Intercreditor and Subordination Agreements. SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS SECTION 6.2 - PRIOR NAMES OF BORROWER: None. SECTION 6.2 - PRIOR TRADE NAMES OF BORROWER: None. SECTION 6.2 - EXISTING TRADE NAMES OF BORROWER: None. SECTION 6.3 - OTHER LOCATIONS AND ADDRESSES: 535 Route 38, Suite 123, Cherry Hill, NJ 08002 SECTION 6.10 - MATERIAL ADVERSE LITIGATION: Chappell v. Commonwealth Energy Corporation; Hohl v Commonwealth Energy Corporation; Wykidal v. Commonwealth Energy Corporation. SECTION 6.10 - FUTURE CLAIMS AND LITIGATION: Borrower will promptly inform Coast in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of Fifty Thousand Dollars ($50,000.00) or more, or involving One Hundred Thousand Dollars ($ 100,000.00) or more in the aggregate. SECTION 8 - ADDITIONAL DUTIEES OF BORROWER SECTION 8.1 - FINANCIAL COVENANTS: 1. At the Closing Date and all times during the Term hereof, Borrower shall maintain a minimum Tangible Net Worth (as defined in Section I of the Agreement) in an amount not 2 26 less than Fifteen Million Dollars ($15,000,000.00), which amount shall increase quarterly by adding eighty percent (80%) of Net Income based on Borrower's financial projections. 2. At the Closing Date and all times during the Term hereof, Borrower shall maintain a minimum unencumbered and unrestricted cash and cash equivalent (including excess loan availability) balance at the beginning of each month to cover no less than six (6) months of Borrower's cash bum rate, based on a six (6) month moving average, using the latest three (3) months actual cash bum combined with the projected next three (3) months cash burn. 3. Audited fiscal year end financial statements must have a positive gross margin. SECTION 8.1 - OTHER PROVISIONS: 1. All Collections, including Green-e rebates from the California Energy Commission, shall be made via a lockbox, in form and substance approved by Coast. In the event Green-e rebates cannot be deposited directly into the lockbox, they shall be excluded from Eligible Collections. 2. Satisfactory legal review of Borrower's contracts with customers, utility companies and suppliers. 3. Coast's receipt of CPA draft audited financial statements for fiscal -year end July 31, 1998 and fiscal year end July 31, 1999 within forty-five days from the Closing Date that are not materially different than the internal statements provided by Borrower. 4. Borrower shall have no accounts payable over ninety (90) days past invoice date at the time of funding. 5. All of Borrower's applicable taxes shall be paid and current at the time of funding and at all times during the Term of the Loan and Security Agreement. 6. Borrower shall ensure that Coast is granted a first priority and only perfected security interest, except for Permitted Liens and a software program called TRIUMPH, on all of Borrower's tangible and intangible assets including, without limitation, accounts receivables, inventory, machinery and equipment, and all other tangible and intangible assets including domain or URL names, patents, trademarks and/or copyrights. Security agreements in domain or URL names, patents, trademarks and copyrights shall be filed with the appropriate agency prior to the Closing Date. 7. Perfected lien on Borrower's registered domain name "electric.com". 8. Assignment of contracts as required by Coast. 9. Intercreditor and Subordination Agreements, in form and substance acceptable to Coast. 10. Subordination of performance bonds in form and substance acceptable to Coast. 11. Coast to receive 100,000 warrants, in form and substance acceptable to Coast, in Borrower, Commonwealth Energy Corporation. 12. All existing electricity supplier contracts must remain in effect unless replaced with contracts acceptable and pre-approved by Coast. 3 27 13. Borrower shall notify Coast immediately in the event any changes occur to the Green-e rebates. Borrower hereby acknowledges that Coast retains the right, in its sole and absolute discretion, to exclude the Green-e rebates from the three (3) month rolling average collections at any time. SECTION 8.2 - INSURANCE: Subject to the limitations set forth in Section 8.2 of the Agreement, Coast shall release to Borrower insurance proceeds with respect to Equipment totaling less than Fifty Thousand Dollars ($50,000.00). SECTION 8.3 - REPORTING: Borrower shall provide Coast with the following: 1. Monthly Receivable agings, aged by invoice date, within five (5) days after the end of each month. 2. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers within five (5) days after the end of each month. 3. Monthly internally prepared financial statements, as soon as available, and in any event within thirty (30) days after the end of each month. 4. Monthly chum rate analysis report, in form and substance acceptable to Coast, within five (5) days after the end of each month. 5. Monthly financial statement projections for the remaining six (6) months of 2000 within thirty (30) days of the Closing Date. Thereafter, semi-annual financial statement projections within ninety (90) days of the end of each six (6) month period. 6. Quarterly internally prepared financial statements, as soon as available, and in any event within forty-five (45) days after the end of each fiscal quarter of Borrower. 7. Quarterly customer lists, including customer name, address, and phone number. 8. Annual CPA audited financial statements, as soon as available, and in any event within ninety (90) days following the end of Borrower's fiscal year, containing the unqualified opinion of, and certified by, an independent certified public accountant acceptable to Coast. SECTION 8.5 - NEGATIVE COVENANTS (ACQUIRED ASSETS): Fifty Thousand Dollars ($50,000.00). SECTION 9 - TERM SECTION 9.1 - MATURITY DATE: June 30, 2003, subject to automatic renewal as provided in Section 9.1 of the Agreement, and early termination as provided in Section 9.2 of the Agreement. 4 EX-10.5 10 a74807gex10-5.txt EXHIBIT 10.5 1 EXHIBIT 10.5 WARRANT THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MUST BE HELD INDEFINITELY UNLESS SUBSEQUENTLY REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR DISPOSED OF PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MUST BE HELD INDEFINITELY UNLESS SUBSEQUENTLY REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR DISPOSED OF PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS WARRANT Corporation: Commonwealth Energy Corporation, a California corporation Number of Shares: 100,000 Class of Stock: Common Stock Initial Exercise Price: $5.50 per share Issued as of. June 28, 2000 Expiration Date: Ninety days after expiration of the Term of the Loan and Security
Agreement dated of even date herewith between the parties hereto FOR VALUE RECEIVED, the adequacy and receipt of which is hereby acknowledged, COMMONWEALTH ENERGY CORPORATION, a California corporation, hereby certifies that COAST BUSINESS CREDIT(R), a division of Southern Pacific Bank, a California corporation, and its successors and assigns, are entitled to purchase from the Company one hundred thousand (100,000) fully paid and nonassessable shares of Common Stock of the Company at any time and from time to time on and after the date hereof until 12:00 midnight California local time on the ninetieth day after expiration of the Term of the Loan and Security Agreement dated of even date herewith between the parties hereto at an exercise price of FIVE DOLLARS AND FIFTY CENTS ($5.50) per share of Common Stock, on the terms and conditions hereinafter set forth. The number of such shares of Common Stock and the Exercise Price are subject to adjustment as provided in this warrant. 1. Certain Definitions. As used in this Warrant, the following terms have the following definitions: "Additional Shares of Common Stock" means all shares of Common Stock issued or issuable by the Company after the date of this Warrant. 1 2 "Common Stock" means the Company's Common Stock, no par value per share, and includes any common stock of the Company of any class or classes resulting from any reclassification or reclassifications thereof which is not limited to a fixed sum or percentage of par value in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. "Company" means Commonwealth Energy Corporation, a California corporation. "Convertible Securities" means evidence of indebtedness, shares of stock or other securities which are at any time directly or indirectly convertible into or exchangeable for Additional Shares of Common Stock. "Current Market Price" of a share of Common Stock or any other security as of a relevant date means: (i) the Fair Value thereof as determined in accordance with clause (ii) of the definition of Fair Value with respect to Common Stock or any other security that is not listed on a national securities exchange or traded on the over-the-counter market or quoted on NASDAQ, and (ii) the average of the daily closing prices for the ten (10) trading days before such date (excluding any trades which are not bona fide arm's length transactions) with respect to Common Stock or any other security that is listed on a national securities exchange or traded on the over-the-counter market or quoted on NASDAQ. The closing price for each day shall be (i) the last sale price of shares of Common Stock or such other security, regular way, on such date or, if no such sale takes place on such date, the average of the closing bid and asked prices thereof on such date, in each case as officially reported on the principal national securities exchange on which the same are then listed or admitted to trading, or (ii) if no shares of Common Stock or if no securities of the same class as such other security are then listed or admitted to trading on any national securities exchange, the average of the reported closing bid and asked prices thereof on such date in the over-the-counter market as shown by the National Association of Securities Dealers automated quotation system or, if no shares of Common Stock or if no securities of the same class as such other security are then quoted in such system, as published by the National Quotation Bureau, Incorporated or any similar successor organization, and in either case as reported by any member firm of the New York Stock Exchange selected by Warrantholders. "Exchange Act" means the Securities Exchange Act of 1934 "Exercise Period" means the period commencing on the date hereof and ending at 12:00 midnight California local time on the Expiration Date. "Exercise Price" means initially Five Dollars and Fifty Cents ($5.50) per share, subject to adjustment as provided in this Warrant. "Expiration Date" means ninety days after expiration of the Term of the Loan and Security Agreement dated of even date herewith between the parties hereto. "Fair Value" means: (i) with respect to a share of Common Stock or any other security, the Current Market Price thereof, and (ii) with respect to any other property, assets, business or entity, an amount determined in accordance with the following procedure: The Company and the holders of the Warrants and Warrant Shares, as applicable, shall use their best efforts to mutually agree to a determination of Fair Value within ten (10) days of the date of the event requiring that such a determination be made. If the Company and such holders are unable to reach an agreement within said ten (10) day period, the Company and such holders shall within ten (10) days of the expiration of the ten (10) day period referred to above each retain a separate independent investment banking firm (which firm shall not be the investment banking firm regularly retained by the Company). If either the Company or such holders fails to retain such an investment banking firm during such period, then the independent investment banking firm 2 3 retained by such holders or the Company, as the case may be, acting alone, shall take the actions outlined below. Such firms shall determine (within thirty (30) days of their being retained) the Fair Value of the security, property, assets, business or entity, as the case may be, in question and deliver their opinion in writing to the Company and to such holders. If such firms cannot jointly make the determination, then, unless otherwise directed by agreement of the Company and such holders, such firms, in their sole discretion, shall choose another investment banking firm independent of the Company and such holders, which firm shall make the determination and render an opinion as promptly as practicable. In either case, the determination so made shall be conclusive and binding on the Company and such holders. The fees and expenses of any such determination made by any and all such investment banking firms shall be paid by the Company. If there is more than one holder of Warrants, and/or Warrant Shares entitled to a determination of Fair Value in any particular instance, each action to be taken by a majority in interest of such holders and the action taken by such majority (including as to any mutual agreement with the Company with respect to Fair Value and as to any selection of investment banking firms) shall be binding upon all such holders. In the case of a determination of the Fair Value per share of Common Stock, the Company and such holders shall not take into consideration, any premium for shares representing control of the Company, any discount for any minority interest therein or any restrictions on transfer under applicable federal and state securities laws or otherwise. "Indemnified Part" and "Indemnifying Party" have the same meanings set fourth in Section 1l(e)(iii). "Registerable Stock" means: (i) all Warrant Shares which are issuable to the Warrantholders pursuant to the Warrants, whether or not the Warrants have in fact been exercised and whether or not such warrant Shares have in fact been issued, (ii) all Warrant Shares acquired by the Warrantholders pursuant to the Warrants, and (iii) any shares of Common Stock, whether or not such shares of Common Stock have in fact been issued, and stock or other securities of the Company issued upon conversion of, in a stock split or reclassification of, or a stock dividend or other distribution on, or in substitution or exchange for, or otherwise in connection with, such Warrant Shares. For purposes of Section 11, a Warrantholder of record shall be treated as the record holder of the related Warrant Shares and other securities pursuant to the warrants. "Securities Act" means the Securities Act of 1933, as amended. "Warrant(s)" means this Warrant and any warrants issued in exchange or replacement of this Warrant or upon transfer hereof. "Warrantholder(s)" means COAST BUSINESS CREDIT, a division of Southern Pacific Bank, a California corporation, and its successors and assigns. "Warrant Shares" means shares of common stock issuable to Warrantholders pursuant to the warrants. 2. Exercise of Warrant. This Warrant may be exercised, in whole or in part, at any time and from time to time during the Exercise Period by written notice to the Company and upon payment to the Company of the Exercise Price (subject to adjustment as provided herein) for the shares of Common Stock in respect of which the warrant is exercised. 3. Form of Payment of Exercise Price. Anything contained herein to the contrary notwithstanding, at the option of the Warrantholders, the exercise Price may be paid in any one or a combination of the following forms: (a) by wire transfer to the Company, (b) by the Warrantholder's check to the Company, (c) by the cancellation of any indebtedness owed by the Company and/or any subsidiaries of the Company to the Warrantholder, and/or (d) by the surrender to the Company of Warrants, Warrant Shares, Common Stock and/or other securities of the Company and/or any subsidiaries of the Company having a Fair Value equal to the Exercise Price. 3 4 4. Cashless Exercise/Conversion; Appreciation Right. (a) Cashless Exercise/Conversion. In lieu of exercising this Warrant as specified in Sections 2 and 3 above, the Warrantholders may from time to time at the Warrantholders' option convert this Warrant, in whole or in part, into a number of shares of Common Stock of the Company determined by dividing (A) the aggregate Fair Value of such shares or other securities otherwise issuable upon the exercise of this Warrant minus the aggregate Exercise Price of such shares by (B) the Fair Value of one such share. (b) Appreciation Right. In lieu of exercising, this Warrant as specified in Sections 2 and 3 above, the Warrantholders may from time to time at the Warrantholders' option require the Company to purchase this Warrant or any portion hereof, for cash, at a price equal to the then Fair Value of the Common Stock issuable upon exercise of this Warrant less the Exercise Price. Upon the Warrantholders' exercise of this option, the Company shall promptly wire transfer to the Warrantholders such amount in immediately available funds as is required under this Section 4(b), but in no event later than five (5) business days after the exercise of such option, in immediately available funds. 5. Certificates for Warrant Shares: New Warrant. The Company agrees that the Warrant Shares shall be deemed to have been issued to the Warrantholders as the record owner of such Warrant Shares as of the close of business on the date on which payment for such Warrant Shares has been made (or deemed to be made by conversion) in accordance with the terms of this Warrant. Certificates for the Warrant Shares shall be delivered to the Warrantholders within a reasonable time, not exceeding five (5) days, after this Warrant has been exercised or converted. A new Warrant representing the number of shares, if any, with respect to which this Warrant remains exercisable also shall be issued to the Warrantholders within such time so long as this Warrant has been surrendered to the Company at the time of exercise. 6. Adjustment of Exercise Price, Number of Shares and Nature of Securities Issuable Upon Exercise of Warrants. (a) Exercise Price: Adjustment of Number of Shares. The Exercise Price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the Exercise Price, the Warrantholders shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, a number of shares determined by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (b) Adjustment of Exercise Price Upon Issuance of Common Stock. If and whenever after the date hereof the Company shall issue or sell Additional Shares of Common Stock without consideration or for a consideration per share less the Current Market Price or the Exercise Price then in effect immediately prior to the issuance or sale of such shares, then the Exercise Price in effect immediately prior to such issuance or sale of such shares shall be reduced to a number which shall be calculated by dividing (A) an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing Exercise Price plus (2) the aggregate consideration, if any received by the Company upon issue or sale, by (B) the total number of shares of Common Stock outstanding immediately after such issue or sale. No adjustment of the Exercise Price, however, shall be made in an amount less than $.01 per share, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to $10 per share or more. The provisions of this Section 6(b) shall not apply to any Additional Shares of Common Stock which are distributed to holders of Common Stock pursuant to a stock split for which an adjustment is provided for under Section 6(f). 4 5 (c) Further Provisions for Adjustment of Exercise Price Upon Issuance of Additional Shares of Common Stock and Convertible Securities. For purposes of Section 6(b), the following, provisions shall also be applicable: (i) In case at any time on or after the date hereof, the Company shall declare any dividend, or authorize any other distribution, upon any stock of the Company of any class, payable in Additional Shares of Common Stock or by the issuance of Convertible Securities, such declaration or distribution shall be deemed to have been issued or sold (as of the record date) without consideration and shall thereby cause an adjustment in the Exercise Price as required by Section 6(b). (ii) (A) In case at any time on or after the date hereof, the Company shall in any manner issue or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, there shall be determined the price per share for which Additional Shares of Common Stock are issuable upon the conversion or exchange thereof, such determination to be made by dividing, (a) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof by (b) the maximum aggregate number of Additional Shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities for such minimum aggregate amount of additional consideration; and such issue or sale shall be deemed to be an issue or sale for cash (as of the date of issue or sale of such Convertible Securities) of such maximum number of Additional Shares of Common Stock at the price per share so determined, and shall thereby cause an adjustment in the Exercise Price, if such an adjustment is required by Section 6(b) hereof. (B) If such Convertible Securities shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration, if any, payable to the Company, or in the rate of exchange upon the conversion or exchange thereof, the adjusted Exercise Price shall, upon any such increase becoming effective, be increased to such Exercise Price as would have been in effect had the adjustments made upon the issuance of such Convertible Securities been made upon the basis of (and the total consideration received therefor) (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such Convertible Securities, (b) the issuance of all Common Stock, all Convertible Securities and all rights and options to purchase Common Stock issued after-the issuance of such Convertible securities, and (c) the original issuance at the time of such change of any such Convertible Securities then still outstanding; provided however, that any such increase or increases shall not exceed, in the aggregate, the amount of the original reduction of the Exercise Price attributable to the Convertible Securities. (C) If any rights of conversion or exchange evidenced by such Convertible Securities shall expire without having been exercised, the adjusted Exercise Price shall forthwith be readjusted to such Exercise Price as would have been in effect had an adjustment with respect to such Convertible Securities been made on the basis that the only Additional Shares of Common Stock issued or sold were those issued upon the conversion or exchange of such Convertible Securities, and that they were issued or sold for the consideration actually received by the Company upon the exercise, plus the consideration, if any, actually received by the Company for the granting, of such Convertible Securities. (iii) (A) In case at any time on or after the date hereof, the Company shall in any manner grant or issue any rights or options to subscribe for, purchase or otherwise acquire Additional Shares of Common Stock, whether or not such rights or options are immediately exercisable, there shall be determined the price per share for which Additional Shares of Common Stock are issuable upon the exercise of such rights or options, such determination to be made by dividing (a) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of such rights or options if the maximum number of Additional Shares were issued pursuant to such rights or options for such minimum aggregate amount of additional consideration, by (b) the maximum number of Additional Shares of Common Stock of the Company issuable upon the exercise of all such rights or options for such minimum aggregate amount of additional consideration; and the granting 5 6 of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of Additional Shares of Common Stock at the price per share so determined, and shall thereby cause an adjustment in the Exercise Price, if such an adjustment is required by Section 6(b) hereof. (B) If such rights or options shall by their terms provide for an increase or increases, with passage of time, in the amount of additional consideration payable to the Company upon the exercise thereof, the adjusted Exercise Price shall, upon any such increases becoming effective, be increased to such Exercise Price as would have been in effect had the adjustments made upon the issuance of such rights or options been made upon the basis of (and the total consideration received therefor) (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such rights or options, (b) the issuance of all Common Stock, all rights and options and all Convertible Securities issued after the issuance of such rights and options, and (c) the original issuance at the time of such change of any such rights or options then still outstanding; provided, however, that any such increase or increases in the Exercise Price shall not exceed, in the aggregate, the amount of the original reduction of the Exercise Price attributable to the grant of such rights or options. (C) If any such rights or options shall expire without having been exercise, the adjusted Exercise Price shall forthwith be readjusted to such Exercise Price as would have been in effect had an adjustment with respect to such rights or options been made on the basis that the only Additional Shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and that they were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of such rights or options. (iv) (A) In case at any time on or after the date hereof, the Company shall grant any rights or options to subscribe for, purchase or otherwise acquire Convertible Securities, there shall be determined the price per share for which Additional Shares of Common Stock are issuable upon the exchange or conversion of such Convertible Securities if such rights or options were exercised, such determination to be made by dividing (a) the total amount, if any, received or receivable by the Company as consideration for the issuance of such rights or options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of such rights or options if the maximum number of Convertible Securities were issued pursuant to such rights or options for such minimum aggregate amount of additional consideration, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exchange or conversion of such Convertible Securities if the maximum number of Additional Shares were issued pursuant to such Convertible Securities for such minimum aggregate amount of additional consideration, by (b) the maximum aggregate number of Additional Shares of Common Stock issuable upon the exchange or conversion of the Convertible Securities for such minimum aggregate amount of additional consideration; and the issue or sale of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of Additional Shares of Common Stock at the price per share to be determined, and thereby shall cause an adjustment in the Exercise Price, if such an adjustment is required by Section 6(b). (B) If such rights or options to subscribe for or otherwise acquire Convertible Securities shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration payable to the Company upon the exercise, exchange or conversion thereof, the adjusted Exercise Price shall, forthwith upon any such increase becoming effective, be increased to such Exercise Price as would have been in effect had the adjustments made upon the issuances of such rights or options been made upon the basis of (and the total consideration received therefor) (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exchange or conversion of such Convertible Securities (b) the issuances of all Common Stock and all rights, options and Convertible Securities issued after the issuance of such rights and options and (c) the original issuances at the time of such change of any such rights, options and Convertible Securities issued upon the exercise of such rights or options which are then still outstanding; provided, however, that any 6 7 such increase or increases shall not exceed, in the aggregate, the amount of the original reduction of the Exercise Price attributable to the grant of such rights or options. (C) If any such rights, options or rights of conversion or exchange of such Convertible Securities shall expire without having been exercised, exchanged or converted, the adjusted Exercise Price shall forthwith be readjusted to such Exercise Price as would have been in effect had an adjustment been made with respect to such rights, options or rights of conversion or exchange of such Convertible Securities on the basis that the only Additional Shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and exchange or conversion of such Convertible Securities and that they were issued or sold for the consideration actually received by the Company upon the exercise of such rights and options and exchange or conversion of such Convertible Securities, plus the consideration, if any, actually received by the Company for the granting of such rights, options or Convertible Securities. (v) In any case where an adjustment has been made in the Exercise Price upon the issuance of Convertible Securities or any right or options to purchase Convertible Securities or any rights or options to purchase Convertible Securities or Additional Shares of Common Stock pursuant to this Section 6(c), no further adjustment shall be made at the time of the conversion of any such Convertible Securities or at the time of the exercise of any such rights or options. (vi) In case at any time on or after the issuance of this Warrant any shares of Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash payable to the Company shall be deemed to be the Fair Value of such consideration. Whether or not the consideration so received is cash, the amount thereof shall be determined after deducting therefrom any expenses incurred or any underwriting commissions or concessions or discounts paid or allowed by the Company in connection therewith. (vii) In case at any time the Company shall fix a record date of the holders of its Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock, Convertible Securities or rights or options to purchase either thereof, or (b) to subscribe for or purchase Common Stock, Convertible Securities or rights or options to purchase either thereof, then such record date shall be deemed to be the date of the issue or sale of the shares of Common stock deemed, pursuant to this Section 6(c), to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (viii) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common stock for the purposes of this Section 6(c). (d) Reorganization, Reclassification, Consolidation, Merger or Sale. If any capital reorganization or reclassification of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive cash, stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the Warrantholders shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Warrant upon exercise of this Warrant and in lieu of the shares of the Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such cash, shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of such Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, and in any such case appropriate provision shall be made with respect to the rights and interest of the Warrantholders to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Exercise Price and of the number of shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, as 7 8 nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company shall-not effect any consolidation, merger or sale of all or substantially all of the assets of the Company unless prior to or simultaneous with the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation, merger or purchase of such assets shall assume, by written instrument executed and mailed or delivered to the Warrantholders, the obligation to deliver to such Warrantholders such cash (or cash equivalent), shares of stock, securities or assets as, in accordance with the foregoing provisions, the Warrantholders may be entitled to receive and containing the express assumption of such successor corporation of the due and punctual performance and observance of each provision of this Warrant to be performed and observed by the Company and of all liabilities and obligations of the Company hereunder; provided, however, in the case of any consolidation or merger of the Company with another corporation or the sale of all or substantially all of its assets to another corporation effected in such a manner that the holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, at the election of each Warrantholder, in lieu of receiving such stock, securities or assets, such Warrantholder shall receive cash equal to the Fair Value of the Common Stock issuable upon exercise of the Warrant, less the Exercise Price payable upon exercise thereof. In case any Additional Shares of Common Stock or Convertible Securities or any rights or options to purchase any Additional Shares of Common Stock or Convertible Securities shall be issued in connection with any merger of another corporation into the Company, the amount of consideration therefor shall be deemed to be the Fair Value of such portion of the assets of such merged corporation as the Board of Directors of the Company shall in good faith determine to be attributable to such Additional Shares of Common Stock, Convertible Securities or rights or options, as the case may be, and the Exercise Price shall be adjusted in accordance with this Section 6(d). (e) Company to Prevent Dilution. In case at any time or from time to time conditions arise by reason of action taken by the Company which are not adequately covered by the provisions of this Section 6, and which might materially and adversely affect the exercise rights of the Warrantholders under any provision of this Warrant, unless the adjustment necessary shall be agreed upon by the Company and the Warrantholders, the Board of Directors of the Company shall appoint a firm of independent certified public accountants of recognized national standing (who have not been employed by the Company within the last five years), acceptable to the Warrantholders, who at the Company's expense shall give their opinion upon the adjustment, if any, on a basis consistent with the standards established in the other provisions of this Section 6, necessary with respect to the Exercise Price and the number of shares purchasable upon exercise of the Warrants, so as to preserve, without dilution, the exercise rights of the Warrantholders. Upon receipt of such opinion, such Board of Directors shall forthwith make the adjustments described therein. (f) Stock Splits and Reverse Splits. In case at any time the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Exercise price in effect immediately prior to such subdivision shall be proportionately reduced and the number of shares of Common Stock purchasable pursuant to this Warrant immediately prior to such subdivision shall be proportionately increased, and conversely, in case at any time the Company shall combine it outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of shares of Common Stock purchasable upon the exercise of this Warrant immediately prior to such combination shall be proportionately reduced. (g) Dissolution, Liquidation and Wind-Up. In case the Company shall, at any time prior to the expiration of this Warrant, dissolve, liquidate or wind up its affairs, the Warrantholders shall be entitled, upon the exercise of this Warrant, to receive in lieu of the shares of Common Stock of the Company which such Warrantholders would have been entitled to receive, the same kind and amount of assets as would have been issued, distributed or paid to such Warrantholders upon any such dissolution, liquidation or winding up with respect to such shares of Common Stock of the Company, had such Warrantholders been the holders of record of the Warrant Shares receivable upon the exercise of this Warrant on the record date for the determination of those persons entitled to receive any such liquidating 8 9 distribution. After such dissolution, liquidation or winding up which shall result in any cash distribution in excess of the Exercise Price provided for by this Warrant, the Warrantholders may, at each such Warrantholder's option, exercise the same without making payment of the Exercise Price, and in such case the Company shall, upon the distribution to said Warrantholders, consider that said Exercise Price has been paid in full to it and in making settlement to said Warrantholders, shall deduct from the amount payable to such Warrantholders an amount equal to such Exercise Price. (h) Noncash Consideration. In case any Additional Shares of Common Stock or Convertible Securities or any rights or options to purchase any Additional Shares of Common Stock or Convertible Securities shall be issued for a consideration in a form other than cash, the amount of such consideration shall be deemed to be fair Value thereof. (i) Accountants' Certificate. In each case of an adjustment in the number of shares of Common Stock or other stock, securities or property receivable on the exercise of the Warrants, the Company at its expense shall cause independent public accountants of recognized standing selected by the Company and acceptable to the Warrantholders to compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based, including a statement of (a) the consideration received or to be received by the Company for any Additional Shares of Common Stock, rights options or Convertible Securities issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock of each class outstanding or deemed to be outstanding, (c) the adjusted Exercise Price and (d) the number of shares issuable upon exercise of this Warrant. The Company will forthwith mail a copy of each such certificate to each Warrantholder. 7. Special Agreements of the Company. (a) Reservation of Shares. The Company covenants and agrees that all Warrant Shares will, upon issuance, be validly issued, fully paid and nonassessable and free from all preemptive rights of any stockholder, and from all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. The Company hereby covenants and agrees to take all such action as may be necessary to assure that the par value per share of the Common Stock is at all times equal to or less than the Exercise Price. (b) Avoidance of Certain Actions. The Company will not, by amendment of its Articles or Certificates of Incorporation or through any reorganization, transfer of assets, consolidation, merger, issue or sale of securities or otherwise, avoid or take any action which would have the effect of avoiding the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in carrying out all of the provisions of this Warrant and in taking all of such actions as may be necessary or appropriate in order to protect the rights of the Warrantholders against dilution or other impairment of their rights hereunder. (c) Securing Governmental Approvals. If any shares of Common Stock required to be reserved for the purposes of exercise of this Warrant require registration with or approval of any governmental authority under any federal law (other than the Securities Act) or under any state law before such shares may be issued upon exercise of this Warrant, the company will, at its expense, as expeditiously as possible, cause such shares to be duly registered or approved, as the case may be. (d) Listing on Securities Exchanges: Registration. If, and so long as, any class of the Company's Common Stock shall be listed on any national securities exchange (as defined in the Exchange Act), the Company will, at its expense, obtain and maintain the approval for listing upon official notice of issuance of all Warrant Shares and maintain the listing of Warrant Shares after their issuance; and the Company will so list on such national securities exchange, will register under the Exchange Act (or any similar statute then in effect), and will maintain such listing of, any other securities that at any time are 9 10 issuable upon exercise of this Warrant if and at the time any securities of the same class shall be listed on such national securities exchange by the Company. (e) Information Rights. So long as the Warrantholders hold this Warrant and/or any of the Warrant Shares, the Company shall deliver to the Warrantholders (i) promptly after mailing, copies of all communications to the shareholders of the Company, (ii) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by the independent public accountants of recognized standing, and (iii) within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. (f) Restrictions on Public Sale by the Company. The Company will not effect any public or private sale or distribution of its convertible debt or equity securities, including a sale pursuant to Regulation D under the Securities Act, during the ten (10) day period prior to, and during the ninety (90) day period beginning on, the closing date of each underwritten offering by the Company made pursuant to a registration statement filed pursuant to Sections 11(a) or 11(b); and the Company shall cause each holder of its privately placed convertible debt or equity securities issued by it at any time on or after the date of this Warrant to agree not to effect any public sale or distribution of any such securities during such period, including a sale pursuant to Rule 144 or Rule 144A under the Securities Act. (g) Preemptive Rights. In the event the Company offers to the Company's shareholders the right to purchase any securities of the Company, then all shares of Common Stock issuable pursuant to the Warrants shall be deemed to be issued and outstanding and held by the Warrantholders and the Warrantholders shall be entitled to participate in such rights offering. (h) Compliance with Law. The Company shall comply with all applicable laws, rules and regulations of the United States and of all states, municipalities and agencies and of any other jurisdiction applicable to the Company and shall-do all things necessary to preserve, renew and keep in full force and effect and in good standing its corporate existence and authority necessary to. continue its business. 8. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon exercise hereof, the Company shall pay to the Warrantholder an amount in cash equal to such fraction multiplied by the Current Market Value of one share of Common Stock. 9. Notices of Stock Dividends, Subscriptions, Reclassifications, Consolidations, Mergers, etc. If at any time: (i) the Company shall declare a cash dividend (or an increase in the then existing dividend rate), or declare a dividend on Common Stock payable otherwise than in cash out of its net earnings after taxes for the prior fiscal year; or (ii) the Company shall authorize the granting to the holders of Common Stock or rights to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (iii) there shall be any capital reorganization, or reclassification, or redemption of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation or firm; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding, up of the Company, then the Company shall give to the Warrantholders at the addresses of such Warrantholders as shown on the books of the Company, at least twenty (20) days prior to the applicable record date hereinafter specified, a written notice summarizing such action or event and stating the record date for any such dividend or rights (or, if a record date is not to be selected, the date as of which the holders of Common Stock of record entitled to such dividend or rights are to be determined), the date on which any such reorganization, reclassification, consolidation, merger, sale of assets, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected the holders of common Stock of record shall be entitled to effect any exchange of their shares of Common Stock for cash (or cash equivalent), securities or other property deliverable upon any such reorganization, reclassification, consolidation, merger, sale of assets, dissolution, liquidation or winding up. 10. Registered Holder-, Transfer of Warrants or Warrant Shares. 10 11 (a) Maintenance of Registration Books; Ownership of this Warrant. The Company shall keep at its principal office a register in which the Company shall provide for the registration, transfer and exchange of this Warrant. The Company shall not at any time, except upon the dissolution, liquidation or winding-up of the Company, close such register so as to result in preventing or delaying the exercise or transfer of this Warrant. (b) Exchange and Replacement. This Warrant is exchangeable upon surrender hereof by the registered holder to the Company at its principal office for new Warrants of like tenor and date representing in the aggregate the right to purchase the number of shares purchasable hereunder, each of such new Warrants to represent the right to purchase such number of shares as shall be designated by said registered holder at the time of surrender. This Warrant and all rights hereunder are transferable in whole or in part upon the books of the Company by the registered holder hereof in person or by duly authorized attorney, and new Warrants shall be made and delivered by the Company, of the same tenor and date as this Warrant but registered in the name of the transferee(s), upon surrender of this Warrant, duly endorsed, to said office of the Company. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant, without requiring the posting of any bond or the giving, of any other security. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange, or transfer or replacement. The Company shall pay all expenses, taxes and other charges payable in connection with the preparation, execution and delivery of Warrants pursuant to this Section 10. (c) Warrants and Warrant Shares Not Registered. The holder of this Warrant, by accepting this Warrant, represents and acknowledges that this Warrant and the Warrant Shares are not being registered under the Securities Act on the grounds that the issuance of this Warrant and the offering and sale of such Warrant Shares are exempt from registration under Section 4(2) of the Securities Act as not involving any public offering. 11. Registration. (a) Required Registration. Whenever the Company shall receive a written request therefor from any holder or holders of at least 10% of the Registrable Stock, the Company shall promptly prepare and file a registration statement under the Securities Act covering the Registrable Stock which is the subject of such request and shall use its best efforts to cause such registration statement to become effective as expeditiously as possible. Upon the receipt of such request, the Company shall promptly give written notice to all holders of Registrable Stock that such registration is to be effected. The Company shall include in such registration statement such Registrable Stock for which it has received written requests to register such shares by the holders thereof within thirty (30) days after the effectiveness of the Company's written notice to such other holders. Except as hereinafter expressly provided, without the written consent of the holders of a majority of the shares of Registrable Stock for which registration has been requested pursuant to this Section, neither the Company nor any other holder of securities of the Company may include securities in such registration. (b) Incidental Registration. Each time the Company shall determine to file a registration statement under the Securities Act (other than on Form S-8 or Form SD-4) in connection with the proposed offer and sale for money of any of its securities by it or by any of its security holders. the Company will give written notice of its determination to all holders of Registrable Stock. Upon the written request of a holder of any Registrable Stock, the Company will cause such Registrable Stock, the holders of which have so requested registration thereof, to be included in such registration statement, all to the extent requisite to permit the sale or other disposition by the prospective seller or sellers of the Registrable Stock to be so registered in accordance with the terms of the proposed offering. If the registration statement is to cover an underwritten distribution, the Company shall use its best efforts to cause the Registrable Stock requested for inclusion pursuant to this Section 11 (b) to be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If, in the good faith judgment of the managing underwriter of such public offering, the inclusion of all of the Registrable Stock requested to be registered would materially and adversely affect the successful marketing of the other 11 12 shares proposed to be offered, then the amount of the Registrable Stock to be included in the offering shall be reduced and the Registrable Stock and the other shares to be offered shall participate in such offering as follows: the shares to be sold by the Company, the Registrable Stock to be included in such offering and the other shares of Common Stock to be included in such offering shall each be reduced pro rata in proportion to the number of shares of Common Stock proposed to be included in such offering by each holder of such shares and by the Company, (c) Registration Procedures. If and whenever the Company is required by the provisions of Section 11(a) or 11(b) to effect the registration of Registrable Stock under the Securities Act, the Company will, at its expense, as expeditiously as possible: (i) In accordance with the Securities Act and the rules and regulations of the Commission, prepare and file with the commission a registration statement on the form of registration statement appropriate with respect to such securities and use its best efforts to cause such registration statement to become and remain effective until the securities covered by such registration statement have been sold, and prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep - such registration statement effective and such registration statement and prospectus accurate and complete until the securities covered by such registration statement have been sold; (ii) If the offering is to be underwritten, in whole or in part, enter into a written underwriting agreement with the holders of the Registrable Stock participating in such offering and the underwriter in form and substance reasonably satisfactory to the managing underwriter of the public offering and the holders of the Registrable Stock participating in such offering; (iii) Furnish to the holders of securities participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters and holders may reasonably request in order to facilitate the public offering of such securities; (iv) Use its best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as such participating holders and underwriters may reasonably request; (v) Notify the holders participating in such registration, promptly after it shall receive notice thereof, of the date and time when such registration statement and each post-effective amendment thereto has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (vi) Notify such holders promptly of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information; (vii) Prepare and file with the Commission, promptly upon the request of any such holders, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for such holders, is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Registrable Stock by such holders; (viii) Prepare and promptly file with the Commission, and promptly notify such holders of the filing of, such amendments or supplements to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event has occurred as the result of which any such prospectus or any other prospectus as then in effect may include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; 12 13 (ix) In case any of such holders or any underwriter for any such holders is required to deliver a prospectus at a time when the prospectus then in circulation is not in compliance with the Securities Act or the rules and regulations of the Commission, prepare promptly upon request such amendments or supplements to such registration statement and such prospectus as may be necessary in order for such prospectus to comply with the requirements of the Securities Act and such rules and regulations; (x) Advise such holders, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (xi) If requested by the managing underwriter or underwriters or a holder of Registrable Stock being sold in connection with an underwritten offering, immediately incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority of the Registrable Stock being sold agree should be included therein relating, to the plan of distribution with respect to such Registrable Stock, including information with respect to the Registrable Stock being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other tens of the underwritten (or best efforts underwritten) offering of the Registrable Stock to be sold in such offering; and make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; (xii) Cooperate with the selling holders of Registrable Stock and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Stock to be sold and not bearing any restrictive legends; and enable such Registrable Stock to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the under-writers; (xiii) Prepare a prospectus supplement or post-effective amendment to the registration statement or the related prospectus or any document incorporated therein by reference or file any other required documents so that, as thereafter delivered to the purchasers of the Registrable Stock, the prospectus will not contain an untrue statement of material fact or omit to state any material fact necessary to make the statements therein not misleading; (xiv) Enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration: (A) make such representations and warranties to the holders of such Registrable Stock and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings; (B) If an underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures of Section 11(e) hereof with respect to all parties to be indemnified pursuant to said Section; and (C) The Company shall deliver such documents and certificates as may be requested by the holders of the majority of the Registrable Stock being sold and the managing underwriters, if any, to evidence compliance with the terms of this Section 11 (c) and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. 13 14 The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder; (xv) Make available for inspection by a representative of the holders of a majority of the Registrable Stock, any underwriter participating in any disposition pursuant to a registration statement, and any attorney or accountant retained by the sellers or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with the preparation of the registration statement; provided, that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such persons unless disclosure of such records, information or documents is required by court or administrative order; (xvi) Otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to the Company's security holders, earning statements satisfying the provisions of Section 11 (a) of the Securities Act, no later ' than forty-five (45) days after the end of any twelve (12) month period (or ninety (90) days, if such a period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Stock is sold to underwriters in an underwritten offering, or, if not sold to underwriters in such an offering, (ii) beginning with the first month of the Company's first fiscal quarter commencing after the effective date of a registration statement; (xvii) Not file any amendment or supplement to such registration statement or prospectus to which a majority in interest of such holders has objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five (5) business days prior to the filing thereof, provided, however, that the failure of such holders or their counsel to review or object to any amendment or supplement to such registration statement or prospectus shall not affect the rights of such holders or any controlling person or persons thereof or any underwriter or underwriters therefor under Section I I (e) hereof; and (xviii) At the request of any such holder (i) furnish to such holder on the effective date of the registration statement or , if such registration includes an underwritten public offering, at the closing provided for in the underwriting agreement, an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters with respect to the registration statement, the prospectus and each amendment or supplement thereto, proceedings under state and federal securities laws, other matters relating to the Company, the securities being registered and the offer and sale of such securities as are customarily the subject of opinions of issuer's counsel provided to underwriters in underwritten public offerings, and such opinion of counsel shall additionally cover such legal and factual matters with respect to the registration as such requesting holder or holders may reasonably request, and (ii) use its best effort to furnish to such holder letters dated each such effective date and such closing date, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to the holder or holders making such request, stating that they are independent certified public accountants within the meaning, of the Securities act and dealing with such matters as the underwriters may request, or, if the offering is not underwritten, that in the opinion of such accountants the financial statements and other financial data of the Company included in the registration statement or the prospectus or any amendment or supplement thereto comply in all material respects with the applicable accounting requirements of the Securities Act, and additionally covering such other financial matters, including information as to the period ending immediately prior to the date of such letter with respect to the registration statement and prospectus, as such requesting holder or holders may reasonably request. (d) Expenses of Registration. All expenses incident to the Company's performance of or compliance with this Warrant, including, without limitation, the following shall be borne by the Company, regardless of whether the registration statement becomes effective: 14 15 (i) All registration and filing fees (including those with respect to filings required to be made with the National Association of Securities Dealers, Inc.); (ii) Fees and expenses of compliance with all securities or blue sky laws (including fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications of the Registerable Stock and in determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Registerable Stock being sold may designate); (iii) Printing, messenger, telephone and delivery expenses; (iv) Fees and disbursements of counsel for the Company, the underwriters and for the sellers of the Registerable Stock as hereinafter provided; (v) Fees and disbursements of all independent certified public accountants of the Company (including the expenses of any special audit and "comfort" letters required by or incident to such performance); (vi) Fees and disbursements of underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registerable Stock or legal expenses of any person other than the Company and the selling holders); and (vii) Fees and expenses of other person retained by the Company. The Company will, in any event, pay its internal expenses (including without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed, rating agency fees and the fees and expenses of any person, including special experts, retained by the Company. In connection with the registration statement required hereunder, the Company will reimburse the holders of Registerable Stock being registered pursuant to the registration statement for the reasonable fees and disbursements of not more than one counsel (or more than one counsel if conflict exists among such selling holders in the exercise of the reasonable judgment of counsel for the selling holders and counsel for the Company) chosen by the holders of a majority of such Registerable Stock. (e) Indemnification. (i) The Company hereby agrees to indemnify each of the holders of Registrable Stock in connection with a registration of any of the securities purchased upon exercise of the Warrants against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, preliminary or final prospectus, or other document incident to any registration, qualification or compliance (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and to reimburse holders of Registrable Stock (including officers and directors of the same and controlling persons) for any legal and other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based 15 16 upon written information furnished to the Company by Warrantholders in an instrument duly executed by Warrantholders and stated to be specifically for use therein. (ii) The Warrantholders severally and not jointly agree to indemnify the Company and its officers and directors and each person, if any, who controls any thereof within the meaning of Section 15 of the Securities Act and their respective successors against all claims, losses damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement of a material fact contained in any prospectus, offering circular or other document incident to any registration, qualification or compliance relating to securities purchased pursuant to the Warrants (or in any related registration statement, notification or the like) or any omission (or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading and will reimburse the Company and each other person indemnified pursuant to this subsection (ii) for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss damage, liability or action; provided, however, that this subsection (ii) shall apply only if (and only to the extent that) such statement or omission was made in reliance upon information (including, without limitation, written negative responses to inquiries) furnished to the Company by an instrument duly executed by Warrantholders and stated to be specifically for use in such prospectus, or other document (or related registration statement, notification or the like) or any amendment or supplement thereto. (iii) Each party entitled to indemnification hereunder (the "Indemnified party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party (at such Indemnifying Party's expense) to assume the defense of any claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be satisfactory to the Indemnified Party, and the Indemnified Party may participate in such defense at such party's expense, and provided, further, that the omission by any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 11 (e) except to the extent that the omission results in a failure of actual notice to the Indemnifying Party and such Indemnifying party is materially damaged solely as a result of the failure to give notice. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect in respect to such claim or litigation. (iv) If the indemnification provided for in this Section 11(e) is unavailable or insufficient to hold harmless an Indemnified Party in respect of any losses, claims, damages, liabilities, expenses or actions in respect thereof referred to herein, then the Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities, expenses or actions in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand, and the Indemnified Party on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities, expenses or actions as well as any other relevant equitable considerations, including the failure to give the notice required hereunder. The relative fault of the Indemnifying Party and the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Indemnifying Party or the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Warrantholders agree that it would not be just and equitable if contributions pursuant to this Section 11(e) were determined by pro rata allocation or by any other method of allocation which did not take account of the equitable considerations referred to above. The amount paid or payable to an Indemnified Party as a result of the losses, claims, damages, liabilities or actions in respect thereof, referred to above, shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the contribution provisions of this Section 11(e), in no event shall the amount contributed by any seller of Registrable Stock exceed the aggregate net offering proceeds received by such seller from the sale of Registrable Stock to-which such contribution or indemnification claim relates. No person guilty of 16 17 fraudulent misrepresentation (within the meaning of Section 11 (f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. (v) The indemnification required by this Section I I (e) shall be made by periodic payments during the course of the investigation or defense, as and when the bills are received or expenses incurred. Anything contained herein to the contrary notwithstanding, the liability of any holder of Registrable Stock under this Section 11 (e) shall not exceed the amount of the net proceeds actually received by such holder from the sale of its Registrable Stock pursuant to the registration, qualification, notification or compliance in respect of which such liability arose. (f) Reporting Requirements Under Exchange Act. The Company shall maintain the registration of its Common Stock under Section 12 of the Exchange Act and shall keep effective such registration and shall timely file such information, documents and reports as the Commission may require or prescribe under Section 13 of the Exchange Act, or other-wise. From and after the effective date of the first registration statement filed by the Company under the Securities act, the Company shall (whether or not it shall then be required to do so) timely file such information, documents and reports as the Commission may require or prescribe under Section 13 or 15(d) (whichever is applicable) of the Exchange Act. Immediately upon becoming subject to the reporting requirements of either Section 13 or 15 (d) of the Exchange Act, the Company shall forthwith upon request furnish any holder of Registrable Stock (i) a written statement by the Company that it has complied with such reporting requirements, (ii) a copy of the most recent annual or quarterly report of the Company, and (iii) such other reports and documents filed by the Company with the Commission as such holder may reasonably request in availing itself of an exemption for the sale of Registrable Stock without registration under the Securities Act. The Company acknowledges and agrees that the purpose of the requirements contained in this Section 11(f) is to enable any such holder to comply with the current public information requirement contained in Rule 144 under the Securities Act should such holder ever wish to dispose of any of the securities of the Company acquired by it without registration under the Securities Act in reliance upon Rule 144 (or any other similar exemptive provision). In addition, the Company shall take such other measures and file such other information, documents and reports as shall hereafter be required by the Commission as a condition to the availability of Rule 144 and Rule 144A under the Securities Act (or any similar exemptive provision hereafter in effect). (g) Stockholder Information. The Company may require each holder of Registrable Stock as to which any registration is to be effected pursuant to this Section 11 to furnish the Company such information with respect to such holder and the distribution of such Registrable Stock as shall be required by law or by the Commission in connection therewith. 12. Representation and Warranties. The Company hereby represents and warrants to and covenants with each Warrantholder, and each holder of Warrant Shares that: (a) Organization and Capitalization of the Company. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. As of the date hereof, the authorized capital of the Company consists of __________ shares of Common Stock and __________ shares of Preferred Stock, of which __________ shares of Common Stock and __________ shares of Preferred Stock are issued and outstanding. The Company has, and at all time during the Exercise Period will have, reserved for issuance pursuant to the Warrants that number of shares of Common Stock that are issuable pursuant to the Warrants. No unissued shares of Common Stock are reserved for any purpose other than for issuance upon the exercise of the Warrants. As of the date hereof, the Company has not issued or agreed to issue any stock purchase rights, options, convertible securities, warrants (other than this Warrant) or any other securities or indebtedness convertible into shares of Common Stock, and there are no preemptive rights in effect with respect to the issuance of any shares of Common Stock. All the outstanding shares of Common Stock and Preferred Stock have been validly issued without violation of any preemptive or similar rights, are fully paid and nonassessible and have been issued in compliance with all federal and applicable state securities laws. (b) Authority. The Company has full corporate power and authority to execute and deliver this Warrant, to issue the shares of Common Stock issuable upon exercise of this Warrant, and 17 18 to perform all of its obligations hereunder, and the execution, delivery and performance hereof has been duly authorized by all necessary corporate action on its part. This Warrant has been duly executed on behalf of the Company and constitutes the legal, valid and binding obligation of the Company enforceable in accordance with its term. (c) No Legal Bar. Neither the execution, delivery or performance of this Warrant nor the issuance of shares of Common Stock issuable upon exercise of this Warrant will (a) conflict with or result in a violation of the Certificate of Incorporation or By-Laws of the Company, (b) conflict with or result in a violation of any law, statute, regulation, order or decree applicable to the Company or any affiliate, (c) require any consent or authorization or filing with, or other act by or in respect of any governmental authority or (d) result in a breach of, constitute a default under or constitute an event creating rights of acceleration, termination or cancellation under any mortgage, lease, contract, franchise, instrument or other agreement to which the Company is a party or by which it is bound. (d) Validity of Shares. When issued upon the exercise of this Warrant as contemplated herein, the shares of Common stock so issued will have been validly issued and will be fully paid and nonassessable. On the date hereof, the par value of the Common Stock is less than the Exercise Price per share of Common Stock. 13. Continuing Validity. A holder of Warrant Shares shall continue to be entitled to all rights to which a Warrantholder is entitled pursuant to the provisions of this Warrant except such rights as by their terms apply solely to a Warrantholder, notwithstanding the fact that this Warrant has been exercised or the period of exercisability has expired. The Company will, at any time upon the request of the holder of the Warrant Shares, acknowledge in writing, in form reasonably satisfactory to such holder, the Company's continuing obligation to afford such holder all rights to which such holder shall continue to be entitled in accordance with the provisions of this Warrant; provide, however, that if such holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder all such rights. 14. Miscellaneous Provisions. (a) Notice of Expiration. The Company shall give written notice to the Warrantholders specifically advising them of the Expiration Date and of their right to exercise the warrants not more than one hundred eighty (180) days and not less than ninety (90) days before the Expiration Date. If such written notice is not so given, the Expiration Date shall automatically be extended until (90) days after the date that the Company gives the Warrantholders such written notice. (b) Governing Law, Venue and Waiver of Jury Trial. This Warrant shall be deemed to have been made in the State of California and the validity this warrant, the construction, interpretation, and enforcement thereof, and the rights of the parties thereto shall be determined under, governed by, and construed in accordance with the internal laws of the State of California, without regard to principles of conflicts of law. The parties agree that all actions or proceedings arising in connection with this Warrant shall be tried and litigated only in the state or federal courts located in the County of Los Angeles, State of California or, at the sole option of a Warrantholder, in any other court in which a Warrantholder shall initiate legal or equitable proceedings and which has the subject matter jurisdiction over the matter in controversy. The Warrantholders and the Company each waive the right to trial by jury and any right each may have to assert the doctrine of forum non conveniens or to object to the extent any proceeding is brought in accordance with this Section 14(b). Service of process, sufficient for personal jurisdiction in any action against the Company, may be made by registered or certified mail, return receipt requested, to its address indicated in Section 14(c). (c) Notices. All notices hereunder shall be in writing and shall be deemed to have been given five (5) days after being mailed by certified mail, addressed to the address below stated of the party to which notice is given, or to such changed address as such party may have fixed by notice: 18 19 To the Company: Commonwealth Energy Corp. 15901 Red Hill, Ste. 100 Tustin, CA 92870 Attention: John A. Barthrop, Esq. To the Warrantholders or holder of Warrant Shares: Coast Business Credit a division of Southern Pacific Bank 12121 Wilshire Boulevard Suite 1400 Los Angeles, California 90025 Attention: Portfolio Manager With a copy (which shall not constitute notice to: Law Offices of Clay Lorinsky 12424 Wilshire Blvd. Suite 1200 Los Angeles, California 90025 provided, however, that any notice of change of address shall be effective only upon receipt. (d) Successors and Assigns. This Warrant shall be binding upon and inure to the benefit of the Company, the Warrantholders and the holders of warrant Shares and the successors, assigns and transferees of the Company, the Warrantholders and the holders of Warrant Shares. (e) Attorneys' Fees. The Company agrees to pay, on demand, all attorneys' fees (including attorneys' fees incurred pursuant to proceedings arising under the Bankruptcy Code) and all other costs and expenses which may be incurred by the Warrantholders and the holders of Warrant Shares in connection with any amendment to this Warrant and/or in connection with the enforcement of this Warrant, whether or not suit is brought. (f) Entire Agreement: Amendments and Waivers. This Warrant sets forth the entire understanding of the parties with respect to the transactions contemplated hereby. The failure of any party to seek redress for the violation or to insist upon the strict performance of any term of this Warrant shall not constitute a waiver of such term and such party shall be entitled to enforce such term without regard to such forbearance. This Warrant may be amended, the Company may take any action herein prohibited or omit to take any action herein required to be performed by it, and any breach of or compliance with any covenant, agreement, warranty or representation may be waived, only if the Company has obtained the written consent or written waiver of the majority in interest of the Warrantholders, and then such consent or waiver shall be effective only in the specific instance and for the specific purpose for which given. (g) Severability. If any term of this Warrant as applied to any person or to any circumstance is prohibited, void, invalid or unenforceable in any jurisdiction, such term shall, as to such jurisdiction, be ineffective to the extent of such prohibition or invalidity without in any way affecting any other term of this Warrant or affecting the validity or enforceablity of this Warrant or of such provision in any other jurisdiction. (h) Headings. The headings in this Warrant are inserted only for convenience of reference and shall not be used in the construction of any of its terms. 19 20 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officers effective as of the date first set forth above. COMMONWEALTH ENERGY CORPORATION By: /s/ James L. Oliver ---------------------------------- Name: James L. Oliver Title: Chief Financial Officer And by: /s/ John A. Barthrop ------------------------------- Name: John Barthrop Title: Secretary Signature page to Warrant 20 EX-10.6 11 a74807gex10-6.txt EXHIBIT 10.6 1 EXHIBIT 10.6 LIMITED LIABILITY COMPANY AGREEMENT LIMITED LIABILITY COMPANY AGREEMENT OF SUMMIT ENERGY VENTURES, LLC 2 TABLE OF CONTENTS
PAGE ---- Article 1. DEFINED TERMS................................................................................... 1 Article 2. FORMATION....................................................................................... 5 Section 2.1 Formation of the Company.................................................................. 5 Section 2.2 Filings .................................................................................. 5 Section 2.3 Name, Registered Office and Agent, Principal Place of Business............................ 5 Section 2.4 Purpose of Company........................................................................ 6 Section 2.5 Term ..................................................................................... 6 Article 3. MEMBERSHIP; DISPOSITION OF iNTERESTS; CAPITAL CONTRIBUTIONS..................................... 6 Section 3.1 Members .................................................................................. 6 Section 3.2 Liability to Third Parties................................................................ 6 Section 3.3 Access to Information..................................................................... 6 Section 3.4 Capital Contributions..................................................................... 6 Section 3.5 Allocation of Interests; Right of First Refusal to Make Additional Capital Contributions.. 7 Section 3.6 Return of Capital, No Interest on Capital................................................. 7 Section 3.7 Limited Liability of Members.............................................................. 8 Section 3.8 Capital Accounts.......................................................................... 8 Article 4. INVESTMENT MANAGER; INVESTMENT COMMITTEE........................................................ 8 Section 4.1 Appointment of Investment Manager; Responsibilities....................................... 8 Section 4.2 Retention or Employment of Other Persons After Approval of Investment..................... 9 Section 4.3 Management Fee; Expenses.................................................................. 9 Section 4.4 Investment Committee...................................................................... 10 Section 4.5 Company Funds............................................................................. 10 Section 4.6 Other Activities and Competition.......................................................... 10 Section 4.7 Duty of Care and Loyalty; Investment Manager's Liability.................................. 11 Section 4.8 Indemnification........................................................................... 11 Section 4.9 Application of Fees....................................................................... 12 Article 5. POWERS, RIGHTS AND DUTIES OF THE MEMBERS........................................................ 12 Section 5.1 Limitations............................................................................... 12 Section 5.2 Right of First Offer...................................................................... 12 Article 6. DISTRIBUTIONS................................................................................... 13 Section 6.1 Distributions............................................................................. 13 Section 6.2 Tax Liability Distributions............................................................... 13 Section 6.3 Distributions in Kind..................................................................... 14 Section 6.4 The Right to Withhold..................................................................... 14 Section 6.5 Sale of Investments or the Company........................................................ 14 Article 7. ALLOCATIONS..................................................................................... 14 Section 7.1 General .................................................................................. 14 Section 7.2 Allocation of Net Income and Net Loss..................................................... 14 Section 7.3 Allocations Upon Final Liquidation........................................................ 15 Section 7.4 Additional Allocation Provisions.......................................................... 15 Article 8. BOOKS AND RECORDS; ACCOUNTING; TAX ELECTIONS.................................................... 16 Section 8.1 Company Books............................................................................. 16
i 3 Section 8.2 Delivery of Records; Inspection........................................................... 16 Section 8.3 Reports and Tax Information............................................................... 17 Section 8.4 Company Tax Elections; Tax Controversies.................................................. 17 Section 8.5 Accounting and Fiscal Year................................................................ 17 Section 8.6 Confidentiality of Information............................................................ 17 Article 9. TRANSFERS, ENCUMBRANCES AND REDEMPTIONS OF MEMBERSHIP INTERESTS................................. 17 Section 9.1 Transfers ................................................................................ 17 Section 9.2 Encumbrances.............................................................................. 17 Section 9.3 Regulatory Prohibition.................................................................... 18 Article 10. WITHDRAWN, REMOVED, ADDITIONAL AND SUBSTITUTE MEMBERS.......................................... 18 Section 10.1 Admissions, Withdrawals and Removals...................................................... 18 Section 10.2 Substitute Members........................................................................ 18 Section 10.3 Additional Members........................................................................ 18 Section 10.4 Withdrawal of Certain Members............................................................. 18 Section 10.5 Conversion of Membership Interest......................................................... 18 Section 10.6 Resignation, Removal, Incapacity Of The Investment Manager................................ 18 Article 11. DISSOLUTION AND WINDING UP..................................................................... 19 Section 11.1 Dissolution and Distribution of Company Assets............................................ 19 Section 11.2 Dissolving Events......................................................................... 19 Section 11.3 Wind-up, Liquidation and Final Distribution of Proceeds................................... 19 Section 11.4 No Restoration of Deficit Capital Account Balances........................................ 20 Article 12. MISCELLANEOUS.................................................................................. 20 Section 12.1 Amendment................................................................................. 20 Section 12.2 Meetings.................................................................................. 20 Section 12.3 No Assignments; Binding Effect............................................................ 20 Section 12.4 Further Assurances........................................................................ 20 Section 12.5 Notices................................................................................... 20 Section 12.6 Waivers................................................................................... 21 Section 12.7 Preservation of Intent.................................................................... 21 Section 12.8 Entire Agreement.......................................................................... 21 Section 12.9 Certain Rules of Construction............................................................. 21 Section 12.10 Counterparts ............................................................................. 21 Section 12.11 Governing Law............................................................................. 21 Section 12.12 Binding Arbitration....................................................................... 21 Section 12.13 Waiver of Partition....................................................................... 22
ii 4 SCHEDULE A Names, Addresses, and Percentage Interests of the Members SCHEDULE B Form of Contribution Agreement iii 5 LIMITED LIABILITY COMPANY AGREEMENT OF SUMMIT ENERGY VENTURES, LLC THIS LIMITED LIABILITY COMPANY AGREEMENT (this "Agreement") of Summit Energy Ventures, LLC is made and entered into as of __________, 2001 (the "Agreement Date"), by and among those Persons identified as the "Members" and that Person identified as the "Investment Manager" herein on the counterpart signature pages to this Agreement. ARTICLE 1. DEFINED TERMS "AAA" is defined in Section 12.12. "Accounting Period" means any period that begins on the Agreement Date or at the opening of business on the day following the end of a previous Accounting Period and ends at the close of business on the earliest of the next Adjustment Date, the end of a Fiscal Year and the date on which the Company is terminated. "Act" means the Delaware Limited Liability Company Act, 6 Del. C. Sections 18-101, et seq., as previously or hereafter amended. "Additional Member" means any Person that has been admitted to the Company as a Member pursuant to Section 10.3 by virtue of such Person receiving its Membership Interest from the Company and not from another Member or any Assignee. "Adjusted Capital Account Deficit" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (i) decrease such deficit by (a) the amount, if any, which such Member is obligated to contribute upon liquidation of such Member's Interest, and (b) any amounts which such Member is deemed to be obligated to restore pursuant to Treasury Regulation Section 1.704-1(b)(2)(ii)(c) or the penultimate sentence of each of Treasury Regulation Sections 1.704-2(i)(5) and 1.704-2(g)(1); and (ii) increase such deficit by such Member's share of the items described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "Adjustment Date" means (i) each date on which an existing or Additional Member contributes cash or property (other than a de minimis amount) to the Company as consideration for an interest in the Company, (ii) each date on which the Company distributes cash or property to a Member (other than a de minimis amount) in consideration for an interest in the Company, (iii) the liquidation of the Company and (iv) any other date reasonably believed by the Investment Manager to be appropriate so as to properly reflect the economic relationship among the Members. "Affiliate(s)" means, with reference to a specified Person(s): (i) a Person that, directly or indirectly, through one or more intermediaries, has control of, is controlled by or is under common control with, the specified Person; 1 6 (ii) any Person that is an officer, director, general partner, managing member or trustee of, or serves in a similar capacity with respect to, the specified Person, or for which the specified Person is an officer, director, general partner, managing member or trustee, or serves in a similar capacity; or (iii) any member of the Immediate Family of the specified Person. "Agreement" is defined in the Preamble. "Agreement Date" is defined in the Preamble. "Assignee" means any Person to which a Member or another Assignee has Transferred all or any part of its Economic Interest in accordance with Section 9.1, but which has not been admitted as a Substitute Member pursuant to Section 10.2. "Bankruptcy" means the occurrence of any one or more of those events set forth in Section 18-304 of the Act. "Book Value" means, with respect to (a) any Company asset as of any date, such Company asset's adjusted basis for Federal income tax purposes as of such date, except as follows: (i) the initial Book Value of a Company asset contributed by a Member to the Company shall be the Value of such Company asset on the date of such contribution; (ii) on each Adjustment Date, the Book Value of each Company asset shall be adjusted to equal its Value on such Adjustment Date, and (iii) if the Book Value of a Company asset has been determined under clause (i) or (ii) above, such Book Value shall thereafter be adjusted by the depreciation, cost recovery and amortization attributable to such Company asset assuming that the adjusted basis of such Company asset was equal to its Book Value determined under the methodology described in Treasury Regulation Section 1.704-1(b)(2)(iv)(g)(3). "Business Day" means any weekday excluding any legal holiday observed pursuant to United States federal or Washington or California state law or regulation. "Capital Account(s)" is defined in Section 3.10. "Capital Commitment" means, when referring to a dollar amount, or amount committed by a Member or prospective Member for investment pursuant to the terms of this Agreement. "Capital Contributions" of any Member means the total amount of money and the initial fair market value of any property (determined net of any liabilities secured by such property that the Company is considered to assume, or take subject to, and determined consistently with Section 752(c) of the Code and without regard to Section 7701(g) of the Code) contributed to the Company by such Member in accordance with this Agreement. The initial fair market value of any property contributed to the Company as an initial Capital Contribution of a Member shall be determined by the Investment Manager and shall be adjusted as provided in Section 3.3(c). "Cash Available for Distribution" means, as of any time of determination, an amount equal to the sum of the excess, if any, of (i) the sum of (A) all cash receipts received by the Company since the date of the immediately prior distribution to the Members pursuant to Section 6.1 or, if the Company has made no such prior distribution, since the Agreement Date, and (B) any reduction, since such date, in the amount of Reserves (as determined by the Investment Manager) set aside over (ii) the sum of (A) all expenses paid by the Company since such date and (B) any increases in the amount of Reserves (as determined by the Investment Manager) set aside. "Certificate" means any and all of a Certificate of Formation of the Company, and any duly authorized, executed and filed amendments or restatements thereof, which are filed in the office of the Secretary of State of the State of Delaware. "CEC" means Commonwealth Energy Corporation, a California corporation. 2 7 "Code" means the Internal Revenue Code of 1986, as previously or hereafter amended. "Common Member" means any holder of a Common Member Interest. "Common Member Interest" means a Membership Interest identified as a Common Member Interest on Schedule A. "Company" means the limited liability company formed pursuant to this Agreement under the name Summit Energy Ventures, LLC. "Company Minimum Gain" has the meaning set forth in Treasury Regulation Sections 1.704-2(b)(2) and 1.704-2(d)(1) for the phrase "partnership minimum gain." "Economic Interest" means a Person's right to share in the Net Income, Net Losses, or similar items of, and to receive distributions from, the Company, but does not include any other rights of a Member including, without limitation, the right to vote or to participate in the management of the Company, or, except as specifically provided in this Agreement or required under the Act, any right to information concerning the business and affairs of the Company. "Effective Date" is defined in Section 12.5. "Encumbrance" means a pledge, alienation, mortgage, hypothecation, encumbrance or similar collateral assignment by any other means, whether for value or no value and whether voluntary or involuntary (including, without limitation, by operation of law or by judgment, levy, attachment, garnishment, bankruptcy or other legal or equitable proceedings). The term "Encumber" shall have a correlative meaning. "Fiscal Year" is defined in Section 8.5. "Flow-Through Entity" is defined in Section 9.3(a)(iv). "Immediate Family" means an individual Person's current spouse, parents, grandparents, siblings, children, children's spouses, grandchildren or grandchildren's spouses or any trusts or estates exclusively for the benefit of any of the foregoing. "Incapacity" means the entry of an order of incompetence or of insanity, or the Bankruptcy, death, Disability, dissolution or termination (other than by merger or consolidation) of any Person. "Incapacitated" shall have a correlative meaning. "Indemnitees" is defined in Section 4.8(a). "Investment" means any investment recommended by the Investment Manager and/or approved by the Investment Committee subject the following parameters, unless so waived by the Investment Committee: (a) no Investment or successor of Investments in any single company or group of related companies may exceed $10,000,000 (ten million dollars); or (b) no Investment may be made in any company with less than two years of operating history and one year of positive net income. "Investment Committee" means the investment committee of the Company established pursuant to Section 4.4. "Investment Manager" means NPM, or any successor investment manager of the Company. "Management Fee" means the fees paid to the Investment Manager pursuant to Section 4.3. 3 8 "Member Minimum Gain" means minimum gain attributable to a Member Nonrecourse Debt determined in accordance with Treasury Regulation Section 1.704-2(i) with respect to "partner minimum gain." "Member Nonrecourse Debt" has the meaning set forth in Treasury Regulation Section 1.704-2(b)(4) for the phrase "partner nonrecourse debt." "Member Nonrecourse Deductions" has the meaning set forth in Treasury Regulation Section 1.704-2(i) for the phrase "partner nonrecourse deductions." "Members" means those Persons owning Membership Interests and identified as such on the books and records of the Company, as well as any Additional Members and Substitute Members. Reference to a "Member" shall refer to any one or more of the Members, as the context may require. "Membership Interest" or "Interest" means the entire ownership interest of a Member in the Company at any particular time, including without limitation, the Member's Economic Interest, any and all rights to vote and otherwise participate in the Company's affairs, and the rights to any and all benefits to which a Member may be entitled as provided in this Agreement, together with the obligations of such Member to comply with all of the terms and provisions of this Agreement. "Net Income" and/or "Net Loss", respectively, for any Accounting Period means the income or loss of the Company for such Accounting Period as determined in accordance with the method of accounting followed by the Company for Federal income tax purposes, including, for all purposes, any income exempt from tax and any expenditures of the Company which are described in Code section 705(a)(2)(B); provided, however, that in determining Net Income and Net Loss and every item entering into the computation thereof, solely for the purpose of adjusting the Capital Accounts of the Members (and not for tax purposes), (i) any income, gain, loss or deduction attributable to the taxable disposition of any Company asset shall be computed as if the adjusted basis of such Company asset on the date of such disposition equaled its Book Value as of such date, (ii) if any Company asset is distributed in kind to a Member, the difference between its Value and its Book Value at the time of such distribution shall be treated as gain or loss, (iii) as to any Company asset held by the Company on an Adjustment Date, the difference between such Company asset's Book Value on such Adjustment Date and its Book Value immediately prior to such Adjustment Date shall be treated as gain or loss, as appropriate, and (iv) any depreciation, cost recovery and amortization as to any Company asset shall be computed by assuming that the adjusted basis of such Company asset equaled its Book Value determined under the methodology described in Treasury Regulation Section 1.704-1(b)(2)(iv)(g)(3); and provided, further, that any item (computed with the adjustments in the preceding proviso) allocated under Section 7.4 shall be excluded from the computation of Net Income and Net Loss. "Nonrecourse Deductions" means deductions as described in Treasury Regulation Section 1.704-2(b)(1). "NPM" means Northwest Power Management, Inc., a Washington corporation. "Percentage Interest(s)" as of any date means 40% as to CEC, 40% as to NPM and 20% as to such persons or persons are as is to be determined by the Investment Manager pursuant to Section 3.5. "Permitted Transferee" with respect to a Member, means any Affiliate of such Member or any other Members. "Person" means and includes an individual, a corporation, a partnership, a limited liability company, a joint venture, a trust, an unincorporated organization and a government or any department or agency thereof, or any entity similar to any of the foregoing. "Preferred Member" means a holder of a Preferred Member Interest. "Preferred Member Interest" means a Membership Interest identified as a Preferred Member Interest on Schedule A. 4 9 "Preferred Return" means a return of 10%, compounded annually. "Regulatory Allocations" is defined in Section 7.4(a)(v). "Reserves" means funds set aside or amounts allocated to reserves that shall be maintained in amounts deemed sufficient by the Investment Manager for working capital, to pay taxes, insurance, debt service and other costs or expenses incident to the conduct of business by the Company as contemplated hereunder and other contingent liabilities. "Responsible Party" is defined in Section 4.8(f). "Substitute Member" means any Assignee that has been admitted to the Company as a Member pursuant to Section 10.2 by virtue of such Assignee's receiving all or a portion of a Membership Interest from another Member or its Assignee, and not pursuant to Section 10.3. "Tax Liability Distribution" is defined in Section 6.2. "Transfer" and "Transferred" mean, with respect to any Membership Interest, a sale, conveyance, exchange, assignment, pledge, encumbrance, gift, bequest, hypothecation or other transfer or disposition by any other means, whether for value or no value and whether voluntary or involuntary (including, without limitation, by realization upon any Encumbrance or by operation of law or by judgment, levy, attachment, garnishment, bankruptcy or other legal or equitable proceedings) or an agreement to do any of the foregoing. "Treasury Regulation" means a Treasury Regulation promulgated under the Code. "Value" of any asset of the Company, as the case may be, as of any date, means the fair market value of such asset, as the case may be, as of such date, as determined by the Investment Manager in good faith and following receipt of a fairness opinion or other valuation performed by a nationally recognized investment bank or appraisal firm if the value of such assets exceeds $1,000,000 (one million). ARTICLE 2. FORMATION Section 2.1 Formation of the Company. The Company was formed as a limited liability company under the Act by the filing of the Certificate with the Office of the Secretary of State of the State of Delaware on ________, 2001. Section 2.2 Filings. The Investment Manager shall have the authority to conduct all filing, recording, publishing and other acts necessary or appropriate for compliance with all requirements for operation of the Company as a limited liability company under this Agreement and the Act and under all other laws of the State of Delaware and such other jurisdictions in which the Company determines that it may conduct business. Section 2.3 Name, Registered Office and Agent, Principal Place of Business. The name of the Company is Summit Energy Ventures, LLC, as such name may be modified from time to time by the Investment Manager as it may deem advisable. The Investment Manager shall promptly provide written notice to each Member of any change in the name of the Company. The Company's registered office in the State of Delaware and its registered agent for service of process on the Company in the State of Delaware at such registered office shall be as set forth in the Company's most recently filed Certificate. The Company's principal place of business currently is 700 Fifth Ave., Suite 6100, Seattle, WA 98104, and thereafter at such other place or places as the Investment Manager may from time to time designate. The Company may maintain offices and places of business at such other place or places within or outside the State of Delaware as the Investment Manager deems advisable. 5 10 Section 2.4 Purpose of Company. Subject to the limitations on the activities of the Company set forth in this Agreement, the purpose and business of the Company shall be the conduct of any business or activity that may be conducted by a limited liability company organized pursuant to the Act, including without limitation (a) to purchase, acquire, sell, transfer, or otherwise dispose of ownership interests, for the benefit of CEC, in energy or energy-related companies that are synergistic to CEC's business; (b) to take advantage of the expertise of NPM, and its Manager Steven Z. Strasser, in managing investment portfolios; (c) to hold title to and beneficial ownership of energy or energy-related companies; and, (d) except as otherwise limited herein, to enter into, make and perform all contracts and other undertakings, and engage in all activities and transactions, as necessary or advisable to the carrying out of the foregoing purposes and businesses of the Company. Section 2.5 Term. The Company commenced as of the date that the Certificate was filed with the Office of the Delaware Secretary of State, and shall continue to exist for a five year period unless terminated earlier pursuant to this Agreement, except that such term may be extended by the Investment Manager and the Investment Committee for up to two additional one-year periods at their mutual discretion; provided, however, that if no Investments are acquired by the Company within 18 months of the Agreement Date then the Investment Committee may terminate this Agreement by giving the Investment Manager 30 days prior written notice of its intent to terminate this Agreement. ARTICLE 3. MEMBERSHIP; DISPOSITION OF INTERESTS; CAPITAL CONTRIBUTIONS Section 3.1 Members. Effective as of the Agreement Date, there are hereby created two classes of Membership Interests in the Company. Such classes of Membership Interests shall be designated as Common Member Interests and Preferred Member Interests, and each such item shall have the respective rights accorded it under this Agreement. The names, addresses, Capital Commitment, Capital Contributions, Percentage Interests of the Members are set forth on Schedule A hereto, which shall be amended from time to time to reflect the admission of Additional Members and Substitute Members pursuant to this Agreement, as well as to reflect any changes in the Members' respective Capital Commitments, Capital Contributions, and Percentage Interests pursuant to the terms of this Agreement. Section 3.2 Liability to Third Parties. No Member shall be liable for the debts, obligations or liabilities of the Company. Section 3.3 Access to Information. Each Member shall be entitled to receive any information from the Company that it may reasonably request concerning the Company; provided, however, that this Section 3.3 shall not obligate the Company or any Member to create any information that does not already exist at the time of such request (other than to convert existing information from one medium to another, such as providing a printout of information that is stored in a computer database). Each Member shall also have the right, upon reasonable notice, and at all reasonable times during usual business hours to inspect the assets of the Company and to audit, examine and make copies of the books of account and other records of the Company. Such right may be exercised through any agent or employee of such Member designated in writing by it or by an independent public accountant, attorney or other consultant so designated. The Company shall bear all costs and expenses incurred in any inspection, examination or audit made on such Member's behalf. Section 3.4 Capital Contributions. Effective as the Agreement Date, CEC and NPM are admitted to the Company as Common Members. On the Agreement Date, CEC and the Company shall execute a Contribution Agreement in the form attached hereto pursuant to which CEC shall make a Capital Contribution of $15,000,000 (fifteen million) and a Capital Commitment of $10,000,000 (ten million), which shall be delivered in two traunches of $5,000,000 (five million) each. CEC agrees that it shall convert the first half of the Capital Commitment into a Capital Contribution at such time as the Investment Manager provides written notice to CEC that 75% (seventy-five percent) of the Capital Contribution made as of the Agreement Date has been invested in 6 11 accordance with the terms of the LLC Agreement. CEC agrees that it shall convert the second half of the Capital Commitment into a Capital Contribution at such time as the Investment Manager provides written notice to CEC that 75% (seventy-five percent) of the first half of the Capital Commitment has been invested in accordance with the terms of the LLC Agreement. Section 3.5 Allocation of Interests; Right of First Refusal to Make Additional Capital Contributions. The Investment Manager may allocate a 20% Percentage Interest to such person or persons as it shall determine; provided, however, that if such Percentage Interest has not been allocated by the time the Company files its first income tax return, then the Percentage Interest shall be divided equally between CEC and the Investment Manager. In addition, subject to the provisions of Section 12.1 hereof, the Investment Manager may amend the provisions of this Agreement to create a class or series of interests for the purpose of accepting additional Capital Contributions from time to time with the approval of the Investment Committee and upon such terms and conditions as agreed by the Investment Manager and the Investment Committee. No Member shall have any obligation to make any additional Capital Contributions; provided, however, that CEC shall have a right of first refusal to make an additional Capital Contribution on the same terms and conditions offered to any prospective Member as follows: (a) Right of First Refusal Notification. In the event that the Investment Manager desires to cause the Company to issue Membership Interests to any Person (other than CEC), the Investment Manager agrees that it will notify (the "Right of First Refusal Notification") CEC in writing of its intention to do so, specifying the nature of the Interests proposed to be issued (the "Offered Interests"), the name of the person or persons to whom the Company proposes to issue the Offered Interests, and the amount of Capital Commitments that will be required in connection with the issuance of such Interests (the "Minimum Price"). The Right of First Refusal Notification shall contain an affirmation by the Investment Manager that he has a reasonable expectation of being able to issue the Interests at the Minimum Price and to such Person or Person, and shall recite the basis for such expectation. The Right of First Refusal Notification shall offer to issue to CEC the Offered Interests, free and clear of any liens or encumbrances in favor of third persons, at the Minimum Price and on such other terms and conditions, if any, not less favorable to CEC as those proposed to be offered to such other Person or Persons. In the event all or any part of the consideration shall consist of other than cash, the Minimum Price shall mean the fair market value of such consideration. (b) Exercise of Right of First Refusal. In the event that CEC elects to purchase or acquire all of the Offered Interests, written notice of such election shall be delivered to the Investment Manager no later than fifteen (15) days following receipt of the Right of First Refusal Notification by CEC, and such notice shall, when taken in conjunction with the Right of First Refusal Notification, be deemed to constitute a valid and legally binding purchase and sale agreement. (c) Closing. The closing of a purchase and sale of Offered Interests pursuant to this Section 3.5 shall take place at the principal executive offices of the Company on the thirtieth (30th) day following the expiration of the period within which the offer to purchase could have been accepted (unless another time is mutually agreed upon by the parties). (1) (d) Option. CEC is hereby granted an option to purchase any of the Investments acquired by the Company at any time during the term of this Agreement on such terms and conditions as are mutually agreeable to the Investment Manager and CEC; provided however, that CEC shall have the right to credit any balance in its Capital Account against the purchase price of the Investment. If the Investment Manager and CEC are unable to reach agreement on the fair market value of such Investment, then the Investment Manager shall obtain a valuation of the Investment from a nationally recognized investment bank or appraisal firm which firm shall be approved by the Investment Committee; provided, however, that the valuation of the Investment shall be the projected value of the Investment at the termination of this agreement; without regard to any extended term. Section 3.6 Return of Capital, No Interest on Capital. Except as expressly provided in this Agreement: (a) no Member or Assignee shall demand or be entitled to the return of any or all of its Capital 7 12 Contribution or Capital Account and (b) no Member or Assignee shall withdraw any portion of its Capital Contribution or receive any distributions from the Company as a return of capital on account of such Capital Contribution. Section 3.7 Limited Liability of Members. Notwithstanding anything to the contrary contained in this Agreement, and except as otherwise required by applicable law, the liability of a Member for any losses of the Company in no event shall exceed, in the aggregate, the amount of its Capital Contribution invested in the Company. Section 3.8 Capital Accounts. There shall be established for each Member on the books of the Company a capital account (the "Capital Account") in compliance with Treasury Regulation Sections 1.704-1(b) or 1.704-2, as amended. Subject to the preceding sentence, each Member's Capital Account shall initially be equal to the amount of cash and the fair market value of any property contributed by a Member to the Company (net of liabilities secured by such contributed property that the Company is treated as assuming or taking subject to pursuant to the provisions of Section 752 of the Code) and, throughout the term of the Agreement, the Capital Account shall be (i) increased by the amount of income and gain allocated to such Capital Account and the amount of any cash and the fair market value of any property contributed by a Member to the Company (net of liabilities secured by such contributed property that the Company is treated as assuming or taking subject to pursuant to the provisions of Section 752 of the Code) and (ii) decreased by the amount of losses and deductions allocated to such Capital Account and the amount of any cash and the fair market value of any property distributed to a Member by the Company in accordance with Section 3.5 or otherwise (net of liabilities secured by such distributed property that the Member is treated as assuming or taking subject to pursuant to the provisions of Section 752 of the Code). ARTICLE 4. INVESTMENT MANAGER; INVESTMENT COMMITTEE Section 4.1 Appointment of Investment Manager; Responsibilities. (a) Appointment of Investment Manager. NPM is hereby appointed the Investment Manager and NPM agrees to assume the responsibilities of the Investment Manager. Upon resignation of the Investment Manager or removal due to Incapacity, fraud or willful misconduct on the part of the Investment Manager, a successor investment manager shall be appointed by the Investment Committee. Upon the resignation or removal of an Investment Manager, a Value shall be placed on the Investment Manager's Membership Interest which Value shall be paid to the Investment Manager on the liquidation of the Investments; provided, however, that if the Value of the Company shall have depreciated since the date the Investment Manager resigned or was removed, then the Value of the Investment Manager's Membership Interests shall be reduced pro-rata to the reduction of the Value of the Company. On the date the Investment Manager either resigns or is removed, the Investment Manager's Membership Interest shall automatically be converted to an Economic Interest only. (b) Investment Management Services. The Investment Manager shall have the powers and duties granted to the Investment Manager pursuant to the terms of this Agreement, including without the authority and responsibility to (i) advise the Company with respect to the acquisition, management, financing and disposition of Investments, (ii) monitor the Company's Investments, (iii) represent the Company in its respective day-to-day dealings with Persons with whom the Company interacts with respect to the business and operations of the Company (including without limitation accountants, attorneys, custodians, insurers and banks) and (iv) monitor and supervise the performance of all parties who have contracts to perform services for the Company (collectively, the "Investment Management Services"). The Investment Manager shall have the sole power and authority to bind the Company, except and to the extent that such power is limited pursuant to Section 4.1(d) hereof. (c) Administrative Services. The Investment Manager shall (i) provide accounting services (but not auditing work), (ii) prepare and deliver reports to the Company, (iii) coordinate investor related services for the Company, (iv) prepare and disseminate financial statements of the Company, (v) coordinate the tax 8 13 returns of the Company, (vi) maintain the books and records of the Company, (vii) select and administer brokerage, bank or custodial accounts for the Company and (viii) perform other similar functions as the Company and the Investment Manager may agree upon (collectively, the "Administrative Services"). (d) Limits on Manager's Powers. Notwithstanding anything in this Agreement to the contrary, the Investment Manager shall not cause or permit the Company to: (i) Purchase or otherwise acquire any Investment without the approval of the Investment Committee required pursuant to Section 4.4 hereof; (ii) possess Company property, or assign Company property, for other than a Company purpose; (iii) admit a Person as a Member, except as provided in this Agreement; (iv) make any loans to the Investment Manager or its Affiliates or any of their respective officers, directors or employees; or (v) transfer any funds for the acquisition of an Investment without the written approval of the Investment Committee. (e) Delegation of Authority of the Company. The Company hereby delegates to the Investment Manager all powers, duties and responsibilities with regard to the Investment Management Services and the Administrative Services and hereby appoints the Investment Manager as the Company's attorney in fact with full authority in the Company's name to perform such services. (f) Subcontracting. The Investment Manager may contract with other persons or entities to provide any or all of the foregoing Investment Management Services and Administrative Services, with the cost to be borne by the Investment Manager; provided that any delegation of such rights or duties shall not release the Investment Manager from its obligations hereunder and the Investment Manager shall remain responsible hereunder for all acts and omissions of such contractor as if such acts or omissions were those of the Investment Manager. (g) Bank Accounts. The Investment Manager shall establish bank accounts in the name of the Company and shall deposit therein the Capital Investments of the Company; provided, however, that the Investment Committee shall have the right to approve any bank selected by the Investment Manager. Section 4.2 Retention or Employment of Other Persons After Approval of Investment. All expenses and fees associated with the due diligence, evaluation and closing of the transaction (including, without limitation, the retention or employment of accountants, attorneys and consultants, reasonable travel and entertainment (collectively, the "Transaction Expenses")) shall be paid by the Company; provided, however, that the Investment Manger may not employ any Persons that are shareholders or Affiliates of the Investment Manager unless either (a) the Person is in the business of providing such services and the cost is comparable to what is generally offered by third parties; or (b) the services are being provided on terms that are no less favorable to the Company than could be obtained from an unrelated third party in an arms-length transaction. Section 4.3 Management Fee; Expenses. (a) The Company shall pay to the Investment Manager, as compensation for its performance of the Investment Management Services and the Administrative Services an annual fee equal to three percent (3%) of the book value of the Investments averaged on an annual basis. The Management fee shall be paid in two semi-annual payments of $375,000 payable on January 8 and July 8 of each calendar year; provided, however, that the Management Fee shall be pro-rated for any partial period. At the end of each calendar year, the 9 14 actual Management Fee shall be calculated and a payment shall be made by the Investment Manager to the Company for any overpayment of Management Fees or by the Company to the Investment Manager for any underpayment of Management Fees. Such payment shall be due and payable on January 8 of each calendar year. (b) Except for expenses to be paid by the Investment Manager pursuant to Section 4.3(c), the Company shall pay all expenses incurred in connection with the operation of the Company, including without limitation, Management Fees, Transaction Expenses with respect to each Investment evaluated or acquired by the Company, indemnification expenses of the Company pursuant to Section 4.8 and legal and accounting expenses of the Company. (c) The Investment Manager shall pay, and the Company will not be obligated to pay, the Investment Manager's administrative costs related to providing the Investment Management Services and the Administrative Expenses, including: salaries and fringe benefits of professional, administrative, clerical, bookkeeping, secretarial and other personnel of the Investment Manager; rent, office equipment, fire and theft insurance, heat, light, cleaning, power, water and other utilities of any office space maintained by the Investment Manager on its own behalf or on behalf of the Company; stationery, postage, office supplies for the Investment Manager and the Company; secretarial services; travel and entertainment; telephone (local and long distance); publications and subscriptions; data processing; printing, publishing and distributing financial reports; and any other overhead type expenses; provided, however, the Company shall reimburse the Investment Manager and its Affiliates for the reasonable costs of providing tax and accounting services to the Company, including maintaining financial books and records, calculating the value of Company Assets and preparing tax returns. Section 4.4 Investment Committee. The Investment Committee shall be comprised of three members appointed by CEC; provided, however, that no officer of director of CEC with an equity interest in the Company may be appointed as a member on the Investment Committee. The Investment Committee shall have the authority to approve or disapprove any recommendation by the Investment Manager to purchase or otherwise acquire or make an Investment. The Company may not purchase or otherwise acquire or make any Investment without the prior approval of the Investment Committee as described in this Section 4.4. All actions required of the Investment Committee shall be taken by a majority vote of the members of the Investment Committee held at a meeting of the Investment Committee no earlier than 2 business days following delivery of written notice of such meeting of specifying the time, place and agenda for such meeting or by written consent of all members of the Investment Committee. Section 4.5 Company Funds. Company funds shall be held in the name of the Company and shall not be commingled with those of any other Person. Company funds shall be used by the Investment Manager only for the business of the Company. Section 4.6 Other Activities and Competition. (a) The Investment Manager agrees that it shall devote such business and professional time to the Company and its purposes and objectives as shall be reasonably necessary in the opinion of the Investment Manager to achieve the objectives of the Company. (b) Except as set forth in Section 4.6(c), the Investment Manager, its Affiliates and agents, members, officers, directors and employees of the Investment Manager and its Affiliates may engage in or possess any interests in business ventures and may engage in other activities of every kind and description independently or with others in addition to those relating to the Company. Each Member authorizes, consents to and approves of such present and future activities by such Persons. Except as set forth in this Agreement, neither the Company nor any Member shall have any right by virtue of this Agreement in or to other ventures or activities of the Investment Manager, its members or their Affiliates or to the income or proceeds derived therefrom. 10 15 (c) Notwithstanding anything to the contrary in Section 4.6(b), neither the Investment Manager, its shareholders, directors, officers or members nor its or their Affiliates shall, without the consent of the Investment Committee, directly or indirectly create, manage or sponsor another partnership or investment fund with investment objectives similar to the Company, until the earlier of the date on which at least seventy-five percent (75%) of the Capital Contribution of the Preferred Members have been invested or committed to be invested; provided, however, that if such an entity is created, the Investment Manager and its Affiliates shall first allocate investment opportunities entirely to the Company until such time that ninety percent (90%) of the Capital Contribution of the Preferred Members have been invested or committed to be invested. (d) In the event that the Investment Committee rejects a recommendation by the Investment Manager to acquire an Investment, then any Member, except CEC, may acquire the Investment; provided, however, that the Member acquires such Investment on the same terms and conditions offered to the Company. In the event that the terms and conditions offered to the Member are more favorable than those offered to the Company, then the Member shall automatically grant the Company a right of first offer to acquire the Investment on the same terms and conditions offered the Member pursuant to the procedure established in Section 5.2. Section 4.7 Duty of Care and Loyalty; Investment Manager's Liability. (a) The Investment Manager shall discharge its duties under this Agreement solely in the interest of the Members and the Company, and shall do so with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Investment Manager shall not deal with the income or assets of the Company in the Investment Manager's own interest or for its own account. (b) To the extent permitted by applicable law, neither the Investment Manager, nor any of its Affiliates, directors, officers, employees, shareholders, members, assigns, representatives or agents, shall be liable, responsible or accountable in damages or otherwise to the Company or any Member for any loss, liability, damage, settlement cost, or other expense (including reasonable attorneys' fees) incurred by reason of any act or omission or any such alleged act or omission performed or omitted by such Person (including those in connection with representation on behalf of the Company on creditors' committees in bankruptcy proceedings or serving on boards of directors or the equivalent thereof for companies or other entities in the Company's portfolio) if such Person acted in good faith and in a manner it reasonably believed to be in, or not opposed to, the best interests of the Company, and if there has been no final adjudication in binding arbitration in the manner provided in Section 4.7(b) determining such Person has acted with gross negligence or willful misconduct with respect to such act or omission. Section 4.8 Indemnification. (a) To the extent permitted by applicable law, the Investment Manager, and any of its Affiliates, directors, officers, employees, shareholders, members, assigns, representatives or agents (each such person being an "Indemnitee") shall be held harmless and be indemnified by the Company for any liability, loss (including amounts paid in settlement), damages or expenses (including reasonable attorneys' fees) suffered by virtue of any acts or omissions or alleged acts or omissions arising out of such Indemnitee's activities in connection with representation of the Company on creditors' committees in bankruptcy proceedings or serving on boards of directors or the equivalent thereof for companies or other entities in the Company's portfolio) if such Person acted in good faith and in a manner it reasonably believed to be in, or not opposed to, the best interests of the Company, and if there has been no final adjudication determining such Indemnitee has acted with gross negligence or willful misconduct with respect to such acts or omissions. The termination of any action, suit or proceeding by judgment, order or settlement shall not, of itself, create a presumption that a Person did not act in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the Company. (b) In the event that any Indemnitee believes it is entitled to indemnification hereunder by virtue of any amount paid as described in subsection (a) of this Section 4.8, the Investment Manager or such Indemnitee shall give notice of such payment, and the circumstances giving rise thereto, to the Members prior 11 16 to receipt of indemnification hereunder and, if within 45 days of such notice CEC objects to such indemnification, the Indemnitee's entitlement thereto shall be referred by CEC and the Indemnitee to binding arbitration. Pending the result of such arbitration, the amounts sought by the Indemnitee as indemnification shall be held by the Company in trust for the parties determined to be entitled thereto in the course of such arbitration. If CEC fails to object to the indemnification within the aforementioned 45-day period, the Indemnitee shall be entitled to such indemnification and shall conclusively be deemed to have satisfied the standards set forth in subsection (a) of this Section 4.8. In the event of any arbitration pursuant to this subsection (b) of Section 4.8, CEC shall, within 30 days of its decision to object to indemnification, select one arbitrator and the Indemnitee shall, within the same period, select a second arbitrator. The two arbitrators thus selected shall, within 15 days of their selection, select a third arbitrator. In the event any arbitrator required to be selected pursuant to the preceding sentences is not selected within the time periods therein set forth, either CEC or the Indemnitee may apply to any court having jurisdiction over CEC and the Indemnitee and such court shall be empowered to select any arbitrator not so selected. The arbitrators shall be limited to determining whether the Indemnitee (i) acted with gross negligence or willful misconduct and (ii) is entitled to indemnification under the standards set forth in subsection (a) of this Section 4.8. Any arbitration hereunder shall be conducted in accordance with the rules of the American Arbitration Association then prevailing, and the decision of the arbitrators shall be final and binding on all the Members and on the Indemnitee. The costs of the arbitration (other than fees and expenses of counsel, which shall be the responsibility of the parties retaining such counsel) shall be borne equally by the parties thereto; provided, however, that in the event that it is determined in such arbitration that the Indemnitee is entitled to indemnification, the Indemnitee shall also be entitled to indemnification for its share of such costs and for the fees and expenses of its counsel. If for any reason the provisions of this subsection (b) are held to be unavailable or unenforceable, then any determination which must be made under this Agreement in binding arbitration may be made by any court of competent jurisdiction. (c) Any indemnification provided hereunder shall be satisfied out of Company assets as an expense of the Company. Section 4.9 Application of Fees. With respect to each Investment all (a) origination fees received in connection with the acquisition of such Investment; (b) monitoring fees and directors' fees paid by portfolio companies in which the Company holds an Investment; and (c) "break-up" or similar fees paid for a failed transaction shall be shared equally by the Investment Manager and the Company. ARTICLE 5. POWERS, RIGHTS AND DUTIES OF THE MEMBERS Section 5.1 Limitations. Except as expressly required by the Act or as expressly provided in this Agreement, the Members in their capacity as members of the Company shall not participate in the management or control of the Company's business nor shall they transact any business for the Company, nor shall they have the power to act for or bind the Company, or otherwise vote on any matter affecting the Company or its business, said powers being vested solely and exclusively in the Investment Manager and the Persons, if any, to whom the Investment Manager delegates such powers in accordance with the provisions of this Agreement. Section 5.2 Right of First Offer. (a) Transfer Notice. If at any time the Investment Manager proposes to dispose of any Investment to one or more third parties, whether by sale, assignment, (a "Transfer"), then the Investment Manager shall give CEC written notice of its intention to make the Transfer (the "Transfer Notice"), which Transfer Notice shall include (i) a description of the Investment to be transferred, (ii) a statement of its bona fide intention to transfer the Investment and (iii) the consideration and the material terms and conditions upon which the proposed Transfer is to be made. The Transfer Notice shall also include a copy of any written proposal, term sheet or letter of intent or other agreement relating to the proposed Transfer. (b) CEC's Option. CEC shall have an option for a period of twenty (20) business days from receipt of the Transfer Notice to elect to purchase the Investment at the same price and subject to the 12 17 same terms and conditions as described in the Transfer Notice. CEC may exercise such purchase option and, thereby, purchase the Investment by notifying the Investment Manager in writing before expiration of such twenty (20) business day period that it wishes to purchase the Investment. During such twenty (20) business day period the Investment Manager shall provide CEC with all information reasonably requested by CEC with respect to the Investment, including such financial, accounting, engineering, intellectual property, legal and operational diligence materials as CEC may reasonably request regarding such Investment. In addition, the Investment Manager shall use its best efforts to make management personnel of the Investment available for due diligence interviews by CEC. To the extent required by the Investment, CEC shall enter into confidentiality agreements that are customary in form, substance and scope for similarly sized mergers and acquisitions in the same industry as the Investment. If CEC gives the Investment Manager notice that it desires to purchase the Investment, then payment for the Investment shall be by wire transfer, against delivery of the Investment to be purchased at a place agreed upon between the parties and at the time of the scheduled closing therefor, which shall be no later than forty-five (45) business days after CEC's receipt of the Transfer Notice, subject to extension of such period for any period necessary to receive required regulatory approvals. In the event that CEC does not exercise its option hereunder with respect to any Investment, the Company may transfer such Investment on terms that are fair to the Company and are no less favorable to the Company than the terms set forth in the Transfer Notice. Any such Transfer shall be consummated no later than 120 days following delivery of the Transfer Notice. ARTICLE 6. DISTRIBUTIONS Section 6.1 Distributions. Subject to the provisions of Sections 6.2, 6.3, and 6.4 and the sole discretion of the Investment Manager, Cash Available for Distribution, if any, shall be distributed to the Members as follows: (a) First, one hundred percent (100%) to the Preferred Members in proportion to their Capital Contributions until the cumulative amount distributed to the Preferred Members pursuant to this Section 6.1(a) is equal to the Preferred Return on the Preferred Members' outstanding Capital Contributions (computed from the date or dates the Capital Contributions were made and taking into account the date of distributions of Capital Contributions pursuant to Section 6.1(b) and the date of distributions of Preferred Returns pursuant to this Section 6.1(a)); and (b) Second, one hundred percent (100%) to the Preferred Members' Capital Contributions until the cumulative amount distributed to the Preferred Members pursuant to this Section 6.1(b) is equal to all Capital Contributions made by the Preferred Members; and (c) Third, any remaining amount to the Members in proportion to the Members' Percentage Interests. Section 6.2 Tax Liability Distributions. Prior to the distribution of cash, if any, pursuant to Section 6.1, the Company shall make a cash distribution to the Members to the extent of Cash Available for Distribution in amounts intended to enable the Members to discharge their United States federal, state and local income tax liabilities arising from the allocations made pursuant to Article 7 (a "Tax Liability Distribution"). The amount of any such Tax Liability Distribution shall be determined by the Investment Manager based on (a) the highest effective combined United States Federal, state and local income tax rate applicable to any Member, and taking into account the deductibility of state and local income taxes for United States federal income tax purposes, and (b) the amounts so allocated pursuant to Article 7 to each Member, and otherwise based on such reasonable assumptions as the Investment Manager determines in good faith to be appropriate. Tax Liability Distributions shall be made to each Member pro rata in accordance with such Member's relative allocation of the corresponding item(s) of gain or income, and shall be treated as advances of, and shall as soon as possible be recouped solely from, distributions otherwise to be received by such Member under this Agreement, provided, that in no event shall such Member otherwise be required to recontribute or otherwise return or repay any such Tax Liability Distribution. Any amount distributed to the Members pursuant to Section 6.1 with respect to a Fiscal Year shall reduce the amount distributable to such Member as a Tax Liability Distribution for such Fiscal Year. 13 18 Section 6.3 Distributions in Kind. No right is given to any Member to demand and receive property other than cash. The Investment Manager may determine, in its sole and absolute discretion, to make a distribution in kind of Company assets to the Members, which may be in registered securities, and such assets shall be distributed in such a fashion as to ensure that the fair market value thereof is distributed and allocated in accordance with this Article 6 and Article 7 and Article 11 hereof. Section 6.4 The Right to Withhold. The Company shall withhold from any distribution such amounts as are required to be withheld by the laws of any taxing jurisdiction. Such withheld amounts shall be treated as amounts distributed to the respective Members on whose account the withholding was imposed. Section 6.5 Sale of Investments or the Company. The parties acknowledge that the Investment Manager is empowered to unilaterally cause the sale of one or more of the Investments (other than any third party interests therein (i.e., those held by Persons not affiliated with the Company)) and all or any portion of the Company. Upon any such sale of one or more Investments, the Investment Manager shall distribute the sales proceeds in accordance with this Agreement. ARTICLE 7. ALLOCATIONS Section 7.1 General. Net Income and Net Loss of the Company shall be determined and allocated with respect to each Accounting Period of the Company as of the end of such Accounting Period. Subject to the other provisions of this Article 7, an allocation to a Member of a share of Net Income or Net Loss shall be treated as an allocation of the same share of each item of income, gain, loss or deduction that is taken into account in computing Net Income or Net Loss. Section 7.2 Allocation of Net Income and Net Loss. Except as provided in Sections 7.3 and 7.4, the Company's Net Income or Net Loss and each item of income, gain, loss and deduction entering into the computation thereof, for each Accounting Period shall be allocated to the Members as follows: (a) Net Income for such Accounting Period shall be allocated as follows: (i) first, an amount of Net Income equal to the excess of (x) all Net Loss previously allocated to the Members pursuant to Section 7.2(b)(iii) over (y) all Net Income previously allocated to the Members pursuant to this Section 7.2(a)(i), shall be allocated to the Members in proportion to each Member's share of such excess of (x) over (y); (ii) second, an amount of Net Income equal to the excess of (x) the sum of (A) all Net Loss previously allocated to the Members pursuant to Section 7.2(b)(ii) and (B) an amount equal to the aggregate preferred return distributable to the Members pursuant to Section 6.1(a) as of the date of allocation for such Accounting Period and all prior Accounting Periods (whether or not such Preferred Return has in fact been distributed) over (y) all Net Income previously allocated to the Members pursuant to this Section 7.2(a)(ii), shall be allocated to the Members in proportion to each Member's share of such excess of (x) over (y); and (iii) third, any remaining Net Income shall be allocated to the Common Members in accordance with their Percentage Interests. (b) Net Loss for such Accounting Period shall be allocated as follows: (i) first, an amount of Net Loss equal to the excess of (x) all Net Income previously 14 19 allocated to the Members pursuant to Section 7.2(a)(iii) over (y) all Net Loss previously allocated to the Members pursuant to this Section 7.2(b)(i) shall be allocated to the Members in proportion to each Member's share of such excess of (x) over (y); (ii) second, an amount of Net Loss equal to the excess of (x) all Net Income previously allocated to the Members pursuant to Section 7.2(a)(ii) over (y) all Net Loss previously allocated to the Members pursuant to this Section 7.2(b)(ii) shall be allocated to the Members in proportion to each Member's share of such excess of (x) over (y); (iii) any remaining Net Loss shall be allocated to the Members in proportion to their Capital Contributions. Section 7.3 Allocations Upon Final Liquidation. Notwithstanding Section 7.2, but subject to Section 7.4, all Net Income or Net Loss (or individual items of either) recognized in the year in which the Company is liquidated shall be allocated to the Members in a manner so that, to the extent possible, the ending Capital Account balances of each of the Members as increased by such Member's share of Company Minimum Gain and Member Minimum Gain shall be equal to the amount of distributions that each such Member would be entitled to receive upon the liquidation of the Company pursuant to Section 11.3. Section 7.4 Additional Allocation Provisions. Notwithstanding the foregoing provisions of this Article 7: (a) Regulatory Allocations. (i) If there is a net decrease in (1) Company Minimum Gain or (2) Member Minimum Gain during any Fiscal Year, the Members shall be allocated items of Company income and gain for such year (and, if necessary, for subsequent years) in accordance with Treasury Regulation Section 1.704-2(f) or Section 1.704-2(i)(4), as applicable. It is intended that this Section 7.4(a)(i) qualify and be construed as a "minimum gain chargeback" and a "chargeback of partner nonrecourse debt minimum gain" within the meaning of such regulations, which shall be controlling in the event of a conflict between such regulations and this Section 7.4(a)(i). (ii) Any Nonrecourse Deductions for any Fiscal Year shall be allocated to the Members in proportion to their Capital Contributions. Any Member Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Member(s) who bears the economic risk of loss (within the meaning of Treasury Regulation 1.702-2) with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable, in accordance with Treasury Regulation Section 1.704-2(i). (iii) If any Member unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Company income and gain shall be allocated, in accordance with Treasury Regulation Section 1.704-1(b)(2)(ii)(d), to the Member in an amount and manner sufficient to eliminate, to the extent required by such Regulation, the Adjusted Capital Account Deficit of the Member as quickly as possible. It is intended that this Section 7.4(a)(iii) qualify and be construed as a "qualified income offset" within the meaning of Treasury Regulation 1.704-1(b)(2)(ii)(d), which shall be controlling in the event of a conflict between such Regulation and this Section 7.4(a)(iii). (iv) If, and only to the extent, any allocation of Net Loss would cause or increase an Adjusted Capital Account Deficit as to any Member, such allocation of Net Loss shall be reallocated among the other Members in accordance with their respective Percentage Interests, subject to the limitations of this Section 7.4(a)(iv). 15 20 (v) The allocations set forth in Sections 7.4(a)(i), (ii), (iii) and (iv) (the "Regulatory Allocations") are intended to comply with certain regulatory requirements, including the requirements of Treasury Regulation Sections 1.704-1(b) and 1.704-2. Notwithstanding the provisions of Section 7.1, the Regulatory Allocations shall be taken into account in allocating other items of income, gain, loss and deduction among the Members so that, to the extent possible, the net amount of such allocations of other items and the Regulatory Allocations to each Member shall be equal to the net amount that would have been allocated to each such Member if the Regulatory Allocations had not occurred. (b) For any Fiscal Year during which any part of a Membership Interest or Economic Interest is Transferred by a Member (or by an Assignee or successor in interest to a Member), the portion of the Net Income and Net Loss of the Company that is allocable in respect of such Transferred interest shall be apportioned between the assignor and the assignee of such interest under any method allowed pursuant to Section 706 of the Code and the applicable Treasury Regulations as determined by the Investment Manager. (c) In the event that the Code or any Treasury Regulations promulgated thereunder require allocations of items of income, gain, loss, deduction or credit different from those set forth in this Agreement, upon the advice of the Company's counsel or accountants, the Investment Manager is hereby authorized to make new allocations in reliance upon the Code, the Treasury Regulations and such advice of the Company's counsel or accountants, such new allocations shall be deemed to be made pursuant to any fiduciary obligation of the Investment Manager to the Company and the Members, and no such new allocation shall give rise to any claim or cause of action by any Member. (d) For income tax purposes, all items of Company income, gain, loss, deduction and any other allocations shall be divided among the Members in the same proportions as they share its correlative item of "book" income, gain, loss or deduction pursuant to this Article 7; provided, that, income, gain, loss and deduction with respect to property whose Book Value differs from its adjusted basis for Federal income tax purposes shall be shared among the Members for federal and state income tax purposes so as to take into account the variation, if any, between the basis of the property to the Company and its Book Value in accordance with Code Section 704(c) and Treasury Regulations 1.704-3, using any method provided by such Treasury Regulations as chosen by the Investment Manager. (e) A Member's proportional share of the Company's "excess nonrecourse liabilities" within the meaning of Treasury Regulation Section 1.752-3(a)(3) at any time shall be its proportional share of the aggregate Capital Contributions to the Company at such time. ARTICLE 8. BOOKS AND RECORDS; ACCOUNTING; TAX ELECTIONS Section 8.1 Company Books. The Investment Manager shall cause to be kept at the principal place of business of the Company, or at such other location as the Investment Manager shall reasonably deem appropriate, full and proper ledgers, other books of account, and records of all receipts and disbursements, other financial activities and the internal affairs of the Company for each Fiscal Year of the term of the Company. Section 8.2 Delivery of Records; Inspection. Upon the reasonable written request of any Member for any purpose reasonably related to such Member's Membership Interest, the Investment Manager, subject to such reasonable standards as may be established from time to time by the Investment Manager, shall deliver to such requesting Member (or, to the extent so directed, to its agent or attorney) a copy of the following information: (a) unaudited quarterly financial reports and audited annual financial reports, which shall include an income statement for the period covered by such statements, a balance sheet as of the last day of such period, a statement of Members' equity, and a management discussion and analysis of the financial condition of the Company and all supporting calculations and information for such reports; 16 21 (b) promptly after becoming available, a copy of the Company's federal, state and local income or information tax returns for the year; (c) a current list of the name and last known business, residence or mailing address of each Member; (d) true and full information regarding the status of the business and financial condition of the Company; and (e) a copy of this Agreement, as amended, and the Certificate, together with executed copies of any written powers of attorney pursuant to which this Agreement, as amended, and the Certificate have been executed. Members (personally or through an authorized representative) may, for purposes reasonably related to their Membership Interests, inspect and copy (at their own cost and expense) the books and records of the Company at all reasonable business hours. Section 8.3 Reports and Tax Information. The Investment Manager shall, at the expense of the Company, send to each Member (and/or Assignee), within ninety (90) days after the end of each tax year (or as soon as reasonably practicable thereafter), the information necessary for such Member (and/or Assignee) to complete its federal, state and local income tax or information returns. Section 8.4 Company Tax Elections; Tax Controversies. The Investment Manager shall have the right to make all elections for the Company provided for in the Code, including, but not limited to, the elections provided for in Section 754 of the Code. The Investment Manager is hereby designated as the "Tax Matters Partner" pursuant to the requirements of Section 6231(a)(7) of the Code, and in such capacity, shall represent the Company, at the Company's expense, in any disputes, controversies or proceedings with the Internal Revenue Service. Section 8.5 Accounting and Fiscal Year. Subject to Code Section 448, the books of the Company shall be kept on such method of accounting for tax and financial reporting purposes as may be determined by the Investment Manager. The fiscal year (the "Fiscal Year") of the Company shall be the calendar year. Section 8.6 Confidentiality of Information. Each party hereto agrees that the provisions of this Agreement, all understandings, agreements and other arrangements between and among the parties, and all other non-public information received from or otherwise relating to the Company, shall be confidential, and shall not be disclosed or otherwise released to any other Person (other than another party hereto), without the written consent of the Investment Manager. Accordingly, each party hereto shall, and shall cause its agents and attorneys to, hold in confidence all such information. ARTICLE 9. TRANSFERS, ENCUMBRANCES AND REDEMPTIONS OF MEMBERSHIP INTERESTS Section 9.1 Transfers. No Member, and no Assignee, may Transfer all or any portion of its Membership Interest to any Person without the prior written consent of the Investment Manager. Section 9.2 Encumbrances. No Member or Assignee may Encumber all or any portion of its Membership or Economic Interest (or any beneficial interest therein) unless the Investment Manager consents in writing thereto, which consents may be given or withheld, or made subject to such conditions as are determined by 17 22 the Investment Manager, in the Investment Manager's sole and absolute discretion. Any purported Encumbrance which is not in accordance with this Agreement shall be null and void. Section 9.3 Regulatory Prohibition. No Member shall take or permit any action to be taken with respect to itself (including, without limitation, any change in its shareholders or partners, as applicable) that would subject the Company to be regulated under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or the Employee Retirement Income Security Act of 1974, each as amended (but, for the sake of clarity, it is recognized that nothing in this Section 9.3 shall prohibit the Company from engaging in business activities that would cause it to be subject, and therefore subjecting itself, to such regulation). ARTICLE 10. WITHDRAWN, REMOVED, ADDITIONAL AND SUBSTITUTE MEMBERS Section 10.1 Admissions, Withdrawals and Removals. No Person shall be admitted to the Company as a Member except in accordance with Section 10.2 or Section 10.3. Except as provided in Section 10.4, no Member shall be entitled to withdraw from the Company prior to dissolution of the Company without the written consent of the Investment Manager, which consent may be given or withheld in the Investment Manager's sole and absolute discretion. Any purported admission, withdrawal or removal which is not in accordance with this Agreement shall be null and void. Section 10.2 Substitute Members. No Assignee shall become a Member of the Company by virtue of such Assignee's receiving all or a portion of any interest in the Company from a Member or another Assignee without the consent of the Investment Manager, which consent may be given or withheld, or made subject to such condition(s), as the Investment Manager deems appropriate, in its sole and absolute discretion. Section 10.3 Additional Members. After all Common Member Interests have been allocated under this Agreement, the Investment Manager may admit an Additional Member with the approval of the Investment Committee and on such terms as the Investment Manager and Investment Committee agree. The Agreement shall be amended to reflect such terms. Section 10.4 Withdrawal of Certain Members. (a) Transfer of Entire Interest. If a Member has transferred all its Membership Interests to one or more Assignees in accordance with the terms of this Agreement, then such Member shall be deemed to have withdrawn from the Company (without any additional action required to be taken by such Member) when all of such Assignees have been admitted as Members in accordance with Section 10.3 hereof. Section 10.5 Conversion of Membership Interest. Upon the Incapacity of a Member, such incapacitated Member's Membership Interest shall automatically be converted to an Economic Interest only, and such Incapacitated Member (or its executor, administrator, trustee, receiver or beneficiary, as applicable) shall thereafter be deemed an Assignee for all purposes hereunder, with the same Economic Interest as was held by such incapacitated Member prior to its Incapacity, but without any other rights of a Member, unless such Assignee is admitted as a Substitute Member pursuant to Section 10.2. Section 10.6 Resignation, Removal, Incapacity Of The Investment Manager. (a) The Investment Manager may be removed as investment manager without its consent only by reason of the Investment Manager's (1) fraud or willful misconduct or (2) gross negligence in the operations of the Company that has a material adverse effect on the business or properties of the Company, or (3) 18 23 the Investment Manager, or Mr. Steven Strasser, the President of Investment Manager, has become Incapacitated; if, in each case, the Investment Committee votes for such removal. Immediately prior to the effective date of such removal, a successor Investment Manager may be appointed to continue the business of the Company upon the majority vote of the Investment Committee. (b) If the Investment Committee removes the Investment Manager in accordance with subsection (a) of this Section 10.6, notice of removal specifying the effective date of removal shall be served on the Investment Manager either by certified or by registered mail, return receipt requested, or by personal service. Any successor Investment Manager appointed by the Investment Committee to replace the Investment Manager pursuant to this Section 10.5 shall, beginning on the date of admission to the Company, have the same rights and obligations under this Agreement as the replaced Investment Manager would have had subsequent to such date if the replaced Investment Manager had continued to act as Investment Manager. ARTICLE 11. DISSOLUTION AND WINDING UP Section 11.1 Dissolution and Distribution of Company Assets. Except as may be permitted in accordance with this Agreement, no Member shall have the right to, and each Member hereby agrees that it shall not, seek to dissolve or cause the dissolution of the Company or to seek to cause a partial or whole distribution or sale of Company assets whether by court action or otherwise, it being agreed that any actual or attempted dissolution, distribution or sale would cause a substantial hardship to the Company and the remaining Members. Section 11.2 Dissolving Events. Notwithstanding the Act, the Company shall be dissolved only upon the earlier to occur of one of the following events: (a) upon the expiration of the Term of this Agreement Company pursuant to Section 2.5; or (b) upon the sale of all or substantially all of the assets of the Company. The dissolution of the Company by any action not specifically set forth above shall be a dissolution in breach and in contravention of this Agreement. Section 11.3 Wind-up, Liquidation and Final Distribution of Proceeds. Upon the dissolution of the Company pursuant to this Article 11, the Company shall thereafter engage in no further business other than that which is necessary to wind-up the business and the Investment Manager shall liquidate all Company assets and allocate (pursuant to Article 6 hereof) all income, gain, loss and deductions resulting therefrom. The cash proceeds from the liquidation of Company assets then shall then be applied or distributed by the Company in the following order: (a) first, to the creditors of the Company (including, without limitation, to Members who are creditors to the extent permitted by law) in satisfaction of liabilities of the Company other than liabilities for distributions to Members pursuant to Section 18-606 of the Act; and to the setting up of any reserves for contingencies which the Investment Manager may consider necessary; (b) second, to Members and former Members in satisfaction of liabilities, if any, for distributions pursuant to Section 18-606 of the Act, and to the setting up of any reserves therefor; and (c) third, in the event of a liquidation and dissolution of the Company to the Members as provided in Section 6.1. Notwithstanding the foregoing, in the event that the Investment Manager determines that an immediate sale of all or any portion of the Company's assets would cause undue loss to the Members, the 19 24 Investment Manager, in order to avoid such loss to the extent not then prohibited by the Act, may either defer liquidation of and withhold from distribution for a reasonable time any assets of the Company except those necessary to satisfy the Company's debts and obligations, or distribute the assets to the Members in kind. Any amounts owed to a Member pursuant to this Section 11.3 shall be reduced by any amounts which any such Member owes to the Company and/or any other Member (including, without limitation, as a result of any such Member's breach and/or contravention of this Agreement). The foregoing shall not limit any other rights or remedies of the Members. Section 11.4 No Restoration of Deficit Capital Account Balances. If any Member has a deficit balance in its Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which the liquidation occurs), then such Member shall have no obligation to make any Capital Contribution with respect to such deficit, and such deficit shall not be considered a debt owed to the Company or to any other Person for any purpose whatsoever. ARTICLE 12. MISCELLANEOUS Section 12.1 Amendment. The written consent of the Investment Committee shall be required to amend or waive any provision of this Agreement, which consents may be given, withheld or made subject to such conditions as are determined by each such Investment Committee member in its sole and absolute discretion. Notwithstanding the foregoing sentence, without the consent of the Member to be adversely affected, this Agreement shall not be amended so as to materially and adversely affect the interest of any Member in Net Income, Net Loss or distributions except as otherwise expressly provided elsewhere in this Agreement. Section 12.2 Meetings. At any time, and from time to time, the Investment Manager may, but shall not be required to, call meetings of the Members. All provisions governing, or otherwise relating to, the holding of meetings of the Members, shall from time to time be established by the Investment Manager. Section 12.3 No Assignments; Binding Effect. This Agreement shall not be assigned or otherwise transferred (by operation of law or otherwise) by any Member except as is otherwise permitted in Article 4, Article 8 and Article 9. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and assigns permitted in accordance with this Agreement and the Act. Section 12.4 Further Assurances. Each of the parties hereto does hereby covenant and agree on behalf of itself, its successors and its assigns, without further consideration, to prepare, execute, acknowledge, file, record, publish and deliver such other instruments, documents and statements, and to take such other action, as may be required by law or reasonably necessary to effectively carry out the purposes of this Agreement. Section 12.5 Notices. Any notice, approval, consent, payment, demand or communication required or permitted to be given to any Member or Assignee under this Agreement shall be in writing and shall be deemed to have been duly given or made: (i) if delivered personally by courier or otherwise, then as of the date delivered (the "Effective Date") or if delivery is refused, then as of the date presented (also an "Effective Date"); (ii) if sent or mailed by Federal Express, Express Mail or other overnight mail service to the Company at its principal office address or to any Member or Assignee at its address appearing in the current records of the Company, then as of the first Business Day after the date so mailed (also an "Effective Date"); (iii) if sent or mailed by certified U.S. Mail, return receipt requested, to the Company at its principal office address or to any Member or Assignee at its address appearing in the current records of the Company, then as of the third Business Day after the date so mailed (also an "Effective Date"); or (iv) if sent by facsimile to the Company at its facsimile telephone number or to any Member or Assignee at its facsimile telephone appearing in the current records of the Company, then either (x) as of 20 25 the date on which the appropriate electronic confirmation of receipt is received by the sending party at or before 5:00 p.m. (receiver's time) on any Business Day or (y) as of the next Business Day if the time of the appropriate electronic confirmation of receipt is received by the sending party after 5:00 p.m. (receiver's time) (both also an "Effective Date"). All notices to the Company shall be sent to the Investment Manager at the address or facsimile number maintained by the Company with respect to such member. The address to which notices to the Company shall be sent may be changed by the Company from time to time by written notice to the Members. Section 12.6 Waivers. No waiver by any Member of any default with respect to any provision, condition or requirement hereof shall be deemed to be a waiver of any other provision, condition or requirement hereof; nor shall any delay or omission of any Member to exercise any right hereunder in any manner impair the exercise of any such right accruing to it hereafter. Section 12.7 Preservation of Intent. If any provision of this Agreement is determined by an arbitrator or any court having jurisdiction to be illegal or in conflict with any laws of any state or jurisdiction, then the Members agree that such provision shall be modified to the extent legally possible so that the intent of this Agreement may be legally carried out. If any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect or for any reason, then the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that all of the Members' rights and privileges shall be enforceable to the fullest extent permitted by law. Section 12.8 Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and fully supersedes any and all prior or contemporaneous agreements or understandings between the parties hereto pertaining to the subject matter hereof. Section 12.9 Certain Rules of Construction. Any ambiguities shall be resolved without reference to which party may have drafted this Agreement. All Article or Section titles or other captions in this Agreement are for convenience only, and they shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Unless the context otherwise requires: (i) a term has the meaning assigned to it; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles; (iii) "or" is not exclusive; (iv) words in the singular include the plural, and words in the plural include the singular; (v) provisions apply to successive events and transactions; (vi) "herein," "hereof" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision; (vii) all references to "clauses," "Sections" or "Articles" refer to clauses, Sections or Articles of this Agreement; and (viii) any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms. Section 12.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. Section 12.11 Governing Law. This Agreement, including its existence, validity, construction, and operating effect, and the rights of each of the parties hereto, shall be governed by and construed in accordance with the laws of the State of Delaware without regard to any otherwise governing principles of conflicts of law. Section 12.12 Binding Arbitration. Any dispute arising under this Agreement shall be settled by arbitration administered by the American Arbitration Association ("AAA") under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Application of the Commercial Arbitration Rules shall be subject to the following: 21 26 There shall be a single neutral arbitrator selected as follows: Within twenty (20) days after the AAA serves the confirmation of notice of filing of the arbitration demand, the parties shall agree on the appointment of a single neutral arbitrator and so notify the AAA. If the parties fail to agree on the appointment of a single neutral arbitrator within that time period, and have not otherwise mutually agreed to extend that time period, then the AAA shall make the appointment. Any arbitrator appointed by the parties or AAA shall be a former state appellate court judge (i.e., a judge of the California Supreme Court or the California Court of Appeal) or a former federal court judge. Section 12.13 Waiver of Partition. The Members hereby agree that the Company assets are not and will not be suitable for partition. Accordingly, each of the Members hereby irrevocably waives any and all rights (if any) that such Member may have to maintain any action for partition of any of such assets. 22 27 IN WITNESS WHEREOF, the undersigned Member has caused this Limited Liability Company Agreement of Summit Energy Ventures, LLC to be duly executed as of the date first above written. Approved as to form and content this 29th day COMMONWEALTH ENERGY CORPORATION of June, 2001 By: /s/ Bradley L. Gates By:/s/ Ian B. Carter -------------------- ------------------ Bradley L. Gates Name: Ian B. Carter Chairman, Legal Committee of the Title: Chairman and CEO Board of Directors of Commonwealth Energy Corporation Address for Notices: ------------------- 15901 Red Hill Ave. Suite 100 Tustin, CA 92780 23 28 IN WITNESS WHEREOF, the undersigned Investment Manager has caused this Limited Liability Company Agreement of Summit Energy Ventures, LLC to be duly executed as of the date first above written. NORTHWEST POWER MANAGEMENT INC. /s/ Steven Z. Strasser -------------------------------------------- By: Steven Z. Strasser Its: President Address for Notices: 700 5th Ave. Suite 6100 Seattle, WA 98104 29 IN WITNESS WHEREOF, the undersigned Member has caused this Limited Liability Company Agreement of Summit Energy Ventures, LLC to be duly executed as of the date first above written. STEVEN Z. STRASSER /s/ Steven Z. Strasser -------------------------------------------- Address for Notices: 700 5th Ave. Suite 6100 Seattle, WA 98104 1 30 SCHEDULE A Names, Addresses and Percentage Interests, of the Members Name: Commonwealth Energy Corporation Address: 15901 Red Hill Ave., Tustin, CA 92780 Percentage Interest: Forty (40) percent Preferred Member Interest One Hundred (100) percent Name: Steven Z. Strasser Address: 700 5th Ave., Suite 6100, Seattle, WA 98104 Percentage Interest: Forty (40) percent 2 31 SCHEDULE B FORM OF CAPITAL CONTRIBUTION AGREEMENT This CAPITAL CONTRIBUTION AGREEMENT (this "Agreement") dated as of _____________, 2001 (the "Effective Date") is entered into between Commonwealth Energy Corporation, a California corporation ("CEC") and Summit Energy Ventures, LLC, a Delaware limited liability company (the "Company"). Each of CEC and the Company is referred to, individually, as a "Party" and, collectively, the "Parties." RECITALS WHEREAS, CEC and Northwest Power Management, Inc. entered into the Limited Liability Company Agreement dated as of ____________, 2001 (the "LLC Agreement"); WHEREAS, the Parties desire to enter into this Agreement to set forth their agreement regarding, inter alia, certain capital contributions to be made to the Company; and NOW, THEREFORE, in consideration of the promises herein contained and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Parties agree as follows: 1. Capital Contribution. CEC hereby makes a cash capital contribution to the Company in an amount equal to $15,000,000 (the "Capital Contribution") and a commitment to make an additional cash capital contribution to the Company in an amount equal to $10,000,000 (the "Capital Commitment"), which shall be delivered in two traunches of $5,000,000 (five million) each. 2. Payment. Upon the Effective Date, CEC shall make (or cause to be made) the Capital Contribution in Dollars in cash or such other immediately available funds and in one lump sum by direct deposit into a bank account for the Company for application by the Manager in accordance with the LLC Agreement. 3. Capital Commitment. CEC agrees that it shall convert the first half of the Capital Commitment into a Capital Contribution at such time as the Investment Manager provides written notice to CEC that 75% (seventy-five percent) of the Capital Contribution made as of the Effective Date has been invested in accordance with the terms of the LLC Agreement. CEC agrees that it shall convert the second half of the Capital Commitment into a Capital Contribution at such time as the Investment Manager provides written notice to CEC that 75% (seventy-five percent) of the first half of the Capital Commitment has been invested in accordance with the terms of the LLC Agreement. 4. Issuance of Membership Interests. Upon receipt of the Capital Contribution, CEC shall own all Preferred Membership Interests of the Company and shall own forty (40) percent of the Common Member Interests of the Company. 5. Representations and Warranties. Each Party hereby represents and warrants to the other that (a) it has the necessary corporate power and authority to enter into this Agreement, and that this Agreement has been duly authorized and executed, and constitutes its valid, legal and binding obligation, enforceable against it in accordance with its terms and (b) no notices to, or consent, authorization or approval of, filing with, or further action by, any person, entity, or governmental authority is required for its due execution and delivery of this Agreement or for this Agreement's effectiveness. 3 32 6. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN SUCH STATE, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PROVISIONS. 7. SUBMISSION TO JURISDICTION; WAIVERS. EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY: SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF CALIFORNIA, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE CENTRAL DISTRICT OF CALIFORNIA, AND APPELLATE COURTS FROM ANY THEREOF; CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS, AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT ANY SUCH ACTION OR PROCEEDING WAS BROUGHT IN ANY INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO SUCH PARTY AT ITS ADDRESS SET FORTH BELOW ITS NAME ON THE SIGNATURE PAGES TO THIS AGREEMENT OR ANY SUCH OTHER ADDRESS OF WHICH THE OTHER PARTIES SHALL HAVE BEEN NOTIFIED IN WRITING; AND AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT THE SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. 8. Waiver. In no event, whether as a result of breach of contract, tort liability (including negligence), strict liability, or otherwise, shall any Party be liable to any other Party for special, punitive, incidental, indirect, exemplary or consequential damages of any nature whatsoever, including loss of profits or revenues. 9. No Third Parties Benefited. This Agreement is for the purpose of setting forth certain rights and obligations of the Parties and no other person shall have any rights hereunder or by reason hereof as a third party beneficiary or otherwise. 10. Further Assurances. Each Party agrees to execute, acknowledge and deliver to the other any documents, and to take any actions, reasonably required by any other Party to confirm or effect the matters set forth herein, or otherwise to carry out the purposes of this Agreement. 11. Miscellaneous. This Agreement embodies the entire agreement and understanding of the Parties and supersedes all prior or contemporaneous agreements and understandings (whether verbal or written) relating to the subject matter hereof. The headings contained in this Agreement are included solely for convenience and are not intended to affect the interpretation of this Agreement. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. 4 33 IN WITNESS WHEREOF, the Parties have executed this Capital Contribution Agreement as of the date first above written. SUMMIT ENERGY VENTURES, LLC, a Delaware limited liability company By: NORTHWEST MANAGEMENT INC. Its Manager By: ____________________________ Name: Address for Notices: Attention: Telephone: 206-624-9921 Facsimile: 206-624-9928 5 34 Approved as to form and content this 29th day COMMONWEALTH ENERGY CORPORATION of June, 2001 By: ________________________ By: ________________________ Bradley L. Gates Name: Chairman, Legal Committee of the Title: Board of Directors of Commonwealth Energy Corporation Address for Notices: -------------------- 15901 Red Hill Ave. Suite 100 Tustin, CA 92780 6 35 FIRST AMENDMENT TO THE LIMITED LIABILITY COMPANY AGREEMENT OF SUMMIT ENERGY VENTURES, LLC This First Amendment, dated as of August __, 2001 (this "Amendment") to the Limited Liability Company Agreement dated as of June 29, 2001 (the "LLC Agreement"), by and among Northwest Power Management Inc., a Washington corporation, in its capacity as Investment Manager, Steven Z. Strasser, an individual, in his capacity as member, and Commonwealth Energy Corporation, a California corporation, in its capacity as member, of Summit Energy Ventures, L.L.C. Capitalized terms not defined herein shall have the meaning ascribed to them in the LLC Agreement. W I T N E S S E T H: WHEREAS, Section 12.1 of the LLC Agreement requires the consent of the Members so affected before the LLC Agreement may be amended; and WHEREAS, the Members desire to amend the LLC Agreement; NOW, THEREFORE, in accordance with the terms of the LLC Agreement, the LLC Agreement is hereby amended as follows: 1 Amendment. (a) Section 2.4 is deleted in its entirety and replaced with the following: "Section 2.4. Purpose of Company. Subject to the limitations on the activities of the Company set forth in this Agreement, the purpose and business of the Company shall be the conduct of any business or activity that may be conducted by a limited liability company organized pursuant to the Act, including without limitation (a) to purchase, acquire, sell, transfer, or otherwise dispose of ownership interests, for the benefit of CEC, in energy or energy-related companies that are synergistic to CEC's business; (b) to take advantage of the expertise of NPM, and its Manager Steven Z. Strasser, in managing investment portfolios; (c) to hold title to and beneficial ownership of energy or energy-related companies; and, (d) except as otherwise limited herein, to enter into, make and perform all contracts and other undertakings, and engage in all activities and transactions, as necessary or advisable to the carrying out of the foregoing purposes and businesses of the Company." (b) Section 3.5, the following proviso is added at the end of the first sentence: "; provided, however, that if such Percentage Interest has not been allocated by the time the Company disposes of an Investment, then the Percentage Interest shall be divided equally between CEC and the Investment Manager." (c) Section 3.5(d), the following proviso is added at the end of the first sentence: "; provided, however, that CEC shall have the right to credit any balance in its Capital Account against the purchase price of the Investment." (d) Section 3.8, the following is inserted before the parenthetical in the last sentence and after the words "by the company" in the same sentence: "in accordance with Section 3.5 or otherwise" (e) Section 4.1(d)(v) is added and reads as follows: 1 36 "(v) transfer any funds for the acquisition of an Investment without the written approval of the Investment Committee." (f) Section 4.1(g) is added and reads as follows: "(g) Bank Accounts. The Investment Manager shall establish bank accounts in the name of the Company and shall deposit therein the Capital Investments of the Company; provided, however, that the Investment Committee shall have the right to approve any bank selected by the Investment Manager." (g) Section 4.3(a) is deleted in its entirety and replaced with the following: "(a) The Company shall pay to the Investment Manager, as compensation for its performance of the Investment Management Services and the Administrative Services an annual fee equal to three percent (3%) of the Capital Contributions delivered to the Company. The Management fee shall be paid upon receipt by the Company of the Capital Contribution and shall be paid thereafter on each anniversary date of the Capital Contribution. Upon termination of this LLC Agreement, any Management fees paid during the calendar year but not earned by the Manager shall be returned to the Company based on multiplying each Management fee payment times the quotient where the numerator equals the days remaining in the calendar year and the denominator equals 365." 2. Survival of LLC Agreement. Except as otherwise amended in this Amendment, the LLC Agreement shall remain in full force and effect. Any reference to the LLC Agreement shall hereafter be understood as a reference to the LLC Agreement as amended by this Amendment. 3. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Delaware applicable to a contract executed and performed in such state without giving effect to the conflicts of laws principles thereof. 2 37 IN WITNESS WHEREOF, the undersigned Member has caused this Amendment to Limited Liability Company Agreement of Summit Energy Ventures, LLC to be duly executed as of the date first above written. COMMONWEALTH ENERGY CORPORATION By: /s/ Ian B. Carter ____________________________________ Name: Ian B. Carter Title: Chairman and CEO 1 38 IN WITNESS WHEREOF, the undersigned Investment Manager has caused this Amendment to Limited Liability Company Agreement of Summit Energy Ventures, LLC to be duly executed as of the date first above written. NORTHWEST POWER MANAGEMENT INC. /s/ Steven Z. Strasser _________________________________ By: Steven Z. Strasser Its: President 39 IN WITNESS WHEREOF, the undersigned Member has caused this Amendment to Limited Liability Company Agreement of Summit Energy Ventures, LLC to be duly executed as of the date first above written. STEVEN Z. STRASSER /s/ Steven Z. Strasser _________________________________ EX-10.7 12 a74807gex10-7.txt EXHIBIT 10.7 1 EXHIBIT 10.7 PECO ENERGY COMPANY CONFIRMATION AGREEMENT PECO ENERGY COMPANY CONFIRMATION AGREEMENT 01/30/01 TO: Ian Carter COMPANY: Commonwealth Energy Corporation This confirmation letter ("Letter") shall confirm the agreement reached on January 24, 2001, between Commonwealth Energy Corporation and PECO Energy Company for the sale and purchase under the terms and conditions as follows: Buyer: Commonwealth Energy Corporation (d/b/a electricAMERICA) ("Commonwealth" or "Buyer") Seller: PECO Energy Company ("PECO", or "Seller") Products: Around the clock energy ("Firm Energy") with associated Conowingo Renewable Credits (as defined below) Term: 35 months Start Date: Hour Ending 0100 February 1, 2001 End Date: Hour Ending 2400 December 31, 2003 Delivery point: PECO Transmission Zone of PJM Interconnection Transmission: Buyer responsible for transmission costs beyond Delivery Point Amount: 50 MW per hour for the Term Price: $38.50/MWh for the Term Payment: Buyer to pre-pay on a monthly basis for the Term, with pre-payment due by wire transfer five business days before the first calendar day of each month for the entire term. For the billing month of February 2001, pre-payment must be made by close of business January 30, 2001. If Buyer fails to pre-pay, Seller will have the right to terminate this Agreement effective as of the date on which pre-payment was due. Payment Schedule: Attached as Exhibit A. Wire Transfer Information: Pre-payment will be made to the following: Mellon Bank Philadelphia, PA ABA# 031-000-037 Credit: PECO Energy Company Account: 2216604 2 Scheduling: Seller will schedule this transaction in eSchedules, or its successor, as PECO Zone-PECO Zone. Buyer will confirm eSchedules contract. Congestion Expenses: Seller will be responsible for all congestion expenses associated with the Product. Assignment: PECO reserves the right to assign this Agreement, or any interest, without consent to an affiliate of PECO or to a third party to be selected by PECO in its sole discretion. Liquidated Damages: In the event that Seller fails to schedule and/or deliver the Quantity of Firm Energy, where such failure was not excused by Force Majeure or by Buyer's failure to perform, Seller shall pay Buyer (on the date payment would otherwise be due under this transaction) an amount for each MWh of such deficiency equal to the positive difference, if any, between (i) the price at which Buyer is able to purchase or otherwise receive such deficient quantity of power acting in a commercially reasonable manner (adjusted to reflect the difference in transmission costs, if any) minus (ii) the Price reflected herein. In the event Buyer fails to schedule and/or to receive the Firm Energy where such failure was not excused by Force Majeure or by Seller's failure to perform, Buyer will pay Seller (on the date payment would otherwise be due under this transaction) an amount for each MWh of such deficiency equal to the positive difference if any, between (i) the Price reflected herein, minus (ii) the price at which Seller is able to sell or otherwise dispose of such deficiency quantity of power acting in a commercially reasonable manner (adjusted to reflect difference in transmission costs, if any). Conowingo Renewable Credits: Buyer will have exclusive entitlement to Renewable Credits associated with a portion of the actual net output of Conowingo Hydroelectric Station equal to 400,800 Mwh for the period February 1, 2001, through December 31, 2001; 438,000 MWh for the period January 1, 2002, through December 31, 2002; and 438,000 MWh for the period January 1, 2003, through December 31, 2003. Renewable Credits are any renewable attributes that reward or encourage power producers or suppliers to provide renewable energy that is associated with the production of electricity from Conowingo Hydroelectric Station. Certification of Exclusivity; Seller certifies that no other party, including PECO Energy Company or any of its affiliates, subsidiaries or divisions, has or shall have claim to the Renewable Credits entitled to Buyer under this Agreement. At the end of the Term, Seller will cooperate to the extent reasonably necessary to assist Buyer in fulfilling substantiation obligations regarding Certification of Exclusivity. Tariff: This sale shall take place, be billed, paid for, and treated confidentially pursuant to the terms of PECO Energy Company's FERC Electric Tariff Volume No. 1. 2 3 IN WITNESS WHEREOF, and intending to be legally bound, the Parties have executed this Agreement by the undersigned duly authorized representatives as of the date of this Agreement. PECO Energy Company Commonwealth Energy Corporation (d/b/a electricAMERICA) By: /s/ Ian McLean By: /s/ Ian B. Carter --------------------------- ---------------------------------- Name: Ian McLean Name: -------------------------------- Title: Senior Vice President, Title: ------------------------------- Exelon Generation, And President, Exelon Power Team Date: Date: -------------------------------- 3 4 EXHIBIT A Payment Schedule:
Month Payment - ----- ------- 2001 Feb-01 $1,293,600 Mar-01 $1,432,200 Apr-01 $1,386,000 May-01 $1,432,200 Jun-01 $1,386,000 Jul-01 $1,432,200 Aug-01 $1,432,200 Sep-01 $1,386,000 Oct-01 $1,432,200 Nov-01 $1,386,000 Dec-01 $1,432,200 2002 Jan-02 $1,432,200 Feb-02 $1,293,600 Mar-02 $1,432,200 Apr-02 $1,386,000 May-02 $1,432,200 Jun-02 $1,386,000 Jul-02 $1,432,200 Aug-02 $1,432,200 Sep-02 $1,386,000 Oct-02 $1,432,200 Nov-02 $1,386,000
1 5
Month Payment - ----- ------- Dec-02 $1,432,200 2003 Jan-03 $1,432,200 Feb-03 $1,293,600 Mar-03 $1,432,200 Apr-03 $1,386,000 May-03 $1,432,200 Jun-03 $1,386,000 Jul-03 $1,432,200 Aug-03 $1,432,200 Sep-03 $1,386,000 Oct-03 $1,432,200 Nov-03 $1,386,000 Dec-03 $1,432,200
2 EX-10.8 13 a74807gex10-8.txt EXHIBIT 10.8 1 EXHIBIT 10.8 EXELON GENERATION COMPANY, LLC CONFIRMATION AGREEMENT EXELON GENERATION COMPANY, LLC, CONFIRMATION AGREEMENT TO: Ian Carter COMPANY: Commonwealth Energy Corporation (d/b/a electricAMERICA) This confirmation letter ("Letter") shall confirm the agreement reached on May 18, 2001, between Commonwealth Energy Corporation and Exelon Generation Company, LLC, for the sale and purchase under the terms and conditions as follows: Buyer: Commonwealth Energy Corporation (d/b/a electricAMERICA) ("Buyer") Seller: Exelon Generation Company, LLC ("Seller") Product: Around the clock energy Term: 36 months Start Date: Hour Ending 0100 June 1, 2001 End Date: Hour Ending 2400 May 31, 2004 Delivery Point: Western Hub of PJM Interconnection Transmission: Buyer responsible for transmission costs beyond Delivery Point Amount: 50 MW per hour for the Term Total Amount: 1,315,200 MWh Price: $35.85/MWh for the Term Buyer's Credit Support: Buyer will provide to Seller a Letter of Credit ("LOC"), issued by a financial institution acceptable to Seller, in the amount of $2.6 million. The LOC will be effective for the Term, with an expiration date of June 1, 2004. Wire Transfer Information: Payment will be made to the following: Mellon Bank Philadelphia, PA ABA# 031-000-037 Credit: Exelon Generation Company, LLC Account: 2216604 Scheduling: Seller will schedule this transaction in day-ahead eSchedules, or its successor Buyer will confirm day-ahead eSchedules contract. Tariff: This sale shall take place, be billed, paid for, and treated confidentially pursuant to the terms of Exelon Generation Company's FERC Electric Tariff Volume No. 1. 1 2 IN WITNESS WHEREOF, and intending to be legally bound, the Parties have executed this Agreement by the undersigned duly authorized representatives as of the date of this Agreement. Exelon Generation Company, LLC Commonwealth Energy Corporation (d/b/a electricAMERICA) By:/s/ Ian McLean By: /s/ Ian B. Carter ----------------------------- ----------------------------- Name: Ian McLean Name: Ian B. Carter Title: Senior Vice President Title: Chairman & CEO Date: 5/13/01 Date: 6/01/01 2 EX-10.9 14 a74807gex10-9.txt EXHIBIT 10.9 1 EXHIBIT 10.9 STANDARD OFFICE LEASE STANDARD OFFICE LEASE -- GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATE 1. Basic Lease Provisions ("Basic Lease Provisions") 1.1 Parties. This Lease, dated, for reference purposes only, April 1, 1997 is made by and between Warner/Redhill Associates, a California general partnership, (herein called "Lessor") and Frederick Michael Bloom, an individual, doing business under the name of Bloom Venture Funding, (herein called "Lessee"). 1.2 Premises: Suite Number(s) 200, ___________ floors, consisting of approximately 3160 feet, more or less, as defined in paragraph 2 and as shown on Exhibit "A" hereto (the "premises"). 1.3 Building: Commonly described as being located at 15941 Redhill Avenue, Suite 200, in the City of Tustin, County of Orange, State of California, as more particularly described in Exhibit A hereto, and as defined in paragraph 2. 1.4 Use: General Office and Venture Capital and Brokerage, subject to paragraph 6. 1.5 Term: Thirty-Six months commencing June 1, 1997 ("Commencement Date") and ending May 31, 2000, as defined in paragraph 3. 1.6 Base Rent: $3,160.00 per month, payable on the first day of each month, per paragraph 4.1. 1.7 Base Rent Increase: The monthly Base Rent payable under paragraph 1.6 above shall be adjusted as provided in paragraph 52 of the addendum. 1.8 Rent Paid Upon Execution: $3,160.00 for ___________________. 1.9 Security Deposit: $10,270.00 to be held as set forth in the addendum. 1.10 Lessee's Share of Operating Expense Increase: 3.33% as defined in paragraph 4.2. 2. Premises, Parking and Common Areas. 2.1 Premises: The Premises are a portion of a building, herein sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic Lease Provisions. "Building" shall include adjacent parking structures used in connection therewith. The Premises, the Building the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the "Office Building Project." Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, paragraph 1.2, as the "premises," including rights to the Common Areas as hereinafter specified. 2.2 Vehicle Parking: So long as Lessee is not in default, and subject to the rules and regulations attached hereto, and as established b Lessor from time to time, Lessee shall be entitled to rent and use 11 ** parking spaces in the Office Building Project at the monthly rate applicable from time to time for monthly parking as set by Lessor and/or its licensee. unreserved** 1 2 2.2.1 If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it ma have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.2.2 The monthly parking rate per parking space will be $0 per month at the commencement of the term of this Lease, and is subject to change upon five (5) days prior written notice to Lessee. Monthly parking fees shall be payable one month in advance prior to the first day of each calendar month. 2.3 Common Areas -- Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Office Building Project and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, lobbies, corridors, stairways and stairwells, public restrooms, elevators, escalators, parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, ramps, driveways, landscaped areas and decorative walls. 2.4 Common Areas -- Rules and Regulations. Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit B with respect to the Office Building Project and Common Areas, and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to modify, amend and enforce said rules and regulations. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees, their agents, employees and invitees of the Office Building Project. 2.5 Common Areas -- Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Building interior and exterior and Common Areas, including, without limitation, changes in the location, size, shape, number, and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways; provided, however, Lessor shall at all times provide the parking facilities required by applicable law; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land and improvements outside the boundaries of the Office Building Project to e a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Office Building Project; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Office Building Project, or any portion thereof; (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Office Building Project as Lessor may, in the exercise of sound business judgment deem to be appropriate. 2 3 3. Term. 3.1 Term. The term and Commencement Date of this Lease shall be as specified in paragraph 1.5 of the Basic Lease Provisions. 3.2 Delay in Possession. Notwithstanding said Commencement Date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date and subject to paragraph 3.2.2, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof; but, in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Lessee, as hereinafter defined; provided, however, that if Lessor shall not have delivered possession of the Premises within ninety (90) days following said Commencement Date, as the same may be extended under the terms of the Work Letter executed by Lessor and Lessee, Lessee may, at Lessee's option, by notice in writing, to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided, however, that , as to Lessee's obligations, Lessee first reimburses Lessor for all costs incurred for Non-Standard Improvements and, as to Lessor's obligations, Lessor shall return any money previously deposited by Lessee (less any offsets due Lessor for Non-Standard Improvements); and provided further, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 3.2.1 Possession Tendered -- Defined. Possession of the Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to be provided by Lessor under this Lease are substantially completed. 3.2.2 Delays Caused by Lessee. There shall be no abatement of rent, and the ninety (90) day period following the Commencement Date before which Lessee's rights to cancel this Lease accrues under paragraph 3.2, shall be deemed extended to the extent of any delays caused by acts or omissions of Lessee, Lessee's agents, employees and contractors. 3.3 Early Possession. If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not change the termination date, and Lessee shall pay rent for such occupancy. 3.4 Uncertain Commencement. In the event commencement of the Lease term is defined as the completion of the improvements, Lessee and Lessor shall execute an amendment to this Lease establishing the date of Tender of Possession (as defined in paragraph 3.2.1). 4. Rent. 4.1 Base Rent. Except as may be otherwise expressly provided in this Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of the Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor upon execution hereof the advance Base Rent described in paragraph 1.8 of the Basic Lease Provisions. Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 Operating Expense Increase. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of the amount by which all Operating Expenses, as hereinafter defined, for each Comparison Year exceeds the amount of all Operating Expenses for the Base Year, such excess being hereinafter referred to as the "Operating Expenses Increase, "in accordance with the following provisions: (a) "Lessee's Share" is defined, for purposes of this Lease, as the percentage set forth in paragraph 1.10 of the Basic Lease Provisions, which percentage has been determined by dividing the approximately square footage of the Premises by the total approximately square footage of the rentable 3 4 space contained in the Office Building Project. It is understood and agreed that the square footage figures set forth in the Basic Lease Provisions are approximations which Lessor and Lessee agree are reasonable and shall not be subject to revisions except in connection with an actual change in the size of the Premises or a change in the space available for lease in the Office Building Project. (b) "Base Year" is defined as the calendar year in which the Lease term commenced. (c) "Comparison Year" is defined as each calendar year during the term of this Lease subsequent to the Base Year; provided, however, Lessee shall have no obligation to pay a share of the Operating Expense increase applicable to the first twelve (12) months of the Lease Term (other than such as are mandated by a governmental authority, as to which government mandated expenses Lessee shall pay Lessee's Share, notwithstanding they occur during the first twelve (12) months). Lessee's Share of the Operating Expense Increase for the first and last Comparison Years of the Lease Term shall be prorated according to that portion of such Comparison Year as to which Lessee is responsible for a share of such increase. (d) "Operating Expenses" is defined, for purposes of this Lease, to include all costs, if any, incurred by Lessor in the exercise of its reasonable discretion, for: (i) The operation, repair maintenance, and replacement, in net, clean, safe, good order and condition, of the Office Building Project, including but not limited to, the following: (aa) The Common Areas, including their surfaces, coverings, decorative items, carpets, drapes and window coverings, and including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, building exteriors and roofs, fences and gates; (bb) All heating, air conditioning, plumbing, electrical systems, life safety equipment, telecommunication and other equipment used in common by, or for the benefit of, lessees or occupants of the Office Building Project, including elevators and escalators, tenant directors, fire detection systems including sprinkler system maintenance and repair. (ii) Trash disposal, janitorial and security services; (iii) Any other service to be provided by Lessor that is elsewhere in this Lease stated to be an "Operating Expense"; (iv) The cost of the premiums for the liability and property insurance policies to be maintained by Lessor under paragraph 8 hereof; (v) The amount of the real property taxes to be paid by Lessor under paragraph 10 hereof; (vi) The cost of water, sewer, gas, electricity, and other publicly mandated services to the Office Building Project; (vii) Labor, salaries and applicable fringe benefits and costs, materials, supplies and tools, used in maintaining and/or cleaning the Office Building Project and accounting and a management fee attributable to the operation of the Office Building Project; (viii) Replacing and/or adding improvements mandated by any governmental agency and any repairs removals necessitated thereby amortized over its useful life according to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as then reasonable in the judgment of Lessor's accountants); 4 5 (ix) Replacements of equipment or improvements that have a useful life for depreciation purposes according to Federal income tax guidelines for five (5) years or less, as amortized over such life. (e) Operating Expenses shall not include the costs of replacements of equipment or improvements that have a useful life for Federal income tax purposes in excess of five (5) years unless it is of the type described in paragraph 4.2(d)(viii), in which case their cost shall be included as above provided. (f) Operating Expenses shall not include any expenses paid by any lessee directly to third parties, or as to which Lessor is otherwise reimbursed by any third party, other tenant, or by insurance proceeds. (g) Lessee's Share of Operating Expense Increase shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time in advance of Lessee's Share of the Operating Expense Increase for any Comparison Year, and the same shall be payable monthly or quarterly, as Lessor shall designate, during each Comparison Year of the Lease term, on the same day as the Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expense Increase as aforesaid, Lessor shall deliver to Lessee within sixty (60) days after the expiration year. If Lessee's payments under this paragraph 4.2(g) during said Comparison Year exceed Lessee's Share as indicated on said statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee's Share of Operating Expense Increase next falling due. If Lessee's payments under this paragraph during said Comparison Year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. Lessor and Lessee shall forthwith adjust between them by cash payment any balance determined to exist with respect to that portion of the last Comparison Year for which Lessee is responsible as to Operating Expense increases, notwithstanding that the Lease term may have terminated before the end of such Comparison Year. 4.3 Rent Increase. 4.3.1 [deleted] 4.3.2 [deleted] 4.3.3 [deleted] 4.3.4 Lessee shall continue to pay the rent at the rate previously in effect until the increase, if any, is determined. Within five (5) days following the date on which the increase is determined, Lessee shall make such payment to Lessor as will bring the increased rental current, commencing with the effective date of such increase through the date of any rental installments then due. Thereafter the rental shall be paid at the increased rate. 4.3.5 At such time as the amount of any change in rental required by this Lease is known or determined, Lessor and Lessee shall execute an amendment to this Lease setting forth such change. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to 5 6 restore said deposit to the full amount then required of Lessee. If the monthly Base Rent shall, from time to time, increase during the term of this lease, Lessee shall, at the election of Lessor and at the time of such increase, deposit with Lessor additional money as a security deposit so that the total amount of the security deposit held by Lessor shall at all times bear the same proportion to the then current Base Rent as the initial security deposit bears to the initial Base Rent set forth in paragraph 1.6 of the Basic Lease Provisions. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not heretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. Use. 6.1 Use. The Premises shall be used and occupied only for the purpose set forth in paragraph 1.4 of the Basic Lease Provisions and for no other purpose. 6.2 Compliance with Law. (a) Lessor warrants to Lessee that to Lessor's actual knowledge, the Premises, in the state existing on the date that the Lease term commenced, but without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect on such Lease term Commencement Date. In the event it is determined that such a violation exists on the Commencement Date, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. (b) Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises. Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Office Building Project. 6.3 Condition of Premises. (a) Lessor shall deliver the Premises to Lessee in a clean condition on the Lease Commencement Date (unless Lessee is already in possession) with the plumbing, lighting, air conditioning, and heating system in the Premises shall be in good operating condition. In the event that it is determined that same has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises and the Office Building Project in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any easements, covenants or restrictions of record, an accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor nor Lessor's agent or agents has made any representation or warranty as to the present or future suitability of the Premises, Common Areas, or Office Building Project for the conduct of Lessee's business. 6 7 7. Maintenance, Repairs, Alterations and Common Area Services. 7.1 Lessor's Obligations. Lessor shall keep the Office Building Project, including the Premises, interior and exterior walls, roof, and common areas, and the equipment whether used exclusively for the Premises or in common with other premises, in good condition and repair; provided, however, Lessor shall not be obligated to paint, repair or replace the floor coverings or the wall coverings, or to repair or replace any improvements that are not ordinarily a part of the Building or are above then Building standards. There shall be no abatement of rent or liability of Lessee on account of any injury or interference with Lessee's business with respect to any improvements, alterations or repairs made by Lessor to the Office Building Project or any part thereof. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. 7.2 Lessee's Obligations. (a) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing the floor coverings or the wall coverings, and to repair or replace any Premises improvements that are not ordinarily a part of the Building or that are above then Building standards. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which is otherwise Lessee's responsibility hereunder. (b) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Except as otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window coverings, wall coverings, floor coverings, wall paneling, ceilings and plumbing on the Premises and in good operating condition. 7.3 Alterations and Additions. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, Utility installations or repairs in, on or about the Premises, or the Office Building Project. As used in this paragraph 7.3 the term "Utility Installation" shall mean window and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing, and telephone and telecommunication wiring and equipment. At the expiration of the term, Lessor may require the removal of any or all of said alterations, improvements, additions or Utility Installations, and the restoration of the Premises and the Office Building Project to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements, additions or Utility Installations, Lessee shall use only such contractor as has been expressly approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, at any time during the term of this Lease, require that Lessee remove any part or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Office Building Project that Lessee shall desire to make shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent to Lessee's making such alteration, improvement, addition or Utility Installation, the consent shall be deemed conditioned upon Lessee 7 8 acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work, and compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by a mechanic's or materialmen's lien against the Premises, the Building or the Office Building Project, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, the Building or the Office Building Project, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises, the Building and the Office Building Project free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest so to do. (e) All alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made to the Premises by Lessee, including but not limited to, floor coverings, panelings, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communication systems, conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is not in default, notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises or the Building, and other than Utility Installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. (f) Lessee shall provide Lessor with as-built plans and specifications for any alterations, improvements, additions or Utility Installations. 7.4 Utility Additions. Lessor reserves the right to install new or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitations, such utilities as plumbing, electrical systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. Insurance; Indemnity. 8.1 Liability Insurance - Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of liability insurance, as reasonably determined by lessor and shall insure Lessee with Lessor as an additional insured against liability arising out of the use, occupancy or maintenance of the Premises by Lessee and Lessee's agents, contractors, employee and invitees. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 8.2 Liability Insurance - Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage Insurance, plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor, but not Lessee, against liability arising out of the ownership, use, occupancy or maintenance of the Office Building Project. 8 9 8.3 Property Insurance - Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost fire and extended coverage insurance, with vandalism and malicious mischief, sprinkler leakage and earthquake sprinkler leakage endorsements, in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, of all of Lessee's personal property, fixtures, equipment and tenant improvements. 8.4 Property Insurance - Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Office Building Project improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in the amount of the full replacement cost thereof, as the same may exist from time to time, utilizing Insurance Services Office standard form, or equivalent, providing protection against all perils included with the classification of fire, extended coverage, vandalism, malicious mischief, plate glass, and such other perils as Lessor deems advisable or may be required by a lender having a lien on the Office Building Project. Lessee will not be named in any such policies carried by Lessor and shall have no right to any proceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender may determine. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1(f) hereof, the deductible amounts under the applicable insurance policies shall be deemed an Operating Expense. Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by Lessor. Lessee shall pay the entirety of any increase in the property insurance premium for the Office Building Project over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 Insurance Policies. Lessee shall deliver to Lessor copies of liability insurance policies required under Paragraph 8.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days prior to the Commencement Date of this Lease. No such policy shall be cancellable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals thereof. 8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by insurance carried by such party hereunder or required to be insured against hereunder, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. If necessary all property insurance policies required under this Lease shall e endorsed to so provide. 8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and its agents, Lessor's master or ground lessor, partners and lenders, from and against any and all claims for damage to the person or property of anyone or any entity arising from Lessee's use of the Office Building Project, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims, costs and expenses arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, employees, or invitees, and from and against all costs, attorney's fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence, and in dealing reasonably therewith, including but not limited to the defense or pursuit of any claim or any action or proceeding involved there; and in case any action or proceeding be brought against Lessor by reason of any such matter, lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to e so indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Office Building Project arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 9 10 8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Office Building Project, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from theft, fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Office Building Project, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Office Building Project or of the equipment, fixtures or appurtenances applicable thereto, and regardless of whether the cause of such damage or injury or the mean of repairing the same is inaccessible, Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Office Building Project, nor from the failure of Lessor to enforce the provisions of any other lease of any other lessee of the Office Building Project. 8.9 No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified in this paragraph 8 are adequate to cover Lessee's property or obligations under this Lease. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. (b) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent (50%) of the then Replacement Cost of the building. (c) "Premises Building Total Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then Replacement Cost of the Building. (d) "Office Building Project Buildings" shall mean all of the buildings on the Office Building Project site. (e) "Office Building Project Buildings Total Destruction" shall mean if the Office Building Project Buildings are damaged or destroyed to the extent that the cost of repair if fifty percent (50%) or more of the then Replacement Cost of the Office Building Project Buildings. (f) "Insured Loss" shall mean damage or destruction which was caused by an event required to be covered by the insurance described in paragraph 8. The fact that an insured Loss has a deductible amount shall not make the loss an uninsured loss. (g) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvement made by lessees, other than those installed by Lessor at Lessee's expense. 9.2 Premises Damage; Premises Building Partial Damage. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Damage or Premises Building Partial Damage, then Lessor shall, as soon as reasonably possible and to the extent the required materials and labor are readily available through the usual commercial channels, at Lessor's expense, repair such damage (but not Lessee's fixtures, equipment or 10 11 tenant improvements originally paid for by Lessee) to its condition existing at the time of the damage, and this Lease shall continue in full force and effect (if Lessee has actually received insurance proceeds). (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from making any substantial use of the Premises, Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage, in which event this Lease shall terminate as of the date of the occurrence of such damage. 9.3 Premises Building Total Destruction; Office Building Project Total Destruction. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, which falls into the classifications of either (i) Premises Building Total Destruction, or (ii) Office Building Project Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction as soon as reasonably possible at Lessor's expense (to the extent the required material are readily available through usual commercial channels) to its condition existing at the time of the damage, but not Lessee's fixtures, equipment or tenant improvements, and this Lease shall continue in full force and effect, or either Lessor or Lessee may elect to terminate this Lease on sixty (60) days prior written notice to the other party (which termination shall be effective as of the date of the occurrence of such damage). 9.4 Damage Near End of Term. (a) Subject to paragraph 9.4(b), if at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an insured Loss falling within the classification of Premises Damage during the last twelve (12) months of the term of this Lease. If, and only if, Lessee duly exercises such option during said twenty (20) day period. Lessor, shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect if Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as if the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary. 9.5 Abatement of Rent; Lessee's Remedies. (a) In the event Lessor repairs or restores the Building or Premises pursuant to the provisions of this paragraph 9, and any part of the Premises are not usable (including loss of use due to loss of access or essential services), the rent payable hereunder (including Lessee's Share of Operating Expense Increase) for the period during which such damage, repair or restoration continues shall be abated, provided (1) the damage was not the result of negligence of Lessee, and (2) such abatement shall only be to the extent the operation and profitability of Lessee's business as operated from the Premises is adversely affected. Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. 11 12 (b) If Lessor shall be obligated to repair or restore the Premises or the Building under the provisions of this Paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such occurrence (as such date is extended by any force majeure or unavoidable delays), or if Lessor shall not complete the restoration and repair within six (6) months after such occurrence (as such date is extended by any force majeure or unavoidable delays), Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion of such repair or restoration. In such event this Lease shall terminate as of the date of such notice (as such date is extended by any force majeure or unavoidable delays). (c) Lessee agrees to cooperate with Lessor in connection with any such restoration and repair, including but not limited to the approval and/or execution of plans and specifications required. 9.6 Termination--Advance Payments. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 10. Real Property Taxes. 10.1 Payment of Taxes. Lessor shall pay the real property tax, as defined in paragraph 10.3, applicable to the Office Building Project subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 Additional Improvements. Lessee shall not be responsible for paying any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Office Building Project by other lessees or by Lessor for the exclusive enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 Definition of "Real Property Tax." As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Office Building Project or any portion thereof by any authority having the direct or indirect power to tax including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor I the Office Building Project or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Office Building Project. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax," or (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a change in ownership, as defined by applicable local statute for property tax purposes, of the Office Building Project or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such change of ownership, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.4 Joint Assessment. If the improvements or property, the taxes for which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not separately assessed, Lessee's portion of that tax shall be equitable determination by Lessor from the respective valuations assigned in the assessor's work sheets or such other information (which may include the cost of construction) as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Personal Property Taxes. 12 13 (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishing, equipment and all other personal property of Lessee contained in the Premises or elsewhere. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. 11.1 Services Provided by Lessor. Lessor shall provide heating, ventilation, air conditioning, and janitorial service as reasonably required, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use, and replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. 11.2 Services Exclusive to Lessee. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 11.3 Hours of Service. Said services and utilities shall be provided during generally accepted business days and hours or such other days or hours as may hereafter be set forth by Lessor. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the cost thereof. 11.4 Excess Usage by Lessee. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security services, over standard office usage for the Office Building Project, without Lessor's prior written consent. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. 11.5 Interruptions. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premise, without Lessor' prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a material default and breach of this Lease without the need for notice to Lessee under paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include the transfer or transfers aggregating: (a) if Lessee is a corporation, more than twenty-five percent (25%) of the voting stock of such corporation, or (b) if Lessee is a partnership, more than twenty-five percent (25%) of the profit and loss participation of such partnership. 12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof without Lessor's consent, to any corporation which controls, 13 14 is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate"; provided that before such assignment shall be effective, (a) said assignee shall assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall be given written notice of such assignment and assumption. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, no assignment or subletting shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the rent and other sums due Lessor hereunder including Lessee's Share of Operating Expense Increase, and to perform all other obligations to be performed by Lessee hereunder. (b) Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. (c) Neither a delay in the approval or disapproval of such assignment or subletting, nor the acceptance of rent, shall constitute a waiver or estoppel of Lessor's right to exercise its remedies of the breach of any of the terms or conditions of this paragraph 12 or this Lease. (d) Lessee's obligations under this Lease have been guaranteed by third parties, then an assignment or sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms hereof. (e) The consent by Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent subletting and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability under this Lease or said sublease; however, such persons shall not be responsible to the extent any such amendment or modification enlarges or increases the obligations of the Lessee or sublessee under this Lease or such sublease. (f) In the event of any default under this Lease, Lessor may proceed directly against Lessee, any guarantors or any one else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible thereof to Lessor, or any security held by Lessor or Lessee. (g) Lessor's written consent to any assignment or subletting of the Premises by Lessee shall not constitute an acknowledgement that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (h) The discovery of the fact that any financial statement relied upon by Lessor in giving its consent to an assignment or subletting was materially false shall, at Lessor's election, render Lessor's said consent null and void. 12.4 Additional Terms and Conditions Applicable to Subletting. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein. 14 15 (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request form Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and until it has been approved in writing by Lessor. In entering into any sublease, Lessee shall use only such form of sublessee as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any sublease shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of Lessee within three (3) days after service of such notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 12.5 Lessor's Expenses. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable costs and expenses incurred in connection therewith, including attorneys', architects', engineers' or other consultants' fees. 12.6 Conditions to Consent. Lessor reserves the right to condition any approval to assign or sublet upon Lessor's determination that (a) the proposed assignee or sublessee shall conduct a business on the Premises of a quality substantially equal to that of Lessee and consistent with the general character of the other occupants of the office Building Project and not in violation of any exclusive or rights then held by other tenants, and (b) the proposed assignee or sublessee be at least as financially responsible as Lessee was expected to be at the time of the execution of this Lease or of such assignment or subletting, whichever is greater. 15 16 13. Default; Remedies. 13.1 Default. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The vacation or abandonment of the Premises by Lessee. Vacation of the Premises shall include the failure to occupy the Premises for a continuous period of sixty (60) days or more, whether or not the rent is paid. (b) The breach by Lessee of any of the covenants, conditions or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f) (false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33 (auctions), or 41.1 (easements), all of which are hereby deemed to be material, non-curable defaults without the necessity of any notice by Lessor to Lessee thereof. (c) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (d) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee other than those referenced in subparagraphs (b) and (c) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (e) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the care of a petition filed against Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provisions of this paragraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's obligation hereunder, was materially false. 13.2 Remedies. In the event of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and any real estate commission actually paid, the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease. 16 17 (b) [Deleted] (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance than Lessor shall not be in default if Lessor commences performance within such 30-day period and thereafter diligently pursues the same to completion. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expense Increase or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Office Building Project. Accordingly, if any installment of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 14. Condemnation. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of aid power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and adversely affect the operation and profitability of Lessee's business conducted from the Premises (which shall represent the definition of the term "material" herein), Lessee shall have the option, to be exercised only in writing within thirty (30) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent and Lessee's Share of Operating Expense Increase shall be reduced in proportion that the floor area of the Premises taken bears to the total floor area of the Premises Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof. Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Lessee of such election within thirty (30) days after receipt of notice of a taking by condemnation of any part of the Premises or the Office Building Project. Any award for the taking of all or any part of the Premises or the Office Building Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improvements that have been paid for by Lessee. For that purpose the cost of such improvements shall be amortized over the original term of this Lease excluding any options. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the 17 18 extent that Lessee has been reimbursed thereof by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. Broker's Fee. 15.1 The brokers involved in this transaction are Jeffrey Lerch, Insignia Commercial Group, Inc. as "listing broker" and N/A, as "cooperating broker," licensed real estate broker(s). A "cooperating broker" is defined as any broker other than the listing broker entitled to a share of any commission arising under this Lease. 16. Estoppel Certificate. 16.1 Each party (as "responding party") shall at any time upon not less than ten (10) days' prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrance of the Office Building Project or of the business of Lessee. 16.2 At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. 16.3 If Lessor desire to finance, refinance, or sell the Office Building Project, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title a lessee's interest in a ground lease of the Office Building Project, and in the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. Severability. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. Interest on Past-due Obligations. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate than allowable by law or judgments from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. Time of Essence. Time is of the essence with respect to the obligations to be performed under this Lease. 18 19 21. Additional Rent. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expense Increase any other expenses payable by Lessee hereunder shall be deemed to be rent. 22. Incorporation of Prior Agreements; Amendments. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representation to Lessee relative to the condition or use by Lessee of the Premises of the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 23. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed to Lessee or to Lessor, as the case may be. Mailed notices shall be deemed given upon actual receipt at the address required, or forty-eight hours following deposit in the mail, postage prepaid, whichever first occurs. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. [Deleted] 26. [Deleted] 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Office Building Project is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Office Building Project is located. 30. Subordination. 30.1 This Lease, and any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Office Building Project and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not 19 20 in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgage, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. 30.2 Lessee agrees to execute any documents required to effectuate an attainment, a subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 28(b). 31. Attorneys' Fees. 31.1 If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, trial or appeal thereon, shall be entitled to his reasonable attorneys' fees to be paid by the losing party as fixed by the court in the same or a separate suit, and whether or not such action is pursued to decision or judgment. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 31.2 The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred in good faith. 31.3 Lessor shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the preparation and service of notice of default and consultations in connection therewith, whether or not a legal transaction is subsequently commenced in connection with such default. 32. Lessor's Access. 32.1 Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders, or lessees, taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or to the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. 32.2 All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. 32.3 Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and sales, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forcible or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction 20 21 on the Premises or Common Areas in violation of this paragraph shall constitute a material default of this Lease. 34. [Deleted] 35. Merger. The voluntary or other surrender of this Lese by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. Guarantor. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Office Building Project. 39. Options. 39.1 Definition. As used in this paragraph the work "Option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option of right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Office Building Project or other property of Lessor or the right of first offer to lease other space within the Office Building Project or other property of Lessor; (3) the right or option to purchase the Premises or the Office Building Project, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 Options Personal. Each Option granted to Lessee I this Lease is personal to the original Lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee; provided, however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extent or renew this Lease has been so exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance alleged in said notice of default is cured, or (ii) during the period of time commencing ton the day after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid, or (iii) in the event that Lessor has given to Lessee three or more 21 22 notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, during the 12 month period of time immediately prior to the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants or conditions of this Lease. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option. If, after such exercise and during the term of this Lease, (i Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(d) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, or (iii) Lessor gives to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants and conditions of this Lease. 40. Security Measures--Lessor's Reservations. 40.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Office Building Project. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Office Building Project or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expends, as set forth in paragraph 4.2(b). 40.2 Lessor shall have the following rights: (a) To change the name, address or title of the Office Building Project or building in which the Premises are located upon no less than 90 days prior written notice; (b) To, at Lessee's expense, provide and install Building standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (d) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the buildings or the Office Building Project or on pole signs in the Common Areas; 40.3 Lessee shall not: (a) Use a representation (photographic or otherwise) of the Building or the Office Building Project or their name(s) in connection with Lessee's business; (b) Suffer or permit anyone, except in emergency to go upon the roof of the Building. Easements. 22 23 40.4 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 40.5 The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 41. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 42. Authority. If Lessee is a corporation, or general or limited partnership, Lessee, and any individual executing this Lease on behalf of such entity represent and warrant that such individual is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 43. Conflict. Any conflict between the printed provisions, Exhibits or Addenda of this Lese and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 44. No Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 45. Lender Modification. Lessee agrees to make such reasonable modifications to this Lese as may reasonably required by an institutional lender in connection with the obtaining of normal financing or refinancing of the Office Building Project. 46. Multiple Parties. If more than one person or entity is named as either Lessor or Lessee herein, except as otherwise expressly provided herein, the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, respectively. 47. Work Letter. This Lease is supplemented by that certain Work Letter of even date executed by Lessor and Lessee, attached hereto as Exhibit C, and incorporated herein by this reference. 48. Attachments. Attached hereto are the following documents which constitute a part of this Lease: Addenda Paragraphs 50 through 68 Exhibit A - Floor Plan Exhibit B - Rules & Regulations Exhibit C - Work Letter to Standard Office Lease 23 24 LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION OF YOUR ATTORNEY FOR HIS APPROVAL, NO REPRESENTATION OR RECOMMENDATIONS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OF THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVISE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 24 25 LESSOR LESSEE Warner/Redhill Associates, Frederick Michael Bloom, a California general partnership an individual By: /s/ Gwen Knight By: /s/ Fred Bloom ----------------------------- ----------------------------- Gwen Knight Frederick Michael Bloom, Its Authorized Representative an Individual Executed at Executed at -------------------- -------------------- on on ----------------------------- ----------------------------- Address Address ------------------------ ------------------------ 25 26 RULES AND REGULATIONS FOR STANDARD OFFICE LEASE Dated: April 1, 1997 By and Between: Warner/Redhill Associates, a California General Partnership GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways and stairways. 2. Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety, reputation, or property of the Office Building Project and its occupants. 3. Lessee shall not make or permit any noises or odors that annoy or interfere with other lessees or persons having business within the Office Building Project. 4. Lessee shall not keep animals or birds within the Office Building Project, and shall not bring bicycles, motorcycles or other vehicles into areas not designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose. 6. Lessee shall not alter any lock or install new or additional locks or bolts. 7. Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces of the premises or Office Building Project. 9. Lessee shall not suffer or permit any thing in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Office Building Project. 10. Furniture, significant freight and equipment shall be moved into or out of the building only with the Lessor's knowledge and consent, and subject to such reasonable limitations, techniques and timing, as may be designated by Lessor. Lessee shall be responsible to the Office Building Project arising from any such activity. 11. Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor. 12. Lessor reserves the right to close and lock the Building on Saturdays, Sundays and legal holidays, and on other days between the hours of ____ P.M. and ____ A.M. of the following day. If Lessee uses the Premises during such periods, Lessee shall be responsible for securely locking any doors it may have opened for entry. 13. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost. 14. No window coverings, shades or awnings shall be installed or used by Lessee. 15. No Lessee, employee or invitee shall go upon the roof of the Building. 27 16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas. 17. Lessee shall not use any method of heating or air conditioning other than as provided by Lessor. 18. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor's written consent. 19. The Premises shall not be used for lodging or manufacturing, cooking or food preparation. 20. Lessee shall comply with all safety, fire protection and evacuation regulations established by Lessor or any applicable governmental agency. 21. Lessor reserves the right to waive any one of these rules or regulations, and/or as to any particular Lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such Lessee. 22. Lessee assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be required. 23. Lessor reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Office Building Project and its occupants. Lessee agrees to abide by these and such rules and regulations. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles." 2. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 3. Parking stickers or identification devices shall be the property of Lessor and be returned to Lessor by the holder thereof upon termination of the holder's parking privileges, Lessee will pay such replacement charge as is reasonably established by Lessor for the loss of such devices. 4. Lessor reserves the right to refuse the sale of monthly identification devices to any person or entity that willfully refuses to comply with the applicable rules, regulations, laws and/or agreements. 5. Lessor reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent offsite location(s), and to reasonably allocate them between compact and standard size spaces, as long as the same complies with applicable laws , ordinances and regulations. 6. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 7. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Lessor will not be responsible for any damages to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 8. Validation, if established, will be permissible only by such methods as Lessor and/or its licensee may establish at rates generally applicable to visitor parking. 28 9. The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited. 10. Lessee shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws and agreements. 11. Lessor reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules and regulations as it may deem necessary for the proper operation of the parking area. 12. Such parking use as is herein provided is intended merely as a license only and no bailment is intended or shall be created hereby. 29 67. Early Possession. Tenant shall be granted "Early Possession" of the premises prior to the Commencement Date set forth herein above upon: 1) Landlord's receipt of all required insurance documentation from Tenant, and; 2) Execution of the Lease by Landlord. During this Early Possession period, Tenant shall be permitted to complete its fixturization, but shall not be permitted to conduct business activities until the Commencement Date. 68. Security Deposit Applications: Provided that Tenant has not been in default of its monetary obligations as set forth in this lease, Landlord shall apply a portion of Tenant's Security Deposit to Tenant's base rent in the amounts of $3,318.00 and $3,476.00 in months thirteen (13) and month twenty-four (24), respectively. If, however, Tenant has been in default of any provision of this lease, the entire amount, or remaining amount as the case may be, shall be held as Security Deposit in accordance with the terms set forth above. IN WITNESS WHEREOF, Lessor and Lessee have executed this Addendum concurrently with the Lease of even date herewith. "LESSOR" WARNER/REDHILL ASSOCIATES, A CALIFORNIA GENERAL PARTNERSHIP By: Los Angeles Warner Redhill Company Ltd., a California limited partnership, its General Partner By /s/ Gwen Knight -------------------------------------- Gwen Knight, Authorized Representative "LESSEE" Frederick Michael Bloom, as Individual By: /s/ Fred Bloom ------------------------------------- Frederick Michael Bloom, an Individual 30 WORK LETTER TO STANDARD OFFICE LEASE Dated: April 1, 1997 By and between: Warner/Redhill Associates, a California General Partnership. 1. Partitions. None. 2. Wall Surfaces. Remove wallcovering in conference room, room 2 and 3. Paint conference room whisper grey. Pain office #2 white on top and grey on bottom, paint office #3 whisper grey. Paint all other offices whisper grey. Clean all other wallcovering to remove blemishes, if possible. Patch all holes in drywall. Holes in wallcovering cannot be patched. 3. Draperies. None. 4. Carpeting. Clean carpeting throughout and remove strands where slightly frayed. 5. Doors. None. 6. Electrical and Telephone Outlets. None. 7. Ceiling. Replace stained ceiling tiles as necessary. 8. Lighting. Replace lights as necessary where burnt-out. 9. Heating and Air Conditioning Ducts. None. 10. Sound Proofing. None. 11. Plumbing. Clean sink and ensure in working order. 12. Entrance Doors. None. 13. [deleted] 14. [deleted] 15. Construction. If Lessor's cost of constructing the improvements to the Premises exceeds the cost of Lessor's Standard Improvements, Lessee shall pay to Lessor in cash before the commencement of such construction a sum equal to such excess. 15.1 If the final plans and specifications are approved by Lessor and lessee, and Lessee pays Lessor for such excess, then Lessor shall, at its sole cost and expense, construct the improvements in accordance with said approved final plans and specifications and all applicable rules, regulations, laws or ordinances. 16. Completion. 16.1 Lessor shall obtain a building permit to construct the Improvements as soon as possible. 16.2 Lessor shall complete the construction of the Improvements as soon as reasonably possible after the obtaining of necessary building permits. 16.3 The term "Completion," as used in this Work Letter, is hereby defined to mean the date the building department of the municipality having jurisdiction of the Premises shall have made a final 31 inspection of the Improvements and authorized a final release of restrictions on the use of public utilities in connection therewith and the same are in a broom-clean condition. 16.4 Lessor shall use its best efforts to achieve Completion of the Improvements on or before the Commencement Date set forth in paragraph 1.5 of the Basic Lease Provisions or within one hundred eighty (180) days after Lessor obtains the building permit from the applicable building department, whichever is later. 16.5 In the event that the Improvements or any portion thereof have not reached Completion by the Commencement Date, this Lease shall not be Invalid, but rather Lessor shall complete the same as soon thereafter as is possible and Lessor shall not be liable to Lessee for damages in any respect whatsoever. 16.6 If Lessor shall be delayed at any time in the progress of the construction of the Improvements or any portion thereof by extra work, changes in construction ordered by Lessee, or by strikes, lockouts, fire, delay in transportation, unavoidable casualties, rain or weather conditions, governmental procedures or delay, or by any other cause beyond Lessor's control, then the Commencement Date established in paragraph 1.5 of the Lease shall be extended by the period of such delay. 17. Term. Upon completion of the Improvements as defined in paragraph 14.3 above, Lessor and Lessee shall execute an amendment to the Lease setting forth the date of Tender of Possession as defined in paragraph 3.2.1 of the Lease or of actual taking of possession, whichever first occurs, as the Commencement Date of this Lease. 18. Work Done by Lessee. Any work done by Lessee shall be done only with Lessor's prior written consent and in conformity with a valid building permit and all applicable rules, regulations, laws and ordinances, and be done in a good and workmanlike manner with good and sufficient materials. All work shall be done only with union labor and only by contractors approved by Lessor, it being understood that all plumbing, mechanical, electrical wiring and ceiling work are to be done only by contractors designated by Lessor. 19. Taking of Possession of Premises. Lessor shall notify Lessee of the Estimated Completion Date at least ten (10) days before said date. Lessee shall thereafter have the right to enter the Premises to commence construction of any Improvements Lessee is to construct and to equip and fixturize the Premises, as long as such entry does not interfere with Lessor's work. Lessee shall take possession of the Premises upon the tender thereof as provided in paragraph 3.2.1 of the Lease to which this Work Letter is attached. Any entry by Lessee of the Premises under this paragraph shall be under all of the terms and provisions of the Lease to which this Work Letter is attached. 20. Acceptance of Premises. Lessee shall notify Lessor in writing of any items that Lessee deems incomplete or incorrect in order for the Premises to be acceptable to Lessee within ten (10) days following Tender of Possession as set forth in paragraph 3.2.1 of the Lease to which this Work Letter is attached. Lessee shall be deemed to have accepted the Premises and approved construction if Lessee does not deliver such a list to Lessor within said number of days. EX-10.10 15 a74807gex10-10.txt EXHIBIT 10.10 1 EXHIBIT 10.10 STANDARD SUBLEASE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD SUBLEASE (Long-form to be used with pre-1996 AIR leases) 1. Parties. This Sublease, dated, for reference purposes only, November 12, 1998, is made by and between Kurt Busch, an individual, ("Sublessor") and Commonwealth ("Sublessee"). 2. Premises, Sublessor hereby subleases to Sublessee and Sublessee hereby subleases from Sublessor for the term, at the rental, and upon all of the conditions set forth herein, that certain real property, including all improvements therein, and commonly known by the street address of 15991 Redhill Ave., Ste. 200, located in the County of Orange, State of California, and generally described as (describe briefly the nature of the property) Commercial ("Premises"). 3. Term. 3.1 Term. The term of this Sublease shall be for _______________________ commencing on November 12, 1998 and ending on June 30, 1999 unless sooner terminated pursuant to any provision hereof. 3.2 Delay commencement. Sublessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises by the commencement date. If, despite said efforts, Sublessor is unable to deliver possession as agreed, Sublessor shall not be subject to any liability therefor, not shall such failure affect the validity of this Sublease. Sublessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is not delivered within sixty days after the commencement date, Sublessee may, at its option, by notice in writing within ten days after the end of such sixty day period, cancel this Sublease, in which event the Parties shall be discharged from all obligations thereunder. If such written notice is not received by Sublessor within said ten day period, Sublessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Sublessee when required and Sublessee does not terminate this Sublease, as aforesaid, any period of rent abatement that Sublessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Sublessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Sublessee. If possession is not delivered within 120 days after the commencement date, this Sublease shall automatically terminate unless the Parties agree, in writing, to the contrary. 4. Rent. 4.1 Base Rent. Sublessee shall pay to Sublessor as Base Rent for the Premises equal monthly payments of $2844 in advance, on the first day of each month of the term hereof. Sublessee shall pay Sublessor upon the execution hereof $1805.00 as Base Rent for rent from Nov. 12, 1998 to Nov. 30, 1998 Base Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the monthly installment. 4.2 Rent Defined. All monetary obligations of Sublessee to Sublessor under the terms of this Sublease (except for the Security Deposit) are deemed to be rent ("Rent"). Rent shall be payable in lawful money of the United States to Sublessor at the address stated herein or to such other persons or at such other places as Sublessor may designate in writing. 5. Security Deposit. Sublessee shall deposit with Sublessor upon execution hereof $2844.00 as security for Sublessee's faithful performance of Sublessee's obligations hereunder. If Sublessee fails to pay Rent or 2 other charges due hereunder, or otherwise defaults with respect to any provision of this Sublease, Sublessor may use, apply or retain all or any portion of said deposit for the payment of any Rent or other charge in default or for the payment of any other sum to which Sublessor may become obligated by reason of Sublessee's default, or to compensate Sublessor for any loss or damage which Sublessor may suffer thereby. If Sublessor so uses or applies all or any portion of said deposit, Sublessee shall within ten days after written demand therefor forward to Sublessor an amount sufficient to restore said Deposit to the full amount provided for herein and Sublessee's failure to do so shall be a material breach of this Sublease. Sublessor shall not be required to keep said Deposit separate from its general accounts. If Sublessee performs all of Sublessee's obligations hereunder, said Deposit, or so much hereof as has not therefore been applied by Sublessor, shall be returned, without payment of interest to Sublessee (or at Sublessor's option, to the last assignee, if any, of Sublessee's interest hereunder) at the expiration of the term hereof, and after Sublessee has vacated the Premises. No trust relationship is created herein between Sublessor and Sublessee with respect to said Security Deposit. 6. Use. 6.1 Agreed Use. The Premises shall be used and occupied only for Offices and for no other purpose. 6.2 Compliance. Sublessor warrants that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances ("Applicable Requirements") in effect on the commencement date. Said warranty does not apply to the use to which Sublessee will put the Premises or to any alterations or utility installations made or to be made by Sublessee. NOTE: Sublessee is responsible for determining whether or not the zoning is appropriate for its intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Sublessor shall, except as otherwise provided, promptly after receipt of written notice from Sublessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Sublessor's expense. If Sublessee does not give Sublessor written notice of a non-compliance with this warranty within six months following the commencement date, correction of that non-compliance shall be the obligation of Sublessee at its sole cost and expense. If the Applicable Requirements are hereafter changed so as to require during the term of this Sublease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("Capital Expenditure"), Sublessor and Sublessee shall allocated the cost of such work as follows: (a) If such Capital Expenditures are required as a result of the specific and unique use of the Premises by Sublessee as compared with uses by tenants in general, Sublessee shall be fully responsible for the cost thereof provided, however, that if such Sublessee may instead terminate this Sublease unless Sublessor notifies Sublessee in writing, within ten days after receipt of Sublessee's termination notice that Sublessor has elected to pay the difference between the actual cost thereof and the amount equal to six months' Base Rent. If the Parties elect termination, Sublessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Sublessor written notice specifying a termination date at least ninety days thereafter. Such termination date shall, however, in no event be earlier then the lst day that Sublessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Sublessee (such as governmentally mandated seismic modifications, then Sublessor shall pay for said Capital Expenditure and the cost thereof shall be prorated between the Sublessor and Sublessee and Sublessee shall only be obligated to pay, each month during the remainder of the term of this Sublease, on the date on which Rent is due, an amount equal to the product of multiplying the cost of such Capital Expenditure by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such Capital Expenditure as such useful like is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then commercially reasonable in the judgment of Sublessor's accountant), with Sublessee reserving the right to prepay its obligation at any time. Provided, however, that if such Capital Expenditure is required 3 during the last two years of this Sublease or if Sublessor reasonably determines that it is not economically feasible to pay its share thereof, Sublessor shall have the option to terminate this Sublease upon ninety days prior written notice to Sublessee unless Sublessee notifies Sublessor, in writing, within ten days after receipt of Sublessor's termination notice that Sublessee will pay for such Capital Expenditure, if Sublessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Sublessee may advance such funds and deduct same, within interest, from Rent until Sublessor's share of such costs have been fully paid. Sublessee may advance such funds and deduct same, within interest, from Rent until Sublessor's share of such costs have been fully paid. If Sublessee is unable to finance Sublessor's share, or if the balance of the Rent due and payable for the remainder o this Sublease is not sufficient to fully reimburse Sublessee on an offset basis, Sublessee shall have the right to terminate this Sublessee upon ten days written notice to Sublessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to nonvoluntary, unexpected, and new Applicable requirements. If the Capital Expenditures are instead triggered by Sublessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Sublessee shall be fully responsible for the cost thereof, and Sublessee shall not have any right to terminate this Sublease. 6.3 Acceptance of Premises and Lessee, Sublessee acknowledges that: (a) it has been advised by Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Sublessee's intended use. (b) Sublessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Sublessor, Sublessor's agents, nor any Broker has made any oral or written representations or warranties with respect to said matters other than as set forth in this Sublease. In addition, Sublessor acknowledges that: (a) Broker has made no representations, promises or warranties concerning Sublessee's ability to honor the Sublease or suitability to occupy the Premises, and (b) it is Sublessor's sole responsibility to investigate the finance capability and/or suitability of all proposed tenants. 7. Master Lease 7.1 Sublessor is the lessee of the Premises by virtue of a lease, hereinafter the "Master Lease", a copy of which is attached hereto marked Exhibit 1, wherein ________________________________________ is the lessor, hereinafter the "Master Lessor." 7.2 This Sublease is and shall be at all times subject and subordinate to the Master Lease. 7.3 The terms, conditions and respective obligations of Sublessor and Sublessee to each other under this Sublease shall be the terms and conditions of the Master Lease except for those provisions of the Master Lease which are directly contradicted by this Sublease in which event the terms of this Sublease document shall control over the Master Lease. Therefore, for the purpose of this Sublease, wherever in the Master Lease the word "Lessor" is used it shall be deemed to mean the Sublessor herein and wherever in the Master Lease the word "Lessee" is used it shall be deemed to mean the Sublessee herein. 4 7.4 During the term of this Sublease and for all periods subsequent for obligations which have arisen prior to the termination of this Sublease, Sublessee does hereby expressly assume and agree to perform and comply with, for the benefit of Sublessor and Master Lessor, each and every obligation of Sublessor under the Master Lease except for the following paragraphs which are excluded therefrom: __________ ________________________________________________. 7.5 The obligations that Sublessee has assumed under paragraph 7.4 hereof are hereinafter referred to as the "Sublessee's Assumed Obligations". The obligations that Sublessee has not assumed under paragraph 7.4 hereof are hereinafter referred to as the "Sublessor's Remaining Obligation". 7.6 Sublessee shall hold Sublessor free and harmless from all liability, judgments, costs, damages, claims or demands, including reasonable attorneys fees, arising out of Sublessee's failure to comply with or perform Sublessee's Assumed Obligations. 7.7 Sublessor agrees to maintain the Master Lease during the entire term of this Sublease, subject, however, to any earlier termination of the Master Lease without the fault of the Sublessor, and to comply with or perform Sublessor's Remaining Obligations and to hold Sublessee fee and harmless from all liability, judgments, costs, damages, claims or demands arising out of Sublessor's failure to comply with or perform Sublessor's Remaining Obligations. 7.8 Sublessor represents to Sublessee that the Master Lease is in full force and effect and that no default exists on the part of any Party to the Master Lease. 8. Assignment of Sublease and Default. 8.1 Sublessor hereby assigns and transfers to Master Lessor the Sublessor's interest in this Sublease, subject however to the provisions of Paragraph 8.2 hereof. 8.2 Master Lessor, by executing this document, agrees that until a Default shall occur in the performance if Sublessor's Obligations under the Master Lease, that Sublessor may receive, collect and enjoy the Rent accruing under this Sublease. However, if Sublessor shall Default in the performance of its obligations to Master Lessor then Master Lessor may, at its option, receive and collect, directly from Sublessee, all Rent owing and to be owed under this Sublease. Master Lessor shall not, by reason of this assignment of the Sublease nor by reason of the collection of the Rent from the Sublessee, be deemed liable to Sublessee for any failure to the Sublessor to perform and comply with Sublessor's Remaining Obligations. 8.3 Sublessor hereby incorporates, authorizes and directs Sublessee upon receipt of any written notice from the Master Lessor stating that a Default exists in the performance of Sublessor's obligations under the Master Lease, to pay to Master Lessor the Rent due and to become due under the Sublease. Sublessor agrees that Sublessee shall have the right to reply upon any such statement and request from Master Lessor, and that Sublessee shall pay such Rent to Master Lessor without any obligation or right to inquire as to whether such Default exists and notwithstanding any notice from or claim from Sublessor to the contrary and Sublessor shall have no right or claim against Sublessee for any such Rent so paid by Sublessee. 8.4 No changes or modifications shall e made to this Sublease without the consent of Master Lessor. 9. Consent of Master Lessor. 9.1 In the event that the Master Lease requires that Sublessor obtain the consent of Master Lessor to any subletting by Sublessor then, this Sublease shall not be effective unless, within ten days of the date hereof, Master Lessor signs this Sublease thereby giving its consent to this Subletting. 5 9.2 In the event that the obligations of the Sublessor under the Master Lease have been guaranteed by third parties then neither this Sublease, nor the Master Lessor's consent, shall be effective unless, within 10 days of the date hereof, said guarantors sign this Sublease thereby giving their consent to this Sublease. 9.3 In the event that Master Lessor does give such consent then; (a) Such consent shall not release Sublessor of its obligations or alter the primary liability of Sublessor to pay the Rent and perform and comply with all of the obligations of Sublessor to be performed under the Master Lease. (b) The acceptance of Rent by Master Lessor from Sublessee or anyone else liable under the Master Lease shall not be deemed a waiver by Master Lessor of any provisions of the Master Lease. (c) The consent to this Sublease shall not constitute a consent to any subsequent subletting or assignment. (d) In the event of any Default of Sublessor under the Master Lease, Master Lessor may proceed directly against Sublessor, any guarantors or anyone else liable under the Master Lease or this Sublease without first exhausting Master Lessor's remedies against any other person or entity liable thereunder to Master Lessor. (e) Master Lessor may consent to subsequent sublettings and assignments of the Master Lease or this Sublease or any amendments or modifications thereof without notifying Sublessor or anyone else liable under the Master Lease and without obtaining their consent and such action shall not relieve such persons from liability. (f) In the event that Sublessor shall Default in its obligations under the Master Lease, then Master Lessor, at its option and without being obligation to do so, may require Sublessee to attorn to Master Lessor in which event Master Lessor shall undertake the obligations of Sublessor under this Sublease from the time of the exercise of said option to termination of this Sublease but Master Lessor shall not be liable for any prepaid Rent nor any Security Deposit paid by Sublessee, nor shall Master Lessor be liable for any other Defaults of the Sublessor under the Sublease. 9.4 The signatures of the Master Lessor and any Guarantors of Sublessor at the end of this document shall constitute their consent to the terms of this Sublease. 9.5 Master Lessor acknowledges that, to the best of Master Lessor's knowledge, no Default presently exists under the Master Lease of obligations to be performed by Sublessor and that the Master Lease is in full force and effect. 9.6 In the event that Sublessor Defaults under its obligations to be performed under the Master Lease by Sublessor, Master Lessor agrees to deliver to Sublessee a copy of any such notice of default. Sublessee shall have the right to cure any Default or Sublessor described in any notice of default within ten days after service of such notice of default on Sublessee. If such Default is cured by Sublessee then Sublessee shall have the right of reimbursement and offset from and against Sublessor. 10. Brokers Fee. 10.1 Upon execution hereof by all parties, Sublessor shall pay to Nothing - Nobody a licensed real estate broker, ("Broker"), a fee as set forth in a separate agreement between Sublessor and Broker, or in the event there is no such separate agreement, the sum of $ Nothing for brokerage services rendered by Broker to Sublessor in this transaction. 6 10.2 Sublessor agrees that if Sublessee exercises any option or right of first refusal as granted by Sublessor herein, or any option or right substantially similar thereto, either to extend the term of this Sublease, to renew this Sublease, to purchase the Premises, or to lease or purchase adjacent property which Sublessor may own or in which Sublessor has an interest, then Sublessor shall pay to Broker a fee in accordance with the schedule of Broker in effect at the time of the execution of this Sublease. Notwithstanding the foregoing, Sublessor's obligation under this paragraph 10.2 is limited to a transaction in which Sublessor is acting as a Sublessor, lessor or seller. 10.3 Master Lessor agrees that if Sublessee shall exercise any option or right of first refusal granted to Sublessee by Master Lessor in connection with this Sublease, or any option or right substantially similar thereto, either to extend or renew the Master Lease, to purchase the Premises or any part thereof, or to lease or purchase adjacent property which Maser Lessor may own or in which Master Lessor has an interest, or if Broker is the procuring cause of any other lease or sale entered into between Sublessee and Master Lessor pertaining to the Premises, any part thereof, or any adjacent properly which Master Lessor owns or in which it has an interest, then as to any of said transactions, Master Lessor shall pay to Broker a fee, in cash, in accordance with the schedule of Broker in effect at the time of the execution of this Sublease. 10.4 Any fee due from sublessor or Master Lessor hereunder shall be due and payable upon the exercise of any option to extend or renew, upon the execution of any new lease, or, in the event of a purchase, at the close of escrow. 10.5 Any transferee of Sublessor's interest in this Sublease, or of Master Lessor's interest in the Master Lease, by accepting an assignment thereof, shall e deemed to have assumed the respective obligations of Sublessor or Master Lessor under this Paragraph 10. Broker shall be deemed to be a third-party beneficiary of this paragraph 10. 11. Attorney's Fees. If any party or t he Broker named herein brings an action to enforce the terms hereof or to declare rights hereunder, the prevailing party in any such action, on trial and appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the Court. 12. Additional Provisions. [If there are no additional provisions, draw a line from this point to the next printed word after the space left here. If there are additional provisions place the same here.] Must add sublessor as additional insured, liability - all risk ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS SUBLEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES, SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR SUBLESSEE'S INTENDED USE. WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED. 7 Executed at: 1562 Parkway Loop, Suite B Tustin, California 92780 /s/ Kurt Busch ----------------------------------- on: November 12, 1998 Kurt Busch Address: "Sublessor" (Corporate Seal) ------------------------ Executed at: 15991 Redhill Ave. Tustin, California 92780 /s/ David Mensch ----------------------------------- on: November 12, 1998 David Mensch "Sublessee" (Corporate Seal) WARNER/REDHILL ASSOCIATES Executed at: -------------------- on: By: PaineWebber Equity Partners One L.P., ----------------------------- Address: a Virginia L.P. ------------------------ By: First Equity Partners, Inc., a Delaware corporation "Master Lessor" (Corporate Seal) By: /s/ Richard S. Coomber Richard S. Coomber, Vice President NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Please write or call us to make sure you are utilizing the most current form. We can be reached at the American Industrial Real Estate Association, 700 South Flower, Suite 600, Los Angeles, CA 90017. (213) 687-8777 Fax (213) 687-8616. EX-10.11 16 a74807gex10-11.txt EXHIBIT 10.11 1 EXHIBIT 10.11 SEVERANCE AGREEMENT This Severance Agreement ("Agreement") is entered into effective as of June 1, 2000 among Commonwealth Energy Corporation, a California corporation ("CEC"), electricAMERICA, Inc., a Delaware corporation ("EA"), and Frederick M. Bloom ("Bloom"), with reference to the following facts: A. EA and Bloom are parties to an Employment Agreement dated as of January 1, 2000 (the "Employment Agreement"), a copy of which is attached as Exhibit A hereto, and CEC has guaranteed performance of EA's obligations under the Employment Agreement. B. EA and CEC have asked Bloom to terminate the Employment Agreement. NOW, THEREFORE, IN CONSIDERATION OF the foregoing facts and the mutual promises set forth below, the parties agree as follows: 1. Termination. The Employment Agreement and CEC's obligations to guarantee performance thereunder are hereby terminated effective as of June 1, 2000. 2. Severance Payments. CEC and EA, jointly and severally, shall afford Bloom all rights and benefits he previously enjoyed under the Employment Agreement, including the following: 2.1 Settlement. Bloom hereby acknowledges receipt of the sum of $23,742 in settlement of all bonus claims. 2.2 Base Salary. Bloom shall continue to receive a Base Salary in accordance with Section 3.1 of the Employment Agreement, which is hereby incorporated herein. 2.3 Insurance. Bloom shall continue to receive the medical, dental and life insurance currently provided by EA. 2.4 Automobile. Bloom shall continue to receive $1,300 per month as reimbursement of certain automobile expenses. -1- 2 2.5 Insurance. EA and CEC shall continue to provide Bloom with insurance benefits provided by Section 6.2 of the Employment Agreement, which is hereby incorporated herein, except that they may purchase "tail" coverage for Bloom for the period ending June 1, 2000. 2.6 Indemnification. EA and CEC shall defend, indemnify and hold Bloom harmless from all liability, cost and expense, including reasonable attorneys' fees, arising out of or related to Bloom's activities as an officer or director of CEC or EA to the extent but only to the extent of benefits received by EA or CEC under existing or future officers and directors, liability or other type of insurance policies. In addition, to the extent CEC or EA cannot obtain full releases of Bloom for his obligations as a guarantor of the corporate obligations of EA and CEC, EA and CEC shall, jointly and severally, indemnify Bloom from all liabilities, costs and expenses arising under such guaranty obligations. 2.7 Withholding. All compensation payable to Bloom shall be subject to such deductions as EA or CEC are from time to time required to make pursuant to law, governmental regulation or order. 2.8 No Offset. Neither EA nor CEC shall have any rights of offset as provided by Section 7.6 of the Employment Agreement, which is hereby incorporated herein. 2.9 Term. The benefits afforded by this Section 2 shall continue through January 31, 2005. 3. Investor Rights Agreement. Concurrently with the execution of this Agreement, the parties shall execute and deliver an Investor Rights Agreement in substantially the form attached as Exhibit B. 4. SEC Filings. EA and CEC shall advise Bloom in accordance with the provisions of Section 7.7 of the Employment Agreement, which is hereby incorporated herein. 5. Miscellaneous. Sections 10.1 through 10.12 of the Employment Agreement are hereby incorporated herein. -2- 3 IN WITNESS WHEREOF, the undersigned have executed this Severance Agreement effective as of the date first set forth above. electricAMERICA, INC. By: ____________________________________ COMMONWEALTH ENERGY CORPORATION By: ____________________________________ /s/ FREDERICK M. BLOOM ________________________________________ Frederick M. Bloom -3- 4 EXHIBIT A 5 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of January 1, 2000 between electricAMERICA, Inc. a Delaware Corporation (the "Company" sometimes referred to as "electricAMERICA"), and Frederick M. Bloom ("Employee"), with reference to the following: A. Employee is the founder and from its inception has been a principal stockholder, director, officer and employee of Commonwealth Energy Corporation, ("Commonwealth" and sometimes referred to as "parent company") the parent company of the Company and has rendered valuable services to Commonwealth and has commenced to develop the business of, and will be rendering valuable services to the Company. B. The Company and Employee desire to enter into this Agreement to assure the Company of the continued services of Employee on the terms provided herein. It is understood by both parties that the Employee is not an employee of Commonwealth, but instead is to be an employee of the electricAMERICA, currently a dba of Commonwealth and is or soon will be a separate operating subsidiary of Commonwealth. In any event, the Company and its parent agree to perform or to cause the performance of the obligations of the Company under the terms of this Agreement. NOW, THEREFORE, in consideration of the various covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Term of Employment. The Company hereby employs Employee and Employee accepts such employment for a term of 61 months, commencing on January 1, 2000 and terminating on January 31, 2005, unless sooner terminated as hereinafter provided. 2. Titles and Responsibilities. Employee shall serve as President of electricAMERICA which duties include supervision of the marketing efforts of electricAMERICA, and in the performance of such duties shall report directly to the Chairman of the Board of the Company who, at this time is also the Chairman of the Board of Commonwealth. Employee's office location shall at all times be in the Orange County Area, California provided that Employee may be required to travel outside such area from time to time to the extent reasonably necessary to the performance of his duties hereunder. During the term hereof, the Company shall not employ or otherwise retain any other person in this capacity. Employee shall in good faith and consistent with his ability, experience and talent perform the duties set forth in this Section 2, and shall devote all of this productive time and efforts to the performance of such duties; provided, however, that Employee may devote time to personal and family investments to the extent that such investments do not materially conflict with the discharge of his duties hereunder. The Company represents that for a period of two years from the commencement of this contract term, Employee shall not be requested to, and shall not manage or otherwise participate in the business operations of Commonwealth in California. 6 3. Compensation and Benefits. The Company shall pay and/or provide the following compensation and benefits to Employee during the term hereof, and Employee shall accept the same as payment in full for all services rendered by Employee to or for the benefit of the Company: 3.1 Base Salary. Employee's base salary for the term of this Agreement shall be Two Hundred Seventy Five Thousand Dollars ($275,000.00) per annum (the "Base Salary"), provided however that said Base Salary shall be reduced during the second year of the term hereof to Two Hundred Twenty Five Thousand Dollars ($225,000.00) if the increase in the total aggregate number of customers (the increase in the customer count) as of the end of the first year, when compared to the total aggregate number of customers as of January 3, 2000 does not equal or exceed fifty thousand (50,000). The term "Customer" or "Customer Count shall mean each meter of a customers of Commonwealth or the Company, or any affiliated company in any state. The parties acknowledge that as of January 3, 2000 the aggregate Customer Count is the sum of (1) 84,286 customers who are being billed and (2) 4,749 "customers" who have committed to switch to Commonwealth or electricAMERICA but are in the DASR process (direct access service request) for a total of 89,935 customers, or Customer Count. If the Customer Count at the end of the first year equals or exceeds fifty thousand (50,000), then the Base Salary shall not be reduced. The Base Salary shall be subject to review from time to time (not less frequently than at the end of each fiscal year of the Company) and, as a result thereof, may be increased (but not decreased, except as set forth herein) at the discretion of the Board. In determining increases if any in the Base Salary, the Board shall take into account, among other things, the Company's Business Plan, including budgets and projections, and the results of operations of the Company, and its affiliated companies. The referenced Business Plans are the Business Plans presented to the Board of Directors of Commonwealth and electricAMERICA by management of said respective companies. The CEO of Commonwealth will prepare or cause to be prepared such Business Plans for presentation to the Board of Commonwealth, and are incorporated herein by this reference. The Base Salary shall be payable in accordance with the payroll practices of the Company in effect from time to time, provided however that upon the signing of this Agreement the Employee shall receive a payment in the sum of fifty thousand dollars ($50,000.00) which is an advance on the first annual salary obligation. The balance of the annual salary will be paid in equal periodic payments per the policy of the Company. 3.2 Bonus. In the event that the aggregate total number of customers of the Company and its parent and any affiliated companies, as of the end of the first year of this Agreement, when compared to the aggregate total of the number of customers of the Company and its parent as of January 3, 2000 equals or exceeds fifty thousand (50,000), then Employee shall receive a bonus of fifty thousand dollars ($50,000) and to the extent the increase in the Customer Count exceeds fifty thousand. Employee shall also receive one dollar ($1.00) for each customer in excess of fifty thousand (50,000). Employee shall be entitled to such a annual cash bonuses each year of this Agreement based on the increase in the aggregate total number of customers equaling or exceeding fifty thousand each prior year. (As an example, if the Customer Count at the end of a year shows an increase of 75,000 customers, Employee will receive $50,000, plus an additional $25,000 which is $1.00 times 25,000). This bonus shall be due and 2 7 payable no later than thirty (30) days following the close of each year. Employee shall also be eligible for an additional discretionary bonus to be determined by the Board of Commonwealth taking into account, among other things, the results of operations of the Company and the affiliated companies for the completed year. (a) Bonus Upon Sale of Assets or Control of the Company. If during the term of this Agreement all or substantially all of the assets of the Company or its parent, or more than fifty percent (50%) of the issued and outstanding voting shares of the Company or its parent are, in any transaction or series of transactions, acquired by any person or entity not now affiliated with the Company or its parent, then the Company shall pay to Employee a bonus equal to eight (8) times the annual Base Salary, plus the amount of any 280 G taxes payable by Employee. In addition all stock options due the Employee shall be immediately earned and issued as non-restricted options. The bonus shall be paid to Employee within sixty (60) days after the date of such Change of Control, and the payment of the bonus shall be accompanied by a summary statement or accounting of the computation thereof. The bonus shall be payable to Employee whether or not Employee elects to terminate this Agreement pursuant to Section 7.3 below. (b) Participation in Public Offering. If during the term of this Agreement the Company or its parent or any affiliated company makes a public offering (as used herein, "public offering" means new shares are marketed and sold to the public pursuant to a contract with an underwriter who commits to create a market for the IPO shares) of shares of any such entity's voting common stock, or any other class securities with substantially similar terms and preferences, ("Common Stock"), Employee shall have the right to sell shares of Common Stock that the Employee may own on the following terms and subject to the following conditions: (i) Employee shall be entitled to have three hundred thousand (300,000) of any such shares of stock of either the parent or successor, or, if applicable, the Company, or any affiliated entity of the Company as Employee may own, placed into a non-restricted Common Stock status immediately prior to the public offering. (ii) If any holder of Common Stock of the Company (hereinafter a "Selling Shareholder") is permitted by the Company or any affiliated company its underwriters to have any of his Common Stock registered and sold with the Common Stock issued by the Company in the public offering, the Common Stock owned by Employee shall be included in the Common Stock registered and sold by the Selling Shareholders, on the same basis as that afforded to the other Selling Shareholders; (iii) Except with respect to shares of Common Stock registered and sold by Employee pursuant to Section (ii) above, (i) Employee acknowledges that the shares of stock so purchased by him will be registered under the Securities Act or any applicable state securities laws; (ii) Employee represents and warrants to the Company that all such stock will be held by him for his account for investment purposes only; (iii) Employee acknowledges and agrees that no stock so acquired by him may be transferred unless and until (A) counsel for the 3 8 applicable company shall have determined, at the company's sole cost and expense, that the intended transfer does not violate the Securities Act of 1933 (the "Securities Act") or the rules and regulations promulgated thereunder or any applicable state securities laws, or (B) the shares have been validly registered under the Securities Act and all applicable state securities law; and (iv) Employee need not enter into any Shareholders Agreement restricting his transfer of the shares of Common Stock so purchased by him. 3.3 Other Fringe Benefits. Employee shall be entitled to participate in all of the Company's incentive and benefit plans and arrangements, including, without limitation, all employee incentive and benefit plans or arrangements made available in the future by the Company to its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements, but on a basis no less favorable than that afforded to any other director, officer or employee of the Company, or of the parent corporation, and with full seniority credit for Employee's prior employment by Commonwealth. The Company shall also provide to Employee at the Company's expense reasonable health insurance coverage as given to other senior management employees of the Company or any affiliated company as approved by the respective Board, and in addition, the Company will pay the cost of term life insurance on Employee up to five thousand dollars ($5,000.00) per year. 3.4 Expenses. The Company shall promptly reimburse Employee for all out-of-pocket expenses actually incurred by him in connection with the performance of his duties hereunder, subject to Employee's furnishing the Company with evidence in the form of receipts satisfactory to the Company and for which the Company will be entitled to a tax deduction, substantiating the claimed expenditures (such expenses being commensurate with the office and executive position of Employee hereunder, and including first class hotel and travel arrangements). Employee's right to be reimbursed for expenses incurred prior to the termination of this Agreement shall survive termination of this Agreement. 3.5 Vacation. Employee shall be entitled to the number of paid vacation days in each calendar year determined by the Board from time to time for the Company's senior executive officers, but not less than 20 business days in any calendar year. Employee shall also be entitled to all paid holidays given to the Company's senior executive officers. Employee shall also be entitled to the sick day benefits and policies as set forth in the Company's employee manual applicable to senior executive officers. 3.6 Automobile: Telephone: etc. During the term hereof the Company shall continue to provide the Employee the sum of One Thousand Three Hundred Dollars ($1,300.00) per month for the purposes of the Employee paying for the use of an automobile of Employee's choosing, throughout the term of this Agreement. At any time during the term, the Employee shall have the right to have the title of the automobile placed in his name. At the end of the term Employee shall have the right to purchase the title to the automobile by assuming the obligation to pay for any outstanding balance due thereon. In addition, the Company shall provide an automobile telephone, a home telecopy machine and an answering service and shall reimburse Employee for all charges incurred by him in connection with the use thereof related to the 4 9 performance of his duties hereunder. 3.7 Withholding and other Deductions. All compensation payable to Employee hereunder shall be subject to such deductions as the Company is from time to time required to make pursuant to law, governmental regulation or order. 3.8 Marketing and Advertising Support. Company agrees that the number and the aggregate salaries for support staff for Employee, and the budgeted amount available to Employee for advertising and marketing shall be no less than said budgets and support staff made available to or for Employee during the last 12 months of his employment with Commonwealth. 3.9 Right to Reinstatement to Nomination on Board of Commonwealth Energy Corporation After Two Years. After the expiration of two years as referenced in a separate agreement between Commonwealth and the California Public Utility Commission, Commonwealth agrees that any management slate of nominees for directors of its Board shall include Employee. 3.10 Registration Rights as to Shares. After the initial public offering, should the Company or any of its affiliates elect to file a registration statement with the Securities Exchange Commission regarding the issuance of shares which involve or relate to the shares presently owned by Employee, or as above defined as Common Stock, Employee shall have the right to "piggy back" all or a portion of his shares in such registration subject to the approval of any underwriter contracted for such registration. 4. Representations and Warranties. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder and (b) Employee is under no physical or mental disability that would hinder the performance of his duties under this Agreement. The Company represents and warrants to Employee that (a) the execution and delivery of this Agreement by the Company and the performance of its obligations hereunder have been duly authorized by the Board and no further corporate action on the Company's part is necessary to authorize this Agreement and the performance of such obligations, and (b) this Agreement constitutes the valid and binding obligation of the Company, enforceable by Employee against the Company strictly in accordance with its terms (subject to laws in effect with respect to creditors' rights generally and applicable principles relating to equitable remedies). 5. Confidential Information. Employee acknowledges that the nature of Employee's engagement by the Company is such that Employee will have access to Confidential Information (as hereinafter defined) which has value to the Company. Employee acknowledges that "Confidential Information" includes all customer lists, quotations, requests for quotations, purchase orders, pricing information, bills of materials, files, data processing reports and other documents relating to the Company's business, whether furnished to Employee by the Company or generated by Employee, alone or in combination with others, and all such Confidential 5 10 Information is considered trade secrets and are valuable assets of the Company. Employee agrees upon termination of employment by either party to immediately return all such materials to the Company and not to make or retain copies thereof. Employee acknowledges that Confidential Information includes, but is not limited to, names and addresses of customers and other employees of the Company, the nature and volume (both dollar and usage or product amount) of business transacted by the Company with any of its customers or accounts or suppliers, and customer usage or purchasing histories. Employee further acknowledges that such information is necessary to the conduct of the Company's business, is not generally known, and give the Company a competitive advantage in the markets it serves. Employee agrees that upon termination of employment, unless Employee is hereafter being retained by the Company in some other capacity, with or without cause, Employee will not, for a period of two (2) years after such termination: A. Use or assist others in using Confidential Information for any purpose competitive with the business of the Company; or B. Solicit or induce or attempt to solicit or induce other employees of the Company to terminate their employment with the Company. Employee further agrees that during his employment hereunder and for two (2) years thereafter, he will communicate the contents of this Paragraph 5 and its subparagraphs to any person or other entity with, from, or by whom Employee seeks employment, if such person or other entity is engaged in a business which is competitive with the business of the Company. The parties agree and declare that, because of the irreparable nature of the injury to the Company which would result if Employee violates or breaches this paragraph 5 and/or its subparagraphs, the award of monetary damages would not adequately compensate the Company for such violation or breach. Therefore, in the event that the Company institutes any action or proceeding to enforce the provisions of this paragraph 5 and/or its subparagraphs, employee hereby waives any claim or defense that the Company has an adequate remedy at law and Employee agrees that any violation by him of this paragraph 5 and/or its subparagraphs shall be the proper subject, without limitation, for immediate, ex parte injunctive relief by the Company. If it shall be judicially determined that Employee has violated any of his obligations under this paragraph 5 and/or its subparagraphs, then the period applicable to the obligation which Employee shall have been determined to have violated or breached shall automatically be extended for a period of time equal in length to the period during which said violation(s) or breach(s) occurred and/or continued. Employee agrees to adhere to and observe the guidelines and requirements concerning non-disclosure of information including financial information and other insider information as may be required per the Securities Exchange Commission rules and regulations. The covenants by Employee contained in this paragraph 5 and/or its subparagraphs are of the essence of this agreement; they shall be construed as independent of any other provision of this Agreement; and the existence of any claim or cause of action of Employee against the Company, 6 11 whether predicated on this Agreement of otherwise, shall not constitute a defense to the enforcement by the Company of these covenants made by Employee. The within covenant shall be applicable during the term of this Agreement and also in the event of termination hereof. irrespective of whether termination shall be by the Company or by Employee. with or without cause. 6. Insurance and Indemnification. 6.1 "Key-Man" Insurance. The Company shall have the right to purchase "key-man" life insurance covering Employee, in the name and for the benefit of the Company and at the Company's expense in any amount not exceeding $2,000.000. Furthermore, so long as it does not adversely affect Employee's ability to obtain life insurance in the general market at prevailing rates, the Company may take out additional "key-man" life insurance with respect to Employee at the Company's cost and for its benefit. Employee shall cooperate in all reasonable respects with the Company's efforts to obtain such insurance and shall submit to any required medical or other examination; provided; however, that if such medical or other examination cannot be conducted by Employee's personal physician, then Employee shall have the right to have his personal physician attend the examination. Upon the termination of his employment hereunder, Employee may acquire any such life insurance policy upon paying the Company an amount equal to the insurance policy's cash surrender value, if any, at the time of termination and reimbursing the Company for the pro rata portion of any premium paid applicable to periods subsequent to the termination. 6.2 Insurance Covering Employee. The Company shall, at its cost, provide insurance coverage to Employee to the same extent as other senior executives and directors of the Company, with respect to (i) director's and officer's liability, (ii) errors and omissions and (iii) general liability. At no time will the director's and officer's liability and errors and omissions insurance fall below $10,000,000. As the company grows appropriate levels of coverage will be to full force and effect. 6.3 Indemnification. The Company shall indemnify Employee and hold him harmless from and against any and all costs. expense, losses, claims, damages. obligations or liabilities (including actual attorneys fees and expenses) arising out of or relating to any acts. or omissions to act, made by Employee on behalf of or in the course of performing services for the Company to the full extent permitted by the Bylaws of the Company as in effect on the date of this Agreement, or, if greater, as permitted by applicable law, provided that the indemnity afforded by the Company's Bylaws shall never be greater than that permitted by applicable law. To the extent a change in applicable law permits greater indemnification than is now afforded by the Bylaws and a corresponding amendment shall not be made in said Bylaws, it is the intent of the parties hereto that Employee shall enjoy the greater benefits so afforded by such change. If any claim, action, suit or proceeding is brought. or claim relating thereto is made, against Employee with respect to which indemnity may be sought against the Company pursuant to this section, Employee shall notify the Company in writing thereof, and the Company shall have the right to participate in, and to the extent that it shall wish, in its discretion, assume and control the defense thereof, with counsel satisfactory to Employee. 7 12 6.4 Rights Not Exclusive. The foregoing rights conferred upon Employee shall not be exclusive of any other right which Employee may have or hereafter acquire under any statute, provision of the Articles of Incorporation or Bylaws, agreement, vote of shareholders or disinterested directors or otherwise, and such provisions shall survive the termination or expiration of this Agreement for any reason whatsoever. 7. Termination. 7.1 Death or Total Disability of Employee. If Employee dies, Employee's employment hereunder shall automatically terminate. If Employee becomes totally disabled during the term of this Agreement, this Agreement may be terminated at the option of the Company. For these purposes Employee shall be deemed totally disabled if Employee becomes physically or mentally incapacitated or disabled or otherwise unable to discharge Employee's duties within the terms of the Company's disability insurance, or as otherwise defined by the Social Security Administration. Prior to termination of this Agreement as a result of disability, and notwithstanding any failure or inability of Employee to render services hereunder, the Company shall continue to pay and/or provide to Employee the compensation and benefits specified in Section 3 hereof. Furthermore, in the event that this Agreement automatically terminates as a result of the death of Employee, or in the event that this Agreement is terminated by the Company as a result of the total disability of Employee, the Company shall continue to pay, Employee (or, in the event of Employee's death, Employee's estate, heirs or personal representative), when otherwise due, for a period of one year thereafter or until expiration of the term hereof, whichever occurs first. the Base Salary, and should such disability continue beyond a year, then for the additional period up to one additional year, one-half of the Base Salary less any proceeds actually received by Employee from any disability insurance provided to Employee at the expense of the Company. 7.2 Termination by the Company for Cause. Except as set forth in Section 7 1, the Company may terminate this ?agreement only for cause, which shall be limited to any one of the following: Employee's conviction by, or entry of a plea of guilty or nolo contendre in, a court of competent and final jurisdiction for any felony which would materially and adversely interfere with Employee's ability to perform his services under this Agreement Upon termination of this Agreement by the Company for cause. Employee shall be entitled to receive all compensation and other benefits payable to him pursuant to Section 3 hereof accrued through the effective date of termination. 7.3 Termination by Employee for Cause. Employee may terminate this Agreement only for cause, which shall be limited to any one of the following: (a) The sale of all or substantially all of the Company's assets to a person unaffiliated with the Company or the occurrence of a Change of Control, in either case 8 13 without Employee's prior written consent. which consent may be given or withheld by Employee in his sole and arbitrary discretion. (b) The Company's material breach of any of the terms and conditions of this Agreement. provided that termination pursuant to this subsection (b) shall not constitute a valid termination for cause unless the Board shall have first received written notice from Employee stating with specificity, the nature of such material breach and affording the Company at least thirty (30) days to cure the material breach alleged. Upon any termination of this Agreement by Employee for cause, Employee shall not be required to render or to provide any further services pursuant to this Agreement and shall be entitled to receive in one lump sum within fifteen (15) days following notice of such termination, a termination payment equal, in the case of termination under (a) above, to eight (8) times the annual Base Salary then being paid to Employee hereunder, plus an amount equal to any 280 G taxes payable by Employee and in the case of termination under (b) above, equal to the monetary value (not discounted to present value) of all of the compensation and other benefits payable to Employee pursuant to this Agreement for the remainder of the term hereof. Such compensation shall be in addition to, and not in lieu of, any payment due under section 3.2 (a) or any other damages to which Employee may otherwise be entitled. 7.4 Stock Repurchase Option. In the event that Employee's employment hereunder ceases following a Change of Control Employee shall have the absolute right, to be exercised in his sole and absolute discretion and in addition to any other compensation or benefits payable to him hereunder, to require the Company to repurchase from him 25% of his capital stock of the Company or its parent then owned by him at an aggregate repurchase price equal to 100% of the then fair market value, as a going concern, without minority or nonliquidity discounts. and no less than the value that other shareholders, on the average. are paid for their stock. Such right may be exercised by notice from Employee to the Company or its parent, as may be applicable, and the closing of the repurchase shall take place at a time and place to be agreed upon by Employee and the Company or its parent, but not to be more than thirty (30) days following the Company's receipt of the notice. At the closing Employee shall sell and the Company or its parent, as is applicable shall purchase the capital stock and stock options, without any representation or warranty by Employee other than that he has good title thereto free of all liens, encumbrances and adverse interests, by Employee's delivery to the Company of a certificate or certificates representing such capital stock and stock options, in each case duly endorsed for transfer or accompanied by appropriate stock powers. and by the Company's delivery to Employee of a certified check representing payment of the purchase price in full. 7.5 No Mitigation. Employee shall have no duty or obligation to mitigate damages hereunder, and if Employee does choose to accept employment elsewhere after any breach or improper termination of this Agreement by the Company, then any income and other employment benefits received by Employee by virtue of his employment by, or rendition of services for or on behalf of, any person or entity other than the Company after such breach or improper termination shall not reduce the Company's obligation to make payments and afford 9 14 benefits hereunder. 7.6 No Offset. The Company shall have no right to offset against any payments or other benefits due to Employee under this Agreement the amount of any claims it may have against Employee by reason of any breach or alleged breach of this Agreement by Employee: provided, however, that the Company shall have the right to offset any amounts due the Company from Employee pursuant to any judgment (after exhaustion of all appeals) rendered by a court of competent jurisdiction in connection with any breach or alleged breach of this Agreement by Employee. 7.7 SEC Filings. The Company as well as its parent company and counsel engaged to advise the Company or its parent company with respect to filings with the SEC shall give timely notice and advice to Employee, to the extent the Company or its parent has or is given information that should so indicate to the Company or its counsel, of any requirement that Employee make filings with the SEC or any other governmental agency having jurisdiction by reason of Employee's position with the Company and/or Employee's transactions to securities of the Company. 8. Relationship Following Expiration of the Term of Agreement. In the event of the expiration of this employment relationship, Employee and Company contemplate that each will negotiate to good faith to reach a mutually acceptable agreement for Employee's continuing services to the Company on a contractual basis or on a consulting basis. the terms and compensation to be negotiated at or near the end of the term of this Agreement. 9. General Relationship. Employee shall be considered an employee of the Company within the meaning of all federal, state and local laws and regulations including, but not limited to, laws and regulations covering unemployment insurance, workers' compensation, industrial accident, labor and taxes. 10. Miscellaneous. 10.1 Entire Agreement. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof. supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 10.2 No Assignment. This Agreement may not be assigned by the Company or Employee without the prior written consent of the other, (which consent may be granted or withheld by such party in its sole and absolute discretion), and any attempt to assign rights and duties without such written consent shall be null and void and of no force and effect. Subject to the preceding sentence, this agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Any Change of Control shall be deemed to be an assignment subject to this section. 10.3 Survival. The covenants, agreements, representations and warranties 10 15 contained in or made pursuant to this Agreement shall survive Employee's termination of employment, irrespective of any investigation made by or on behalf of any party. 10.4 Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement. 10.5 Waiver. The failure of either party hereto at any time to enforce performance by the other party of any provision of this Agreement shall in no way affect such party's rights thereafter to enforce the same, nor shall the waiver by either party of any breach of any provision hereof be deemed to be a waiver by such party of any other breach of the same or any other provision hereof. 10.6 Section Headings. The headings of the several sections in this Agreement are inserted solely for the convenience of the parties and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof. 10.7 Notices. All notices and other communications required or permitted under this Agreement shall be in writing, served personally on, telecopied, sent by courier or other express private mail service, or mailed by certified, registered or express United States mail postage prepaid, and shall be deemed given upon receipt if delivered personally, telecopied, or sent by courier or other express private mail service, or if mailed when actually received as shown on the return receipt. Notices shall be addressed as follows: (a) If to the Company, to: electricAMERICA, Inc. 15901 Red Hill Avenue Suite 100 Tustin, CA 92780 (b) If to Employee, to: Frederick M. Bloom 41 Montgomery Newport Beach, CA. 92660 Either party may change its address for purposes of this Section by giving to the other, in the manner provided herein, a written notice of such change. 10.8 Severability. All sections, clauses and covenants contained in this Agreement are severable, and in the event any of them shall be held to be invalid by any court, this Agreement shall be interpreted as if such invalid sections, clauses or covenants were not contained herein. 10.9 Applicable Law. This Agreement is made with reference to the laws of the State of California, shall be governed by and construed in accordance therewith, and any court action brought under or arising out of this Agreement shall be brought in any competent 11 16 court within the State of California, County of Orange. 10.10 Attorneys' Fees. If any legal action, arbitration or other proceeding is brought for the enforcement of this Agreement, or because of any alleged dispute, breach, default or misrepresentation in connection with this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs it incurred in that action or proceeding, in addition to any other relief to which it may be entitled. 10.11 Gender. Where the context so requires, the use of the masculine gender shall include the feminine and/or neuter genders and the singular shall include the plural, and vice versa, and the word "person" shall include any corporation, firm, partnership or other form of association. 10.12 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date hereinabove set forth. THE COMPANY electricAMERICA, Inc. a California corporation By: /s/ JOHN A. BARTHROP ------------------------------- Secretary EMPLOYEE By: /s/ FREDERICK M. BLOOM ------------------------------- Frederick M. Bloom In the event of a breach in the performance of any obligation of the Company stated in this Agreement, Commonwealth agrees, upon five days notice to Commonwealth of such breach, to perform and/or pay the cost to perform or cure. Commonwealth Energy Corporation By: /s/ JOHN A. BARTHROP ------------------------------- John A. Barthrop 12 17 EXHIBIT B 18 INVESTOR RIGHTS AGREEMENT THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is entered into as of June 1, 2000 between Commonwealth Energy Corporation, a California corporation ("CEC"), and Frederick M. Bloom ("Shareholder"), with reference to the following facts: A. Bloom currently owns 7,095,160 shares of CEC (the "Shares"), 1,200,000 shares of which Bloom has made available to CEC under the terms of an Accommodation Agreement between Bloom and CEC dated as of May ___, 2000. B. in order to induce Bloom to resign as an officer, director and employee of CEC, CEC desires to afford Bloom certain benefits equivalent to those he enjoyed prior to such resignations. NOW, THEREFORE, IN CONSIDERATION OF the foregoing facts and the mutual promises set forth herein, the parties agree as follows: 1. Participation in Public Offering. If during the term of this Agreement CEC or any affiliated company makes a public offering (as used herein, "public offering" means new shares are marketed and sold to the public pursuant to a contract with an underwriter who commits to create a market for the new shares) of shares of any such entity's voting common stock, or any other class securities with substantially similar terms and preferences, Bloom shall have the right to sell the Shares on the following terms and subject to the following conditions: 1.1 Initial Shares. Bloom shall be entitled to have 300,000 of his Shares placed into a nonrestricted common stock status immediately prior to the public offering. 1.2 Participation. If any shareholder of CEC (hereinafter a "Selling Shareholder") is permitted to have any of his shares of CEC registered and sold with the shares issued by CEC in the public offering, all or a portion of the Shares owned by Bloom shall be included in the shares registered and sold by the selling shareholders, on the same basis as that afforded to the other selling shareholders. Exhibit B - Page 1 19 1.3 No Restrictions. Bloom need not enter into any Shareholders Agreement, lock-up agreement or other arrangement restricting his transfer of the Shares. 2. Registration Rights. After the initial public offering, should CEC or any of its affiliates elect to file a registration statement with the Securities and Exchange Commission ("SEC") regarding the issuance of shares of CEC, Bloom shall have the right to "piggy back" all or a portion of his Shares in such registration subject to the approval of any underwriter contracted for such registration. 3. Miscellaneous. 3.1 Entire Agreement. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 3.2 No Assignment. This Agreement may not be assigned by CEC or Bloom without the prior written consent of the other (which consent may be granted or withhold by such party in its sole and absolute discretion), and any attempt to assign rights and duties without such written consent shall be null and void and of no force and effect. Subject to the preceding sentence, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Any change of control of CEC, however effected, shall be deemed to be an assignment subject to this Section. 3.3 Waiver. The failure of either party hereto at any time to enforce performance by the other party of any provision of this Agreement shall in no way affect such party's rights thereafter to enforce the same, nor shall the waiver by either party of any breach of any provision hereof be deemed to be a waiver by such party of any other breath of the same or any other provision hereof. 3.4 Section Headings. The headings of the several Sections in this Agreement are inserted solely for the convenience of the parties and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof. 3.5 Notices. All notices and other communications required or permitted under this Agreement shall be in writing, served personally on, telecopied, sent by courier or other express private mail service, or mailed by certified, registered or express United States mail postage prepaid, and shall be deemed given upon receipt if delivered personally, telecopied, or sent by courier or other express private mail service, or if mailed when actually received as shown on the return receipt. Notices shall be addressed as follows: Exhibit B - Page 2 20 If to CEC: Commonwealth Energy Corporation 15901 Red Hill Avenue Suite 100 Tustin, CA 92780 Fax: (714) 481-6589 If to Bloom: Frederick M. Bloom 41 Montgomery Newport Beach, CA 92660 Fax: (949) 219-0885 Either party may change its address for purposes of this Section by giving to the other, in the manner provided herein, a written notice of such change. 3.6 Severability. All Sections, clauses and covenants contained in this Agreement are severable, and in the event any of them shall be held to be invalid by any court, this Agreement shall be interpreted as if such invalid sections, clauses or covenants were not contained herein, provided that the economic benefits of the Agreement are substantially preserved. 3.7 Applicable Law. This Agreement is made with reference to the laws of the State of California, shall be governed by and construed in accordance therewith, and any court action brought under or arising out of this Agreement shall be brought in any competent court within the State of California, County of Orange. 3.8 Attorneys' Fees. If any legal action, arbitration or other proceeding is brought for the enforcement of this Agreement, or because of any alleged dispute, breach, default or misrepresentation in connection with this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs it incurred in such action or proceeding, in addition to any other relief to which it may be entitled. 3.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. Exhibit B - Page 3 21 IN WITNESS WHEREOF, the parties have executed and delivered this Investor Rights Agreement effective as of the date first set forth above. COMMONWEALTH ENERGY CORPORATION By: ------------------------------------ /s/ FREDERICK M. BLOOM --------------------------------------- Frederick M. Bloom Exhibit B - Page 4 EX-10.12 17 a74807gex10-12.txt EXHIBIT 10.12 1 EXHIBIT 10.12 IAN CARTER EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of January 1, 2000, between Commonwealth Energy Corporation, a California corporation (the reference herein to the "Company" includes all subsidiary companies owned or controlled now or hereafter by Commonwealth Energy Corporation, including but not limited to electricAMERICA, electric.com and any and all other entities formed as a result of expanding the business of Commonwealth Energy Corporation) and Ian B. Carter ("Employee"), with reference to the following: A. Employee has been a principal stockholder, director, officer and employee of the Company and has rendered valuable services to the Company. B. The Company and Employee desire to enter into this Agreement to assure the Company of the continued services of Employee on the terms provided herein. NOW, THEREFORE, in consideration of the various covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Term of Employment. The Company hereby employs Employee and Employee accepts such employment for a term of 61 months, commencing on January 1, 2000 and terminating on January 31, 2005, unless sooner terminated as hereinafter provided. 2. Titles and Responsibilities. Employee shall serve as Chairman and Chief Executive Officer of the Company and in the performance of such duties shall report directly to (and only to) the Board of Directors of the Company (the "Board"). Employee shall also serve as director and chairman of affiliated companies as the Board may desire. Subject to applicable law and the overall policy directives of the Board, Employee shall have complete autonomy with respect to the day to day management of the business and affairs of the Company and shall have all executive powers and authority which are necessary to enable him to discharge his duties as Chairman and Chief Executive Officer of the Company and which are commonly incident to such office. Employee's office location shall at all times be in the Orange County Area, California provided that Employee may be required to travel outside such area from time to time to the extent reasonably necessary to the performance of his duties hereunder. During the term hereof, the Company shall not employ or otherwise retain any other person who reports directly to the Board, who is afforded aggregate compensation greater than that of Employee or who is afforded executive responsibilities greater than those of Employee. In addition, during the term hereof, the Company shall include Employee as a qualified candidate on any slate of nominees for directors presented by management for proxy or for appointment or to any shareholders for consideration and vote to the end that Employee shall at all times be and remain a member of the Board and shall be member of any Executive Committee, provided however that nothing herein shall override the legal requirements regarding nonparticipation and/or non voting in matters involving conflicts of interest that may come before a committee or before the Board. 1 2 Employee shall in good faith and consistent with his ability, experience and talent perform the duties set forth in this Section 2, and shall devote all of his productive time and efforts to the performance of such duties; provided, however, that Employee may devote time to personal and family investments to the extent that such investments do not materially conflict with the discharge of his duties hereunder. 3. Compensation and Benefits. The Company shall pay and/or provide the following compensation and benefits to Employee during the term hereof, and Employee shall accept the same as payment in full for all services rendered by Employee to or for the benefit of the Company: 3.1 Base Salary. A salary of $ 275,000 per annum for the first twelve months of the term of this Agreement, $ 325,000 per annum for the second twelve months of the term, 375,000 per annum for the third twelve months of the term, $ 425,000 per annum for the fourth twelve months of the term, and $ 500,000 per annum for the fifth twelve months of the term (the "Base Salary"). The Base Salary shall be subject to review from time to time (not less frequently than at the end of each fiscal year of the Company) and, as a result thereof, may be increased (but not decreased) at the discretion of the Board. In determining such increases in the Base Salary, if any, the Board shall take into account, among other things, the Company's Business Plan and the Company's results of operations. The Base Salary shall be payable in accordance with the payroll practices of the Company in effect from time to time. 3.2 Bonus. In the event that the Company achieves in any year during the term hereof an increase of fifty thousand (50,000) or more new customers (a new customer is defined as an additional meter being served and the Increase in the Customer Count means the increase if any in comparing the Customer Count at the beginning of the year with the Customer Count at the end of said year, taking into account any loss of customers to arrive at the aggregate or net Customer Count) Employee shall receive one dollar per new customer up to $50,000 maximum in the first year, up to $75,000 in the second year, and up to $100,000 per year in the third, fourth and fifth years. The bonus shall be due and payable no later than thirty (30) days following the determination by the Company's independent certified public accountants, or, certified by the Chief Financial Officer . If such results are achieved Employee shall also be eligible for an additional discretionary bonus to be determined by the Board taking into account, among other things, the Business Plan and the Company's results of operations for the completed fiscal year. The bonus provided herein shall cease if and when the Company, or any affiliated company makes an initial public offering. As used herein, "initial public offering" means new shares are marketed and sold to the public pursuant to a contract with an underwriter who commits to create a market for the IPO shares on NASDAQ or the American Stock Exchange or the New York Stock Exchange. (a) Bonus Upon Sale of Assets or Control of the Company. If during the term of this Agreement all or substantially all of the assets of the Company or more than fifty percent (50%) of the issued and outstanding voting shares of the Company are, in any transaction or series of transactions, acquired by any one person or entity not then affiliated with the Company, then the Company shall pay to Employee a bonus equal to eight (8) times the annual Base Salary due the Employee plus the amount of I.R.S. Code 280 G taxes, payable by Employee. In addition all stock options due the Employee shall be immediately earned and issued as non-restricted options. The bonus shall be paid to Employee within sixty (60) days after the Closure date of such purchase of assets or stock, and the payment of the bonus shall be accompanied by a summary statement or accounting of the computation thereof. The bonus shall be payable to Employee whether or not Employee elects to terminate this Agreement pursuant to Section 7.3 below. (b) Participation in Public Offering. If during the term of this Agreement the Company makes a public offering of shares of its voting common stock, or any other class securities with substantially similar terms and preferences, ("Common Stock"). Employee shall have the right and option to purchase shares of Common Stock from the Company prior to the public offering on the following terms and subject to the following conditions: 2 3 (i) Employee shall be entitled to purchase from the Company prior to the public offering three hundred thousand (300,000) shares of restricted Common Stock immediately prior to the public offering and shall be entitled to purchase the shares of Common Stock at a purchase price of $2.50 for each share. These shares shall be allowed to be sold with the public stock in the Public Offering at the discretion of the Employee. (ii) If any holder of Common Stock of the Company (hereinafter a "Selling Shareholder") is permitted by the Company and the Company's underwriters to have any of his Common Stock registered and sold with the Common Stock issued by the Company in the public offering, the Common Stock so purchased by Employee shall be included in the Common Stock registered and sold by the Selling Shareholders, on the same basis as that afforded to the other Selling Shareholders; (iii) Except with respect to shares of Common Stock registered and sold by Employee pursuant to Section (ii) above, (i) Employee acknowledges that the shares of stock so purchased by him will be registered under the Securities Act or any applicable state securities laws; (ii) Employee represents and warrants to the Company that all such stock will be held by him for his account for investment purposes only; (iii) Employee acknowledges and agrees that no stock so acquired by him may be transferred unless and until (A) counsel for the Company shall have determined, at the Company's sole cost and expense, that the intended transfer does not violate the Securities Act of 1933 (the "Securities Act") or the rules and regulations promulgated thereunder or any applicable state securities laws, or (B) the shares have been validly registered under the Securities Act and all applicable state securities law; and (iv) Except with respect to shares of Common Stock registered and sold by Employee pursuant to Section (ii) above, all shares of stock so purchased by Employee shall be subject to a Shareholders Agreement among the Company, Employee and the other controlling shareholders of the Company substantially similar in form and substance to such Shareholders Agreement, if any, as may then be in effect among the Company and its employee Shareholders. If no such shareholders Agreement then exists among the Company and its employee Shareholders, Employee need not enter into any Shareholders Agreement restricting his transfer of the shares of Common Stock so purchased by him. (c) Bonus for Successful Initial Public Offering ("IPO"). This stock option bonus shall be deemed earned by the Employee for increasing the capitalized value of the Company or any related entity which is the subject of the IPO. Capitalized value shall be calculated by taking the initial value placed on one share of stock or the value of one share of stock thirty (30) days after the date of the IPO, whichever is higher, and multiply said value per one share by the total number of shares and options outstanding. (For example, if the stock is priced at $10.00 per share either on the date of the IPO or thirty (30) days thereafter and the total number of outstanding shares and options is forty million (40,000,000), the capitalized value shall be $400,000,000). The options shall be earned as follows: at a capitalized value with a floor of $100,000,000 or less, the Employee is granted 100,000 options. For each increase of $11,000,000 in capitalized value, the Employee is granted an additional 25,000 options up to a maximum of 2,000,000 options. At an increase of $11,000,000 increments, the Employee shall cap out at 2,000,000 options at a capitalized value of $936,000,000, or greater. These bonus options shall have Demand Registration rights for the Employee and shall be subject to the same terms as described in paragraph 3.2 (b) (i). Said options shall have a ten-year period before expiring. 3.3 Employee Stock Option Plan. Concurrently herewith, the Company shall grant to Employee for signing this agreement, a stock option to purchase three hundred thousand (300,000) shares. For the balance of the term of this agreement there shall be four additional stock option periods to purchase one hundred thousand (100,000) shares in each one year period of the Company's capital stock on the terms outlined in paragraph 3.2 (b) (i). (Said four stock option issuances shall be earned upon each anniversary thereafter). These four options shall be considered as part of the salary package. In addition, concurrently with these four options there shall be four additional options of three hundred thousand (300,000) shares each. These four options shall be earned by Employee if the Customer Count grows or increases a minimum of twenty percent (20%) annually over the 1999 year, non compounded, Customer Count. The Customer Count is defined as the aggregate customer base or customer count at the end of 3 4 1999 minus all industrial customers and all commercial customers signed with the Company. The Employee at his discretion may place the allowed amount of these options into the Company's Incentive Stock Option Plan. Said options shall have a ten year period to expiration, unless the Stock Option Plan does not authorize same. Any shares of capital stock so purchased by Employee shall be entitled to participate, on the same basis as those owned by any other shareholders, in any selling shareholder allotment afforded to the Company's other shareholders in connection with any and all public offerings of the Company's capital stock hereafter effected. Any shares issued under this bonus shall have Demand registration rights and shall be subject to the terms of paragraph 3.2 (b) (i). These options shall be afforded the same privileges as shares. For example, the options will initially be issued in Commonwealth Energy Corporation, with the understanding that should the IPO be a separate entity other than Commonwealth Energy Corporation, the same number of options will be issued to the Employee in the IPO entity -- for example, electric.com. In this case, the option price for each share will be the same price as the price at which the shares are initially offered, or $2.50, whichever is lower. 3.4 Other Fringe Benefits. Employee shall be entitled to participate in all of the Company's incentive and benefit plans and arrangements, including, without limitation, all employee incentive and benefit plans or arrangements made available in the future by the Company to its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements, but on a basis no less favorable than that afforded to any other director, officer or employee of the Company. The Company shall also provide to Employee and his spouse and any family members under the age of majority at the Company's expense reasonable health insurance coverage as given to other senior management employees of the Company, as approved by the Board, and life and disability insurance in amounts and types of coverage as approved by the Board. 3.5 Expenses. The Company shall promptly reimburse Employee for all out-of-pocket expenses actually incurred by him in connection with the performance of his duties hereunder, subject to Employee's furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures (such expenses being commensurate with the office and executive position of Employee hereunder, and including first class hotel and travel arrangements). Employee's right to be reimbursed for expenses incurred prior to the termination of this Agreement shall survive termination of this Agreement. 3.6 Vacation. Employee shall be entitled to the number of paid vacation days in each calendar year which shall not be aggregated or carried forward, as determined by the Board from time to time for the Company's senior executive officers, but not less than 30 business days in any calendar year. Employee shall also be entitled to all paid holidays given to the Company's senior executive officers. 3.7 Automobile; Telephone; etc. During the term hereof the Company shall make payments of One Thousand Three Hundred Dollars ($1,300.00) per month to the manufacturer or dealer or other person or entity as designated by the Employee for an automobile of the Employee's choice. At the time of termination of this agreement the Employee shall assume the responsibility of any such payments. In addition, the Company shall provide an automobile telephone, a home telecopy machine and an answering service and shall reimburse Employee for all charges incurred by him in connection with the use thereof related to the performance of his duties hereunder. In addition, the Company shall pay the reasonable cost for insurance coverage for liability and property damage, and also comprehensive and collision coverage for the automobile. 3.8 Withholding and other Deductions. All compensation payable to Employee hereunder shall be subject to such deductions as the Company is from time to time required to make pursuant to law, governmental regulation or order. 4. Representations and Warranties. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder and (b) Employee is under no physical or mental disability that would hinder the performance of his duties under this Agreement. The Company represents and warrants to Employee that (a) the execution 4 5 and delivery of this Agreement by the Company and the performance of its obligations hereunder have been duly authorized by the Board and no further corporate action on the Company's part is necessary to authorize this Agreement and the performance of such obligations, and (b) this Agreement constitutes the valid and binding obligation of the Company, enforceable by Employee against the Company strictly in accordance with its terms (subject to laws in effect with respect to creditors' rights generally and applicable principles relating to equitable remedies). 5. Confidential Information. Employee acknowledges that the nature of Employee's engagement by the Company is such that Employee will have access to Confidential Information (as hereinafter defined) which has value to the Company. During the term of this Agreement and at all times thereafter, Employee shall keep all of the Confidential Information in confidence and shall not disclose any of the same to any other person, except the Company's personnel entitled thereto and other persons designated in writing by the Company or except as otherwise required by law. Employee shall not use the Confidential Information for Employee's personal gain or benefit outside the scope of Employee's engagement by the Company. The term "Confidential Information," as used herein, means all information or material not generally known by non-Company personnel which (a) gives the Company some competitive business advantage or the opportunity of obtaining such advantage or the disclosure of which could be materially detrimental to the interests of the Company; (b) which is owned by the Company or in which the Company has an interest and (c) which is either (i) marked "Confidential Information," "Proprietary Information" or other similar marking, (ii) known by Employee to be considered confidential and proprietary by the Company or (iii) from all the relevant circumstances should reasonably be assumed by Employee to be confidential and proprietary to the Company. Employee agrees that upon termination of employment, unless retained by the Company in some other capacity, Employee will not, for a period of two (2) years after such termination: (a) Use or assist others in using Confidential Information for any purpose competitive with the business of the Company or any affiliated company; or (b) Solicit or induce, or attempt to solicit or induce any officer or Senior manager who is a key "man" employee of the Company, provided further that this provision shall not be deemed to be breached in any such employee hired by Employee states that he or she voluntarily quit the Company without being induced by an offer by Employee to quit and accept a salary higher than his or her existing salary. 6. Insurance and Indemnification. 6.1 "Key-Man" Insurance. The Company shall have the right to purchase "key-man" life insurance covering Employee, in the name and for the benefit of the Company and at the Company's expense in any amount not exceeding $2,000,000. Furthermore, so long as it does not adversely affect Employee's ability to obtain life insurance in the general market at prevailing rates, the Company may take out additional "key-man" life insurance with respect to Employee at the Company's cost and for its benefit. Employee shall cooperate in all reasonable respects with the Company's efforts to obtain such insurance and shall submit to any required medical or other examination; provided; however, that if such medical or other examination cannot be conducted by Employee's personal physician, then Employee shall have the right to have his personal physician attend the examination. Upon the termination of his employment hereunder, Employee may acquire any such life insurance policy upon paying the Company an amount equal to the insurance policy's cash surrender value, if any, at the time of termination and reimbursing the Company for the pro rata portion of any premium paid applicable to periods subsequent to the termination. 6.2 Insurance Covering Employee. The Company shall, at its cost, provide insurance coverage to Employee to the same extent as other senior executives and directors of the Company, with respect to (i) director's and officer's liability, (ii) errors and omissions and (iii) general liability. At no time will the director's and officer's liability and errors and omissions insurance coverage 5 6 fall below $10,000,000. As the company grows, appropriate adjustments to the levels of coverage will be in full force and effect. 6.3 Indemnification. The Company shall indemnify Employee and hold him harmless from and against any and all costs, expenses, losses, claims, damages, obligations or liabilities (including actual attorneys fees and expenses) arising out of or relating to any acts, or omissions to act, made by Employee on behalf of or in the course of performing services for the Company to the full extent permitted by the Bylaws of the Company as in effect on the date of this Agreement, or, if greater, as permitted by applicable law, provided that the indemnity afforded by the Company's Bylaws shall never be greater than that permitted by applicable law. To the extent a change in applicable law permits greater indemnification than is now afforded by the Bylaws and a corresponding amendment shall not be made in said Bylaws, it is the intent of the parties hereto that Employee shall enjoy the greater benefits so afforded by such change. If any claim, action, suit or proceeding is brought, or claim relating thereto is made, against Employee with respect to which indemnity may be sought against the Company pursuant to this section, Employee shall notify the Company in writing thereof, and the Company shall have the right to participate in, and to the extent that it shall wish, in its discretion, assume and control the defense thereof, with counsel satisfactory to Employee. 6.4 Rights Not Exclusive. The foregoing rights conferred upon Employee shall not be exclusive of any other right which Employee may have or hereafter acquire under any statute, provision of the Articles of Incorporation or Bylaws, agreement, vote of shareholders or disinterested directors or otherwise, and such provisions shall survive the termination or expiration of this Agreement for any reason whatsoever. 7. Termination. 7.1 Death or Total Disability of Employee. If Employee dies, Employee's employment hereunder shall automatically terminate. If Employee becomes totally disabled during the term of this Agreement, this Agreement may be terminated at the option of the Company. For these purposes Employee shall be deemed totally disabled if Employee becomes physically or mentally incapacitated or disabled or otherwise unable to discharge Employee's duties hereunder for a period of one hundred twenty (120) consecutive calendar days or for one hundred fifty (150) calendar days (whether or not consecutive) in any one hundred eighty (180) calendar day period. Prior to termination of this Agreement as a result of disability, and notwithstanding any failure or inability of Employee to render services hereunder, the Company shall continue to pay and/or provide to Employee the compensation and benefits specified in Section 3 hereof. Furthermore, in the event that this Agreement automatically terminates as a result of the death of Employee, or in the event that this Agreement is terminated by the Company as a result of the total disability of Employee, the Company shall continue to pay Employee (or, in the event of Employee's death, Employee's estate, heirs or personal representative), when otherwise due, for a period of one year thereafter or until expiration of the term hereof, whichever occurs first, the Base Salary and bonus specified in Sections 3.1 and 3.2 hereof. . 7.2 Termination by the Company for Cause. Except as set forth in Section 7.1, the Company may terminate this Agreement only for cause, which shall be limited to any one of the following: (a) Employee's conviction by, or entry of a plea of guilty or nolo contendere in, a court of competent and final jurisdiction for any felony which would materially and adversely interfere with Employee's ability to perform his services under this Agreement (b) In no event whatsoever shall the Company's failure to meet the projections set forth in the Business Plan be grounds for the Company's termination of this Agreement. (c) Upon termination of this Agreement by the Company for cause, Employee shall be entitled to receive all compensation and other benefits payable to him pursuant to Section 3 hereof accrued through the effective date of termination. 6 7 7.3 Termination by Employee for Cause. Employee may terminate this Agreement only for cause, which shall be limited to any one of the following: (a) The sale of all or substantially all of the Company's assets to a person unaffiliated with the Company or the occurrence of a Change of Control, in either case without Employee's prior written consent, which consent may be given or withheld by Employee in his sole and arbitrary discretion. (b) The Company's material breach of any of the terms and conditions of this Agreement, provided that termination pursuant to this subsection (b) shall not constitute a valid termination for cause unless the Board shall have first received written notice from Employee stating with specificity the nature of such material breach and affording the Company at least thirty (30) days to cure the material breach alleged. Upon any termination of this Agreement by Employee for cause, Employee shall not be required to render or to provide any further services pursuant to this Agreement and shall be entitled to receive in one lump sum within fifteen (15) days following notice of such termination, a termination payment equal, in the case of termination under (a) above, to eight (8) times the Base Salary then being paid to Employee hereunder, and equal, in the case of termination under (b) above, to the monetary value (not discounted to present value) of all of the compensation, including all the options, and other benefits payable to Employee pursuant to this Agreement for the remainder of the term hereof. Such compensation shall be in addition to, and not in lieu of, any other damages to which Employee may otherwise be entitled. 7.4 Stock Repurchase Option. In the event that the Company should terminate this agreement early, Employee shall have the absolute right, to be exercised in his sole and absolute discretion and in addition to any other compensation or benefits payable to him hereunder, to require the Company to repurchase from him all capital stock and stock options of the Company then owned by him at an aggregate repurchase price equal to 100% of then aggregate price value of the Company's capital stock. Such right may be exercised by notice from Employee to the Company, and the closing of the repurchase shall take place at a time and place to be agreed upon by Employee and the Company, but not to be more than thirty (30) days following the Company's receipt of the notice. At the closing Employee shall sell and the Company shall purchase the capital stock and stock options, without any representation or warranty by Employee other than that he has good title thereto free of all liens, encumbrances and adverse interests, by Employee's delivery to the Company of a certificate or certificates representing such capital stock and stock options, in each case duly endorsed for transfer or accompanied by appropriate stock powers, and by the Company's delivery to Employee of a certified check representing payment of the purchase price in full. 7.5 No Mitigation. Employee shall have no duty or obligation to mitigate damages hereunder, and if Employee does choose to accept employment elsewhere after any breach or improper termination of this Agreement by the Company, then any income and other employment benefits received by Employee by virtue of his employment by, or rendition of services for or on behalf of, any person or entity other than the Company after such breach or improper termination shall not reduce the Company's obligation to make payments and afford benefits hereunder. 7.6 No Offset. The Company shall have no right to offset against any payments or other benefits due to Employee under this Agreement the amount of any claims it may have against Employee by reason of any breach or alleged breach of this Agreement by Employee; provided, however, that the Company shall have the right to offset any amounts due the Company from Employee pursuant to any judgment (after exhaustion of all appeals) rendered by a court of competent jurisdiction in connection with any breach or alleged breach of this Agreement by Employee. 7.7 SEC Filings. The Company or its counsel engaged to advise the Company with respect to filings with the SEC shall give timely notice and advice to Employee, to the extent the Company has or is given information that should so indicate to the Company or its counsel, of any requirement that Employee make filings with the SEC or any other governmental agency having jurisdiction by reason of 7 8 Employee's position with the Company and/or Employee's transactions in securities of the Company. 8. Failure to Extend Term. If at the expiration of the term of this Agreement the Company has met or exceeded the projections set forth in the Business Plan and the Company does not offer to extend Employee's employment on terms no less favorable than those stated herein but at his then current level of compensation and other benefits (subject to upward adjustment to reflect increases, if any, in the cost of living during the term hereof as reflected in the level of the Consumer Price Index-All Items for the Los Angeles Metropolitan Area, promulgated by the Bureau of Labor Statistics of the United States Department of Labor), the Company shall upon such expiration pay Employee a sum of $100,000 for a period of ten (10) years. Employee agrees to consult to the company during that period and shall be Vice-Chairman of the Board. 9. General Relationship. Employee shall be considered an employee of the Company within the meaning of all federal, state and local laws and regulations including, but not limited to, laws and regulations governing unemployment insurance, workers' compensation, industrial accident, labor and taxes. 10. Miscellaneous. 10.1 Entire Agreement. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 10.2 No Assignment. This Agreement may not be assigned by the Company or Employee without the prior written consent of the other (which consent may be granted or withheld by such party in its sole and absolute discretion), and any attempt to assign rights and duties without such written consent shall be null and void and of no force and effect. Subject to the preceding sentence, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 10.3 Survival. The covenants, agreements, representations and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment, irrespective of any investigation made by or on behalf of any party. 10.4 Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement. 10.5 Waiver. The failure of either party hereto at any time to enforce performance by the other party of any provision of this Agreement shall in no way affect such party's rights thereafter to enforce the same, nor shall the waiver by either party of any breach of any provision hereof be deemed to be a waiver by such party of any other breach of the same or any other provision hereof. 10.6 Section Headings. The headings of the several sections in this Agreement are inserted solely for the convenience of the parties and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof. 10.7 Notices. All notices and other communications required or permitted under this Agreement shall be in writing, served personally on, telecopied, sent by courier or other express private mail service, or mailed by certified, registered or express United States mail postage prepaid, and shall be deemed given upon receipt if delivered personally, telecopied, or sent by courier or other express private mail service, or if mailed when actually received as shown on the return receipt. Notices shall be addressed as follows: (a) If to the Company, to: Commonwealth Energy Corporation 15901 Red Hill Avenue 8 9 Suite 100 Tustin, CA 92780 (b) If to Employee, to: Ian B. Carter 19392 Lemon Hill Drive Santa Ana, CA 92705 Either party may change its address for purposes of this Section by giving to the other, in the manner provided herein, a written notice of such change. 10.8 Severability. All sections, clauses and covenants contained in this Agreement are severable, and in the event any of them shall be held to be invalid by any court, this Agreement shall be interpreted as if such invalid sections, clauses or covenants were not contained herein. 10.9 Applicable Law. This Agreement is made with reference to the laws of the State of California, shall be governed by and construed in accordance therewith, and any court action brought under or arising out of this Agreement shall be brought in any competent court within the State of California, County of Orange. 10.10 Attorneys' Fees. If any legal action, arbitration or other proceeding is brought for the enforcement of this Agreement, or because of any alleged dispute, breach, default or misrepresentation in connection with this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs it incurred in that action or proceeding, in addition to any other relief to which it may be entitled. 10.11 Gender. Where the context so requires, the use of the masculine gender shall include the feminine and/or neuter genders and the singular shall include the plural, and vice versa, and the word "person" shall include any corporation, firm, partnership or other form of association. 10.12 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. 10.13 Option Rights. All stock options shall vest immediately, except as otherwise set forth in Section 3.3. All stock option rights, including grants, or bonuses, or rights to stock options shall include the right in favor of Employee, that in the event of any stock splits or option splits, Employee's options and rights shall also be included and split, and the Company agrees to take all appropriate action to accomplish this commitment. Any options owned by Employee shall in no event be subject to forfeiture or termination in the event that Employee's status as an employee should terminate or expire. 10.15 Right of Employee to Terminate. Employee has the right, after thirty months of the term of this agreement, and at his sole discretion, to terminate this agreement. All options and funds earned at that point shall accrue to the benefit of the Employee In order for the Employee to exercise this option, the Company or an affiliated company has to have completed an IPO. 10.15 Guarantee. In the event a separate entity takes control of the operation of the Company for any reason whatsoever, the Company represents and agrees that this Employment Agreement, and all obligations of the Company to Employee shall become the obligations of any such successor company or entity. This successor obligation by any such company or entity or related company includes but is not limited to electricAMERICA or electric.com in the event Commonwealth becomes insolvent, or is dissolved and/or becomes a subsidiary of either named company, or any other related company. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date hereinabove set forth. 9 10 Commonwealth Energy Corp., a California corporation By: /s/ John A. Barthrop ---------------------------------- John A. Barthrop Its: General Counsel EMPLOYEE /s/ Ian B. Carter -------------------------------------- Ian B. Carter 10 11 EXHIBIT A INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered into and is effective as of November 1, 2000, by and between COMMONWEALTH ENERGY CORPORATION, a California corporation (the "Corporation"), and IAN B. CARTER, an individual ("Indemnitee"). R E C I T A L S: A. Indemnitee performs a valuable service to the Corporation in his capacity as an officer and a director of the Corporation. B. The shareholders of the Corporation have adopted Bylaws (the "Bylaws") providing for the indemnification of the officers, directors, employees and other agents of the Corporation as authorized by the California Corporations Code, as amended (the "Code"). C. The Bylaws and the Code, by their non-exclusive nature, permit contracts between the Corporation and its directors, officers, employees and other agents with respect to indemnification of such persons. D. In accordance with the authorization provided by the Bylaws and the Code, the Corporation is entitled to purchase a policy or policies of Directors' and Officers' Liability Insurance ("Insurance") covering certain liabilities which may be incurred by its directors and officers in the performance of their duties to the Corporation. E. As a result of developments affecting the terms, scope and availability of Insurance, there exists general uncertainty as to the extent of protection afforded such persons by such Insurance and by statutory and bylaw indemnification provisions. F. In order to induce Indemnitee to continue to serve as an officer of the Corporation, the Corporation has determined and agreed to enter into this Agreement with Indemnitee. NOW, THEREFORE, the parties hereto agree as follows: 1. Services to the Corporation. Indemnitee will serve, at the will of the Corporation or under separate contract, if any such contract exists, as an officer of the Corporation or as a director, officer or other fiduciary of the Corporation or an affiliate of the Corporation (including any employee benefit plan of the Corporation) faithfully and to the best of his ability so long as he is duly elected and qualified in accordance with the provisions of the Bylaws, other applicable constitutive documents of the Corporation or such affiliate, or other separate contract, if any such contract exists; provided, however, that Indemnitee may at any time and for any reason resign from such position (subject to any contractual obligation that Indemnitee may have assumed apart from this Agreement) and that the Corporation or any affiliate shall have no obligation under this Agreement to continue Indemnitee in any such position. 2. Indemnity of Indemnitee. The Corporation shall hold harmless, indemnify and advance expenses to Indemnitee as provided in this Agreement and to the fullest extent authorized, permitted or required by the provisions of the Bylaws and the Code, as the same may be amended from time to time (but, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than were permitted by the Bylaws or the Code prior to adoption of such amendment). The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the rights set forth in the other sections of this Agreement. 11 12 3. Additional Indemnity. In addition to and not in limitation of the indemnification otherwise provided for herein, and subject only to the exclusions set forth in Section 4 hereof, the Corporation hereby further agrees to hold harmless and indemnify Indemnitee: (a) Against any and all expenses (including reasonable attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Indemnitee becomes legally obligated to pay because of any claim or claims made against or by him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrative, administrative or investigative (including an action by or in the right of the Corporation) to which Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Indemnitee is, was or at any time becomes a director, officer, employee or other agent of the Corporation, or is or was serving or at any time serves at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and (b) Otherwise to the fullest extent as may be provided to Indemnitee by the Corporation under the non-exclusivity provisions of the Code. 4. Limitations on Additional Indemnity. No indemnity pursuant to Section 3 hereof shall be paid by the Corporation: (a) On account of any claim against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 19' )4 and amendments thereto or similar provisions of any federal, state or local statutory law; (b) On account of Indemnitee's conduct that was knowingly fraudulent or deliberately dishonest, or that constituted willful misconduct; (c) On account of Indemnitee's conduct that constituted a breach of Indemnitee's duty of loyalty to the Corporation or resulted in any personal profit or advantage to which Indemnitee was not legally entitled; (d) For which payment has actually been made to Indemnitee under a valid and collectible insurance policy or under a valid and enforceable indemnity clause, bylaw or agreement, except in respect of any excess beyond payment under such insurance, clause, bylaw or agreement; (e) If indemnification is not lawful (and, in this respect, both the Corporation and Indemnitee have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication) or is prohibited by any applicable state securities laws with respect to any violation of applicable federal or state securities laws; or (f) In connection with any proceeding (or part thereof) initiated by Indemnitee, or any proceeding by Indemnitee against the Corporation or its directors, officers, employees or other agents, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the Corporation, (iii) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Code, or (iv) the proceeding is initiated pursuant to Section 9 hereof. 5. Continuation of Indemnity. All agreements and obligations of the Corporation contained herein shall continue during the period Indemnitee is a director, officer, employee or other agent of the Corporation (or is or was severing at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrative, administrative or investigative, by reason of the fact that Indemnitee was a director of the Corporation or serving in any other capacity referred to herein. 12 13 6. Partial Indemnification. Indemnitee shall be entitled under this Agreement to indemnification by the Corporation for a portion of the expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Indemnitee becomes legally obligated to pay in connection with any action, suit or proceeding referred to in Section 3 hereof even if not entitled hereunder to indemnification for the total amount thereof, and the Corporation shall indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. 7. Notification and Defense of Claim. Not later than thirty (30) days after receipt by Indemnitee of notice of the commencement of any action, suit or proceeding, Indemnitee will, if a claim in respect thereto is to be made against the Corporation under this Agreement, notify the Corporation of the commencement thereof, but tile omission so to notify the Corporation will not relieve it from any liability which is may have to Indemnitee otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Indemnitee notifies the Corporation of the commencement thereof. (a) The Corporation will be entitled to participate therein at its own expense; (b) Except as otherwise provided below, the Corporation may, at its option and jointly with any other indemnifying party similarly notified and electing to assume such defense, assume the defense thereof, with counsel reasonably satisfactory to Indemnitee. After notice from the Corporation to Indemnitee of its election to assume the defense thereof, the Corporation will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof except for reasonable costs of investigation or otherwise as provided below. Indemnitee shall have the right to employ separate counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by the Corporation, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and Indemnitee in the conduct of the defense of such action, or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Indemnitee's separate counsel shall be at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Corporation or as to which Indemnitee shall have made the conclusion provided for in (ii) above; and (c) The Corporation shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent, which shall not be unreasonably withheld. The Corporation shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent which may be given or withheld in Indemnitee's sole discretion. 8. Expenses. The Corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by Indemnitee in connection with such proceeding upon receipt of an undertaking by or on behalf of Indemnitee to repay said amounts it if shall be determined ultimately that Indemnitee is not entitled to be indemnified under the provisions of this Agreement, the Bylaws, the Code or otherwise. 9. Enforcement. Any right to indemnification or advances granted by this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Indemnitee, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under Section 3 hereof (other than an action brought to enforce a claim for advancement of expenses pursuant to Section 8 hereof, provided that the required undertaking has been tendered to the Corporation) that Indemnitee is not entitled to indemnification because of the limitations set forth in Section 4 hereof, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or its shareholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Indemnitee is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors or its 13 14 shareholders) that such indemnification is improper, shall be a defense to the action or create a presumption that Indemnitee is not entitled to indemnification under this Agreement or otherwise. 10. Subrogation. In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Corporation effectively to bring suit to enforce such rights. 11. Non-Exclusivity of Rights. The rights conferred on Indemnitee by this Agreement shall not be exclusive of any other right which Indemnitee may have or hereafter acquire under any statute, provision of the Articles of Incorporation, the Bylaws, agreement, vote of shareholders or directors or otherwise, both as to action in his/her official capacity and as to action in another capacity while holding office. 12. Survival of Rights. (a) The rights conferred on Indemnitee by this Agreement shall continue after Indemnitee has ceased to be a director, officer, employee or other agent of the Corporation or to serve at the request of tile Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and shall inure to the benefit of Indemnitee's heirs, executors and administrators. (b) The Corporation shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Corporation, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession had taken place. 13. Separability. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. Furthermore, if this Agreement shall be invalidated in its entirety on any ground, then the Corporation shall nevertheless indemnify Indemnitee to the fullest extent provided by the Bylaws, the Code or any other applicable law. 14. Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of California. 15. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 16. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute but one and the same Agreement. Only one such counterpart need be produced to evidence the existence of this Agreement. 17. Headings. The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 18. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) upon delivery if delivered by hand to the party to whom such notice or other communication shall have been directed, or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to: Mr. Ian B. Carter 14 15 19392 Lemon Hill Drive Santa Ana, CA 92705 (b) If to the Corporation, to: Commonwealth Energy Corporation 15901 Redhill Avenue Tustin, CA 92780 Attn: Chairman of the Board or to such other address(es) as may have been furnished to/by Indemnitee to/by the Corporation. IN WITNESS WHEREOF, the parties hereto have duly executed this Indemnification Agreement as of the day and year first above written. CORPORATION COMMONWEALTH ENERGY CORPORATION, a California corporation By: /s/ John A. Barthrop -------------------------------------------- John A. Barthrop, Secretary to the Board and General Counsel to the Corporation INDEMNITEE By: /s/ Ian B. Carter -------------------------------------------- Ian B. Carter 15 16 ADDENDUM TO EMPLOYMENT AGREEMENT THIS ADDENDUM is entered into as of November 1, 2000 and shall modify, change and clarify, as specified herein, that EMPLOYMENT AGREEMENT by and between Commonwealth Energy Corporation, a California Corporation and Ian B. Carter ("Employee"), said agreement was entered into as of January 1, 2000. This ADDENDUM shall be made a part thereof and shall be attached thereto the referenced EMPLOYMENT AGREEMENT. Paragraph 3.2. Bonus shall be deleted in its entirety and shall be replaced with the folio-wing paragraph. "Employee is entitled to a cash bonus based on the Company's results in a given calendar year. Said cash bonus shall be based on the Company's results of operation for the completed fiscal year. One measurement shall be the performance of the company versus the Business Plan. By meeting the requirements for this bonus the Employee shall be entitled to one hundred thousand ($100,000.00) dollars as a cash bonus for that calendar year. The Compensation Committee shall determine this bonus and any additional discretionary cash bonus. This bonus shall be due and payable no later than thirty (30) days following the determination by the Compensation Committee. Paragraph 3.2(a). Bonus Upon Sale of Assets or Control of the Company shall be deleted in its entirety and shall be replaced with the following paragraph: "If during the term of the Agreement (i) all or substantially all of the assets of the Company or more than fifty percent (50%) of the issued and outstanding voting shares of the Company are, in any transaction or series of transactions, acquired by any one person or entity not then affiliated with the Company, or (ii) control of the Company is taken over by a group of shareholders when no significant change of ownership has taken place, or (iii) a liquidity event such as a merger, acquisition, strategic alliance or any other event that could bring substantial capital into the company and any of these events listed require that the Employee be terminated, leave the company, replaced or any other event that no longer allows or requires the Employee to remain with the Company, then the Company shall pay to Employee a bonus equal to eight (8) times the annual Base Salary due the Employee plus the amount of I.R.S. Code 280 G taxes, payable by Employee. In addition all stock options referred to in this Agreement, whether earned or unearned shall be deemed to be valued at 2 times the then aggregate price value of the Company's capital stock (See paragraph 3.9). The bonus shall be paid to the Employee and the options purchased from the Employee prior to the Closure date of such an event taking place. The bonus shall be payable to Employee whether or not Employee elects to terminate this Agreement pursuant to Section 7.3 below." Paragraph 3.2(b). Participation in Public Offering. Change the first sentence of this paragraph to read: "If during the term of this Agreement the Company makes a public offering of shares of its voting common stock, or any other class securities with substantially similar terms and preferences, ("Common Stock") or if the company supports any other form of liquidity event such as a merger, acquisition, strategic alliance, etc. . . then all stock options referred to in this entire paragraph whether earned or not shall immediately be considered vested prior to the public offering, or other such liquidity event, on the following terms and conditions: Paragraph 3.2(c). Bonus for Successful Initial Public Offering ("IPO"). This paragraph shall be deleted in its entirety and shall be replaced with the following paragraph: Paragraph 3.2(c). Specific Event Bonus Options. These bonus options shall be earned by the Employee for successfully completing specific events, which are:
Event Options Earned Completion of the Audit 500,000 Settlement with DOC 250,000 Settlement with CPUC 500,000 Complete Liquidity Event 750,000
These bonus options shall have Demand Registration rights for the Employee and shall be subject to the same terms as described in paragraph 3.2(b)(i). Said options shall have a ten-year period before expiring. 1 17 Paragraph 3.3 Employee Stock Option Plan: Delete the part of the paragraph starting with the words, "In addition, concurrently" and ending with the words "signed with the Company". Replace the deleted sentences with the following: "In addition, the Employee may earn additional options by meeting or exceeding the financial aspects of the Business Plan as approved by the Compensation Committee. For meeting the Business Plan in any calendar year the Employee shall earn and additional 100,000 options; if the Company exceeds the Business Plan by 5% or more the Employee shall earn an additional 100,000 options, for a total of 200,000 options; and if the Company exceeds the Business by 10% or more the Employee shall earn an additional 100,000 options, for a total of 300,000 options. Add the following sentence to Paragraph 3.4 Other Fringe Benefits: For a period of ten years, whether the Employee is employed or not, the company agrees to pay for a term life insurance policy for the Employee in an amount of one million and five hundred thousand ($1,500,000) dollars. Add the following two paragraphs: 3.9 Stock Repurchase Option: In the event the company should terminate this agreement early, or the company is taken over through any event that takes control of the company itself or by taking control of the Board of Directors, or a sale of assets as defined herein. Whether such a takeover is considered non-consensual or not; hostile or not: all financial payments due to the Employee and all options due to the Employee, at the sole discretion of the employee, shall be considered due and owing and shall be considered earned as shown in the following paragraphs 3.1, 3.2, 3.2(a), 3.2(b), 3.2(c), 3.3, 3.4, and 3.7. Employee shall have the absolute right, subject to applicable State and Federal securities laws, to be exercised in his sole discretion and in addition to any other compensation or benefits payable to Employee hereunder, to require the Company to repurchase from Employee all capital stock and stock options of the Company then earned or to be earned by Employee at an aggregate repurchase price (see definition below) equal to two (2) times the then aggregate price value of the Company's capital stock. The employee, in the employee's sole and absolute discretion, may exercise such right twenty-four (24) hours prior to the closing of such an event. Prior to the closing, as defined herein, the Employee may elect to sell all or some of the Employee's stocks and/or stock options and the Company shall agree to purchase the same capital stock and stock options earned or to be earned by the Employee, at the Employee's sole discretion. The Employee without any representation or warranty by Employee may exercise this option; other than the Employee has good title thereto free of all liens, encumbrances and adverse interests. By Employee delivering to the Company a certificate or certificates representing such capital stock and stock options, or this employment agreement, in each case duly endorsed for transfer or accompanied by appropriate stock powers, and or notice of the exercise of the right to have the Company repurchase the Employee's options and or stock. In which case the Company shall be obligated to immediately deliver to the Employee certified funds representing payment of the purchase price in full for all of the stock, and with regard to the options an amount equal to the difference between the exercise price owed by the Employee for the options and the above referenced repurchase price payable by the Company for the shares that would otherwise be issued in relation to the Employee's options being repurchased by the Company. The term "aggregate price value" shall mean the value of the optioned shares as set forth by the Company for the purposes of calculating the withholding taxes for the applicable issuance period of the options being repurchased. It is acknowledged that any options which vest due to the Change of Control shall be deemed to have been issued on the date of vesting and thus the latest stock price for such options shall be the price used to determine the value for such accelerated vested options. This clause may be invoked by the Employee in the case of any takeover or any Change of Control. 6.5 Term Life Insurance: The Company agrees to pay for a term life insurance policy for the Employee in the amount of $1,500,000 for a period of ten years starting as soon as the Employee qualifies for said insurance. Said annual payments shall not exceed $5,000 per year and shall be made either annually in advance or if the insurance company desires the total amount for the ten year period will be placed into an escrow account controlled by the insurance company. This term life insurance policy shall have a beneficiary designated by the Employee and shall be an obligation of the company whether or not the Employee is employed over the next ten years. 2 18 An Attachment A, an Indemnification Agreement for Directors and Officers shall be -attached hereto and made a part hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date hereinabove set forth. Commonwealth Energy Corporation Employee A California Corporation By: /s/ John Barthrop By: /s/ Ian B. Carter ------------------------------- --------------------------------- John Barthrop Ian B. Carter General Counsel By: /s/ Robert C. Perkins ------------------------------- Robert C. Perkins, Director Compensation Committee 3 EX-10.13 18 a74807gex10-13.txt EXHIBIT 10.13 1 EXHIBIT 10.13 RICHARD PAULSEN EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of November 1, 2000 between Commonwealth Energy Corporation, a California corporation (the "Company") and Richard L. Paulsen ("Employee"), with reference to the following: A. Employee has heretofore acted as a Consultant to the Company, and in that capacity has rendered valuable services to the Company. B. The Company and Employee desire that Employee continue to provide services to the Company as an employee of the Company on the terms provided herein. NOW, THEREFORE, in consideration of the various covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Term of Employment. The Company hereby employs Employee and Employee accepts such employment for a term of fifty-two (52) months, commencing on November 1, 2000 and terminating on December 31, 2004 (the "Initial Term"); notwithstanding the foregoing, however, the term of this Agreement is subject to earlier termination as provided in Section 7 below. 2. Title and Responsibilities. During the term of this Agreement, Employee shall serve as Chief Operating Officer of the Company and President of the Company's subsidiary Utilihost. In the performance of such duties Employee shall report directly to (and only to) the Chief Executive Officer of the Company (the "CEO") and shall, subject to the reasonable supervision and control of the CEO, have the duties, responsibilities and authority commensurate with such positions in companies comparable to the Company and Utilihost. Employee's office location shall at all times be in offices of the Company located in Orange County, California. Employee may be required to travel from time to time to the extent reasonably necessary to the performance of his duties hereunder. Employee shall in good faith and consistent with his ability, experience and talent perform the duties set forth in this Section 2, and shall devote substantially all of his productive time and efforts to the performance of such duties; provided, however, that Employee may participate in civic, charitable, and other not-for-profit activities and manage personal and family investments to the extent that the same does not materially conflict with the discharge of his duties hereunder. 3. Compensation and Benefits. The Company shall pay and/or provide the following compensation and benefits to Employee during the term hereof, and Employee shall accept the same as payment in full for all services rendered by Employee to or for the benefit of the Company: 3.1 Base Salary. The Company shall pay Employee a salary of $275,000 per annum for the first twelve months of the term of this Agreement, $325,000 per annum for the second twelve months of the term, $375,000 per annum for the third twelve months of the term, and $425,000 per annum thereafter (the "Base Salary"). Notwithstanding the foregoing, the Base Salary shall be subject to review from time to time (not less frequently than at the end of each fiscal year of the Company) and, as a result thereof, may be increased (but not decreased) at the discretion of the CEO and the Compensation Committee of the Company's Board of Directors. In determining such increases in the Base Salary, if any, the CEO and the Compensation Committee of the Company's Board of Directors shall take into account, among other things, the Company's achievement of the objectives set forth in its business plan and the Company's results of 1 2 operations. The Base Salary shall be payable in accordance with the payroll practices of the Company in effect from time to time. 3.2 Bonus Based Upon Meters Under Contract. Employee shall be paid a cash bonus with respect to the calendar year ending December 31, 2001 provided that, as of the last day of that calendar year, the number of meters under contract for billing purposes under the TRIUMPH system is not less than 1,000,000. Employee shall be paid a cash bonus with respect to each calendar year thereafter in the amount indicated opposite that calendar year in the table below, provided that, as of the last day of that calendar year, the Company has increased the number of meters under contract for billing purposes under the TRIUMPH system from the last day of the immediately preceding calendar year, on a net basis, by a number of meters which is not less than the number of meters indicated opposite that fiscal year:
Year Ending Minimum No. of Meters Bonus ----------- --------------------- ----- December 31, 2002 1,500,000 $ 75,000 December 31, 2003 2,000,000 $100,000 December 31, 2004 2,500,000 $100,000 Each year thereafter 1,000,000 more than the $100,000 immediately preceding year
The bonus with respect to each calendar year shall be due and payable no later than thirty (30) days following the last day of that year. In addition, the Company has to show net income from operations for the year in which the bonus was earned, except in the case of an expansion year, in which case the bonus will be at the discretion of the Company's Board of Directors. For purposes of this Section 3.2, "meters under contract for billing purposes under the TRIUMPH h system" shall include all such meters of the Company's customers, and all meters of any other company utilizing the TRIUMPH system. 3.3 Bonus Upon Change in Control of the Company. If during the term of this Agreement there is a Change in Control (as defined below), then the Company shall pay to Employee, concurrently with such Change in Control, a cash bonus in an amount equal to the sum of (a) eight times the Employee's then current annual Base Salary; and (b) the amount of taxes payable by Employee under Internal Revenue Code Section 280G with respect to the bonus contemplated by this Section 3.3. The bonus contemplated by this Section 3.3 shall be paid to Employee whether or not Employee elects to terminate this Agreement pursuant to any of the terms of this Agreement. For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of (A) the outstanding shares of common stock of the Company, or (B) the combined voting power of the Company's then-outstanding securities entitled to vote generally in the election of directors; (ii) during any period of not more than two consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (iii) below) whose election by the Board or nomination by the Company's shareholders was approved by a vote of at least a majority of the directors still in office who either were in office at the beginning of such period or whose election or nomination for election was previously so approved, ceases for any reason to constitute a majority of the Board; or (iii) the Company is a party to a merger or consolidation which results in the holders of voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the Company sells or disposes of all or substantially all of the Company's assets or any transaction having similar effect is consummated; or the Company is subject to a hostile takeover in the form of a proxy fight or any other means that allows the company to be controlled by a material change in the Board of Directors. In the event the company is taken 2 3 over, whether hostile or otherwise, all financial payments and options, earned or otherwise, shall be considered due and owing and shall be considered earned as shown in the following paragraphs 3.1, 3.2, 3.3, 3.4, and 3.5. All payments shall be made to the Employee prior to the changeover date of the event that would take over the company. 3.4 Stock Option Plan. Concurrently herewith, the Company shall grant to Employee stock options entitling Employee to purchase 900,000 shares of the Company's common stock, with an exercise price of $2.75 per share (the "Options"). The right to exercise the Options shall be vested as to 225,000 shares covered thereby immediately upon the grant of the Options. The Options shall vest as to an additional 225,000 shares on each of December 31, 2001, December 31, 2002 and December 31, 2003; provided, however, that the Options shall vest in full immediately prior to the consummation of any Change in Control. The Options shall have a term of seven years (regardless of any termination of Employee's employment, except as required by Section 422 of the Internal Revenue Code with respect to those of the Options that are "incentive" stock options within the meaning of that Section), and shall, to the maximum extent permitted by law, be "incentive" stock options within the meaning of Section 422 of the Internal Revenue Code. Employee shall be entitled to include the shares purchased or purchasable upon exercise of the Options in any registration statement hereafter filed by the Company under the Securities Act of 1933, as amended, on a basis which is no less favorable to Employee than the basis on which any other shareholder of the Company is entitled to include such shareholder's shares in such registration statement. 3.5 Stock Repurchase Option: In the event the company is taken over through any event that takes control of the company itself or by taking control of the Board of Directors, or a sale of assets as defined herein. Whether such a takeover is considered non-consensual or not; hostile or not: all financial payments due to the Employee and all options due to the Employee, at the sole discretion of the employee, shall be considered due and owing and shall be considered earned as shown in the following paragraphs 3.1, 3.2, 3.3, and 3.4. Employee shall have the absolute right, subject to applicable State and Federal securities laws, to be exercised in his sole discretion and in addition to any other compensation or benefits payable to Employee hereunder, to require the Company to repurchase from Employee all capital stock and stock options of the Company then earned or to be earned by Employee at an aggregate repurchase price (see definition below) equal to two (2) times the then aggregate price value of the Company's capital stock; not to exceed a total price of $10.00 per share. The employee, in the employee's sole and absolute discretion, may exercise such right twenty-four (24) hours prior to the closing of such an event. Prior to the closing, as defined herein, the Employee may elect to sell all or some of the Employee's stocks and/or stock options and the Company shall agree to purchase the same capital stock and stock options earned or to be earned by the Employee, at the Employee's sole discretion. The Employee without any representation or warranty by Employee may exercise this option; other than the Employee has good title thereto free of all liens, encumbrances and adverse interests. By Employee delivering to the Company a certificate or certificates representing such capital stock and stock options, or this employment agreement, in each case duly endorsed for transfer or accompanied by appropriate stock powers, and or notice of the exercise of the right to have the Company repurchase the Employee's options and or stock. In which case the Company shall be obligated to immediately deliver to the Employee certified funds representing payment of the purchase price in full for all of the stock, and with regard to the options an amount equal to the difference between the exercise price owed by the Employee for the options and the above referenced repurchase price payable by the Company for the shares that would otherwise be issued in relation to the Employee's options being repurchased by the Company. The term "aggregate price value" shall mean the value of the optioned shares as set forth by the Company for the purposes of calculating the withholding taxes for the applicable issuance period of the options being repurchased. It is acknowledged that any options which vest due to the Change of Control shall be deemed to have been issued on the date of vesting and thus the latest stock price for such options shall be the price used to determine the value for such accelerated vested options. This clause may be invoked by the Employee in the case of any takeover or any Change of Control. 3.6 Other Fringe Benefits. Employee shall be entitled to participate in all of the Company's incentive and benefit plans and arrangements, including, without limitation, all bonus, compensation and other incentive and benefit plans or arrangements made available now or in the future by the Company to 3 4 its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements, but on a basis no less favorable than that afforded to any other director, officer or employee of the Company. The Company shall also provide to Employee at the Company's expense all health, medical, hospitalization, life and disability insurance provided to other senior executives of the Company. 3.7 Expenses. The Company shall promptly reimburse Employee for all out-of-pocket expenses actually incurred by him in connection with the performance of his duties hereunder, subject to Employee's furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures (such expenses being commensurate with the office and executive position of Employee hereunder, and including first class hotel and travel arrangements). Employee's right to be reimbursed for expenses incurred prior to the termination of this Agreement shall survive termination of this Agreement. 3.8 Vacation. Employee shall be entitled to the number of paid vacation days in each calendar year determined by the Board from time to time for the Company's senior executive officers, but not less than twenty (20) business days in any calendar year. Employee shall also be entitled to all paid holidays given to the Company's senior executive officers. 3.9 Automobile; Telephone; Etc. During the term hereof the Company shall provide Employee $800 per month for the purposes of the Employee paying for an automobile and related expenses. In addition, the Company shall provide a cell phone and shall reimburse Employee for all charges incurred by him in connection with the use thereof related to the performance of his duties hereunder. 3.10 Withholding and other Deductions. All compensation payable to Employee hereunder shall be subject to such deductions as the Company is from time to time required to make pursuant to law, governmental regulation or order. 4. Representations and Warranties. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder; and (b) Employee is under no physical or mental disability that would hinder the performance of his duties under this Agreement. The Company represents and warrants to Employee that (i) the execution and delivery of this Agreement by the Company and the performance of its obligations hereunder have been duly authorized by the Board and no further corporate action on the Company's part is necessary to authorize this Agreement and the performance of such obligations; and (ii) this Agreement constitutes the valid and binding obligation of the Company, enforceable by Employee against the Company strictly in accordance with its terms (subject to laws in effect with respect to creditors' rights generally and applicable principles relating to equitable remedies). 5. Confidential Information. Employee acknowledges that the nature of Employee's engagement by the Company is such that Employee will have access to Confidential Information (as hereinafter defined) which has value to the Company. During the term of this Agreement and at all times thereafter, Employee shall keep all of the Confidential Information in confidence and shall not disclose any of the same to any other person, except the Company's personnel entitled thereto and other persons designated in writing by the Company or except as otherwise required by law. Employee shall not use the Confidential Information for Employee's personal gain or benefit outside the scope of Employee's engagement by the Company. The term "Confidential Information," as used herein, means all information or material not generally known by non-Company personnel which (a) gives the Company some competitive business advantage or the opportunity of obtaining such advantage or the disclosure of which could be materially detrimental to the interests of the Company; (b) which is owned by the Company or in which the Company has an interest; and (c) which is either (i) marked "Confidential Information," "Proprietary Information" or other similar marking, (ii) known by Employee to be considered confidential and proprietary by the Company, or (iii) from all the relevant circumstances should reasonably be assumed by Employee to be confidential and proprietary to the Company. 4 5 6. "Key Man" Insurance. The Company shall have the right to purchase "key-man" life insurance covering Employee, in the name and for the benefit of the Company and at the Company's expense in any amount not exceeding $2,000,000. Employee shall cooperate in all reasonable respects with the Company's efforts to obtain such insurance and shall submit to any required medical or other examination; provided; however, that if such medical or other examination cannot be conducted by Employee's personal physician, then Employee shall have the right to have his personal physician attend the examination. Upon the termination of his employment hereunder, Employee may acquire any such life insurance policy upon paying the Company an amount equal to the insurance policy's cash surrender value, if any, at the time of termination and reimbursing the Company for the pro rata portion of any premium paid applicable to periods subsequent to the termination. 7. Termination; Separation Compensation. 7.1 Termination. Notwithstanding Section 1 above, Employee's employment with the Company shall terminate upon the earliest to occur of any of the following: the death of Employee; the "total disability" of Employee (as hereinafter defined); the expiration of ten (10) days after the receipt by Employee of written notice of termination executed by the Company if Employee willfully breaches or habitually neglects the duties which he is required to perform under the terms of this Agreement (unless caused by Employee's disability), provided that such termination is approved by not less than a majority of the then current members of the Company's Board of Directors; the expiration of ten (10) days after the receipt by Employee of written notice of termination executed by the Company if Employee shall make any intentional material misrepresentation to the Company's Board of Directors, commit fraud, embezzlement, misappropriation or any felony or other criminal act with respect to Company, and/or any affiliates thereof, whether or not a criminal or civil charge is filed in connection therewith, provided that such termination is approved by not less than a majority of the then current members of the Company's Board of Directors; the expiration of one hundred eighty (180) days after receipt by the Company of written notice of termination executed by Employee; the expiration of ten (10) days after receipt by the Company of written notice of termination executed by Employee if, without Employee's written consent, there shall have been any adverse change in Employee's status, title, position, duties, responsibilities or authorities contemplated by this Agreement; or the expiration of ten (10) days after receipt by the Company of written notice of termination executed by Employee if there shall have been a material breach by the Company of any of its obligations under this Agreement, which default is not cured within such ten day period. 7.2 Definition of Total Disability. For purposes of this Agreement, Employee shall be deemed to have suffered a "total disability" if he is unable to perform substantially all of the duties theretofore performed by him under this Agreement by reason of any medically determinable physical or mental impairment which has lasted for not less than one hundred twenty (120) consecutive calendar days or for one hundred fifty (150) calendar days (whether or not consecutive) in any one hundred eighty (180) calendar days. Prior to termination of this Agreement as a result of total disability, and notwithstanding any failure or inability of Employee to render services hereunder, the Company shall continue to pay and/or provide to Employee the compensation and benefits specified in Section 3 hereof. 7.3 Separation Compensation. If Employee's employment terminates pursuant to Section 7.1(a), (b), (c), (d) or (e) of this Agreement, Employee shall be entitled to receive the Base Salary and other 5 6 compensation and benefits provided for under this Agreement through the date of termination, but shall not be entitled to receive any severance pay or non-vested employment benefits or options, or any other termination benefits, except to the extent otherwise required to be paid under applicable California law. If Employee's employment terminates for any reason other than pursuant to the provisions of this Agreement referred to in the immediately preceding sentence, then Employee shall be entitled to receive (i) the Base Salary and other compensation and benefits provided for under this Agreement through the date of termination, and (ii) an amount equal to one and one-half times Employee's then current annual Base Salary. The amount specified in clause (ii) above shall be payable in eighteen (18) equal monthly installments, commencing immediately following the termination of Employee's employment. The Company and Employee both agree that the amount of the severance payment specified by the immediately preceding sentence is reasonable under the circumstances existing at the time of the execution of this Agreement. 7.4 Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, and the amount of any payment or benefit provided in this Section 7 shall not be reduced by any compensation earned by Employee as a result of employment by another employer or by any other benefits. 8. General Relationship. Employee shall be considered an employee of the Company within the meaning of all federal, state and local laws and regulations including, but not limited to, laws and regulations governing unemployment insurance, workers' compensation, industrial accident, labor and taxes. 9. Indemnification Agreement. As a material inducement to Employee to execute and deliver this Agreement, concurrently with the execution and delivery of this Agreement, the Company and Employee have executed and delivered an Indemnification Agreement in the form attached to this Agreement as Exhibit A. 10. Miscellaneous. 10.1 Entire Agreement. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 10.2 No Assignment. This Agreement may not be assigned by the Company or Employee without the prior written consent of the other (which consent may be granted or withheld by such party in its sole and absolute discretion), and any attempt to assign rights and duties without such written consent shall be null and void and of no force and effect. Subject to the preceding sentence, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 10.3 Survival. The covenants, agreements, representations and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment, irrespective of any investigation made by or on behalf of any party. 10.4 Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement. 10.5 Waiver. The failure of either party hereto at any time to enforce performance by the other party of any provision of this Agreement shall in no way affect such party's rights thereafter to enforce the same, nor shall the waiver by either party of any breach of any provision hereof be deemed to be a waiver by such party of any other breach of the same or any other provision hereof. 10.6 Section Headings. The headings of the several sections in this Agreement are inserted solely for the convenience of the parties and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof. 6 7 10.7 Notices. All notices and other communications required or permitted under this Agreement shall be in writing, served personally on, telecopied, sent by courier or other express private mail service, or mailed by certified, registered or express United States mail postage prepaid, and shall be deemed given upon receipt if delivered personally, telecopied, or sent by courier or other express private mail service, or if mailed when actually received as shown on the return receipt. Notices shall be addressed as follows: (a) If to the Company, to: Commonwealth Energy Corporation 15901 Red Hill Avenue Suite 100 Tustin, CA 92780 If to Employee, to: Richard L. Paulsen 30842 Steeplechase Drive San Juan Capistrano, CA 92675 Either party may change its address for purposes of this Section by giving to the other, in the manner provided herein, a written notice of such change. 10.8 Severability. All sections, clauses and covenants contained in this Agreement are severable, and in the event any of them shall be held to be invalid by any court, this Agreement shall be interpreted as if such invalid sections, clauses or covenants were not contained herein. 10.9 Applicable Law. This Agreement is made with reference to the laws of the State of California, shall be governed by and construed in accordance therewith, and any court action brought under or arising out of this Agreement shall be brought in any competent court within the State of California, County of Orange. 10.10 Attorneys' Fees. If any legal action, arbitration or other proceeding is brought for the enforcement of this Agreement, or because of any alleged dispute, breach, default or misrepresentation in connection with this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs it incurred in that action or proceeding, in addition to any other relief to which it may be entitled. 10.11 Gender. Where the context so requires, the use of the masculine gender shall include the feminine and/or neuter genders and the singular shall include the plural, and vice versa, and the word "person" shall include any corporation, firm, partnership or other form of association. 10.12 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date hereinabove set forth. COMMONWEALTH ENERGY CORP. EMPLOYEE By: /s/ Ian B. Carter /s/ Richard L. Paulsen ------------------------------ ---------------------------- Ian B. Carter, Chairman of the Richard L. Paulsen Board and CEO By: /s/ Robert C. Perkins ------------------------------ Robert C. Perkins, Director Compensation Committee
7 8 Exhibit A - Indemnification Agreement, attached hereto and made a part hereof 8 EX-10.14 19 a74807gex10-14.txt EXHIBIT 10.14 1 EXHIBIT 10.14 JAMES OLIVER EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of November 1, 2000 between Commonwealth Energy Corporation, a California corporation (the "Company") and James L. Oliver ("Employee"), with reference to the following: A. Employee has heretofore acted as the Chief Financial Officer to the Company and its affiliated companies, and in that capacity has rendered valuable services to the Company. B. The Company and Employee desire that Employee continue to provide services to the Company as an employee of the Company on the terms provided herein. NOW, THEREFORE, in consideration of the various covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Term of Employment. The Company hereby employs Employee and Employee accepts such employment for a term of fifty-two (52) months, commencing on November 1, 2000 and terminating on December 31, 2004 (the "Initial Term"); notwithstanding the foregoing, however, the term of this Agreement is subject to earlier termination as provided in Section 7 below. 2. Title and Responsibilities. During the term of this Agreement, Employee shall serve as Chief Financial Officer of the Company. In the performance of such duties Employee shall report directly to (and only to) the Chief Executive Officer of the Company (the "CEO") and shall, subject to the reasonable supervision and control of the CEO, have the duties, responsibilities and authority commensurate with such positions in companies comparable to the Company. Employee's office location shall at all times be in offices of the Company located in Orange County, California. Employee may be required to travel from time to time to the extent reasonably necessary to the performance of his duties hereunder. Employee shall in good faith and consistent with his ability, experience and talent perform the duties set forth in this Section 2, and shall devote substantially all of his productive time and efforts to the performance of such duties; provided, however, that Employee may participate in civic, charitable, and other not-for-profit activities and manage personal and family investments to the extent that the same does not materially conflict with the discharge of his duties hereunder. 3. Compensation and Benefits. The Company shall pay and/or provide the following compensation and benefits to Employee during the term hereof, and Employee shall accept the same as payment in full for all services rendered by Employee to or for the benefit of the Company: 3.1 Base Salary. The Company shall pay Employee a salary of $150,000 per annum for the first twelve months of the term of this Agreement, $180,000 per annum for the second twelve months of the term, $210,000 per annum for the third twelve months of the term, and $240,000 per annum thereafter (the "Base Salary"). Notwithstanding the foregoing, the Base Salary shall be subject to review from time to time (not less frequently than at the end of each fiscal year of the Company) and, as a result thereof, may be increased (but not decreased) at the discretion of the CEO and the Compensation Committee of the Company's Board of Directors. In determining such increases in the Base Salary, if any, the CEO and the Compensation Committee of the Company's Board of Directors shall take into account, among other things, the Company's achievement of the objectives set forth in its business plan and the Company's results of 1 2 operations. The Base Salary shall be payable in accordance with the payroll practices of the Company in effect from time to time. 3.2 Bonus. Employee shall be paid a cash bonus of thirty percent of the Employee's annual salary at that time with respect to each calendar year ending December 31st of each year provided that the Company or the Company together with its affiliated companies has met or exceeded the projections in its annual business plan for pretax profit for the time period in question or the board of directors determines that either external or internal factors significantly change the business environment beyond the control of the Employee and said factors adversely influence the achievement of the pretax profit objective of the business plan. The bonus with respect to each calendar year shall be due and payable no later than thirty (30) days following the last day of that year. In addition, the Company has to show net income from operations for the year in which the bonus was earned, except in the case of an expansion year, in which case the bonus will be at the discretion of the Company's Board of Directors. 3.3 Bonus Upon Change in Control of the Company. If during the term of this Agreement there is a Change in Control (as defined below), then the Company shall pay to Employee, concurrently with such Change in Control, a cash bonus in an amount equal to the sum of (a) four times the Employee's then current annual Base Salary; and (b) the amount of taxes payable by Employee under Internal Revenue Code Section 280G with respect to the bonus contemplated by this Section 3.3. The bonus contemplated by this Section 3.3 shall be paid to Employee whether or not Employee elects to terminate this Agreement pursuant to any of the terms of this Agreement. For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of (A) the outstanding shares of common stock of the Company, or (B) the combined voting power of the Company's then-outstanding securities entitled to vote generally in the election of directors; (ii) during any period of not more than two consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (iii) below) whose election by the Board or nomination by the Company's shareholders was approved by a vote of at least a majority of the directors still in office who either were in office at the beginning of such period or whose election or nomination for election was previously so approved, ceases for any reason to constitute a majority of the Board; or (iii) the Company is a party to a merger or consolidation which results in the holders of voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the Company sells or disposes of all or substantially all of the Company's assets or any transaction having similar effect is consummated; or the Company is subject to a hostile takeover in the form of a proxy fight or any other means that allows the company to be controlled by a material change in the Board of Directors. In the event the company is taken over, whether hostile or otherwise, all financial payments and options, earned or otherwise, shall be considered due and owing and shall be considered earned as shown in the following paragraphs 3.1, 3.2, 3.3, 3.4, and 3.7. All payments shall be made to the Employee prior to the changeover date of the event that would take over the company. 3.4 Stock Option Plan. Concurrently herewith, the Company shall grant to Employee stock options entitling Employee to purchase 500,000 shares of the Company's common stock, with an exercise price of $2.75 per share (the "Options"). The right to exercise the Options shall be vested as to 125,000 shares covered thereby immediately upon the grant of the Options. The Options shall vest as to an additional 125,000 shares on each of December 31, 2001, December 31, 2002 and December 31, 2003. The Options shall have a term of seven years (regardless of any termination of Employee's employment, except as required by Section 422 of the Internal Revenue 2 3 Code with respect to those of the Options that are "incentive" stock options within the meaning of that Section), and shall, to the maximum extent permitted by law, be "incentive" stock options within the meaning of Section 422 of the Internal Revenue Code. Employee shall be entitled to include the shares purchased or purchasable upon exercise of the Options in any registration statement hereafter filed by the Company under the Securities Act of 1933, as amended, on a basis which is no less favorable to Employee than the basis on which any other shareholder of the Company is entitled to include such shareholder's shares in such registration statement. 3.5 Stock Repurchase Option: In the event the company is taken over through any event that takes control of the company itself or by taking control of the Board of Directors, or a sale of assets as defined herein. Whether such a takeover is considered non-consensual or not; hostile or not: all financial payments due to the Employee and all options due to the Employee, at the sole discretion of the employee, shall be considered due and owing and shall be considered earned as shown in the following paragraphs 3.1, 3.2, 3.3, and 3.4. Employee shall have the absolute right, subject to applicable State and Federal securities laws, to be exercised in his sole discretion and in addition to any other compensation or benefits payable to Employee hereunder, to require the Company to repurchase from Employee all capital stock and stock options of the Company then earned or to be earned by Employee at an aggregate repurchase price (see definition below) equal to two (2) times the then aggregate price value of the Company's capital stock; not to exceed a total price of $10.00 per share. The employee, in the employee's sole and absolute discretion, may exercise such right twenty-four (24) hours prior to the closing of such an event. Prior to the closing, as defined herein, the Employee may elect to sell all or some of the Employee's stocks and/or stock options and the Company shall agree to purchase the same capital stock and stock options earned or to be earned by the Employee, at the Employee's sole discretion. The Employee without any representation or warranty by Employee may exercise this option; other than the Employee has good title thereto free of all liens, encumbrances and adverse interests. By Employee delivering to the Company a certificate or certificates representing such capital stock and stock options, or this employment agreement, in each case duly endorsed for transfer or accompanied by appropriate stock powers, and or notice of the exercise of the right to have the Company repurchase the Employee's options and or stock. In which case the Company shall be obligated to immediately deliver to the Employee certified funds representing payment of the purchase price in full for all of the stock, and with regard to the options an amount equal to the difference between the exercise price owed by the Employee for the options and the above referenced repurchase price payable by the Company for the shares that would otherwise be issued in relation to the Employee's options being repurchased by the Company. The term "aggregate price value" shall mean the value of the optioned shares as set forth by the Company for the purposes of calculating the withholding taxes for the applicable issuance period of the options being repurchased. It is acknowledged that any options which vest due to the Change of Control shall be deemed to have been issued on the date of vesting and thus the latest stock price for such options shall be the price used to determine the value for such accelerated vested options. This clause may be invoked by the Employee in the case of any takeover or any Change of Control. 3.6 Other Fringe Benefits. Employee shall be entitled to participate in all of the Company's incentive and benefit plans and arrangements, including, without limitation, all bonus, compensation and other incentive and benefit plans or arrangements made available now or in the future by the Company to its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements, but on a basis no less favorable than that afforded to any other director, officer or employee of the Company. The Company shall also provide to Employee at the Company's expense all health, medical, hospitalization, life and disability insurance provided to other senior executives of the Company. 3.7 Expenses. The Company shall promptly reimburse Employee for all out-of-pocket expenses actually incurred by him in connection with the performance of his duties hereunder, subject to Employee's furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures (such expenses being commensurate with the office and executive position of Employee hereunder, and including first class hotel and travel arrangements). Employee's right to be reimbursed for expenses incurred prior to the termination of this Agreement shall survive termination of this Agreement. 3.8 Vacation. Employee shall be entitled to the number of paid vacation days in each calendar year determined by the Board from time to time for the Company's senior executive officers, but not less 3 4 than fifteen (15) business days in any calendar year. Employee shall also be entitled to all paid holidays given to the Company's senior executive officers. 3.9 Automobile; Telephone; Etc. During the term hereof the Company shall provide Employee $600 per month for the purposes of the Employee paying for an automobile and related expenses. In addition, the Company shall provide a cell phone and shall reimburse Employee for all charges incurred by him in connection with the use thereof related to the performance of his duties hereunder. 3.10 Withholding and other Deductions. All compensation payable to Employee hereunder shall be subject to such deductions as the Company is from time to time required to make pursuant to law, governmental regulation or order. 4. Representations and Warranties. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder; and (b) Employee is under no physical or mental disability that would hinder the performance of his duties under this Agreement. The Company represents and warrants to Employee that (i) the execution and delivery of this Agreement by the Company and the performance of its obligations hereunder have been duly authorized by the Board and no further corporate action on the Company's part is necessary to authorize this Agreement and the performance of such obligations; and (ii) this Agreement constitutes the valid and binding obligation of the Company, enforceable by Employee against the Company strictly in accordance with its terms (subject to laws in effect with respect to creditors' rights generally and applicable principles relating to equitable remedies). 5. Confidential Information. Employee acknowledges that the nature of Employee's engagement by the Company is such that Employee will have access to Confidential Information (as hereinafter defined) which has value to the Company. During the term of this Agreement and at all times thereafter, Employee shall keep all of the Confidential Information in confidence and shall not disclose any of the same to any other person, except the Company's personnel entitled thereto and other persons designated in writing by the Company or except as otherwise required by law. Employee shall not use the Confidential Information for Employee's personal gain or benefit outside the scope of Employee's engagement by the Company. The term "Confidential Information," as used herein, means all information or material not generally known by non-Company personnel which (a) gives the Company some competitive business advantage or the opportunity of obtaining such advantage or the disclosure of which could be materially detrimental to the interests of the Company; (b) which is owned by the Company or in which the Company has an interest; and (c) which is either (i) marked "Confidential Information," "Proprietary Information" or other similar marking, (ii) known by Employee to be considered confidential and proprietary by the Company, or (iii) from all the relevant circumstances should reasonably be assumed by Employee to be confidential and proprietary to the Company. 6. "Key Man" Insurance. The Company shall have the right to purchase "key-man" life insurance covering Employee, in the name and for the benefit of the Company and at the Company's expense in any amount not exceeding $2,000,000. Employee shall cooperate in all reasonable respects with the Company's efforts to obtain such insurance and shall submit to any required medical or other examination; provided; however, that if such medical or other examination cannot be conducted by Employee's personal physician, then Employee shall have the right to have his personal physician attend the examination. Upon the termination of his employment hereunder, Employee may acquire any such life insurance policy upon paying the Company an amount equal to the insurance policy's cash surrender value, if any, at the time of termination and reimbursing the Company for the pro rata portion of any premium paid applicable to periods subsequent to the termination. 7. Termination; Separation Compensation. 7.1 Termination. Notwithstanding Section 1 above, Employee's employment with the Company shall terminate upon the earliest to occur of any of the following: 4 5 the death of Employee; the "total disability" of Employee (as hereinafter defined); the expiration of ten (10) days after the receipt by Employee of written notice of termination executed by the Company if Employee willfully breaches or habitually neglects the duties which he is required to perform under the terms of this Agreement (unless caused by Employee's disability), provided that such termination is approved by not less than a majority of the then current members of the Company's Board of Directors; the expiration of ten (10) days after the receipt by Employee of written notice of termination executed by the Company if Employee shall make any intentional material misrepresentation to the Company's Board of Directors, commit fraud, embezzlement, misappropriation or any felony or other criminal act with respect to Company, and/or any affiliates thereof, whether or not a criminal or civil charge is filed in connection therewith, provided that such termination is approved by not less than a majority of the then current members of the Company's Board of Directors; the expiration of one hundred eighty (180) days after receipt by the Company of written notice of termination executed by Employee; the expiration of ten (10) days after receipt by the Company of written notice of termination executed by Employee if, without Employee's written consent, there shall have been any adverse change in Employee's status, title, position, duties, responsibilities or authorities contemplated by this Agreement; or the expiration of ten (10) days after receipt by the Company of written notice of termination executed by Employee if there shall have been a material breach by the Company of any of its obligations under this Agreement, which default is not cured within such ten day period. 7.2 Definition of Total Disability. For purposes of this Agreement, Employee shall be deemed to have suffered a "total disability" if he is unable to perform substantially all of the duties theretofore performed by him under this Agreement by reason of any medically determinable physical or mental impairment which has lasted for not less than one hundred twenty (120) consecutive calendar days or for one hundred fifty (150) calendar days (whether or not consecutive) in any one hundred eighty (180) calendar days. Prior to termination of this Agreement as a result of total disability, and notwithstanding any failure or inability of Employee to render services hereunder, the Company shall continue to pay and/or provide to Employee the compensation and benefits specified in Section 3 hereof. 7.3 Separation Compensation. If Employee's employment terminates pursuant to Section 7.1(a), (b), (c), (d) or (e) of this Agreement, Employee shall be entitled to receive the Base Salary and other compensation and benefits provided for under this Agreement through the date of termination, but shall not be entitled to receive any severance pay or non-vested employment benefits or options, or any other termination benefits, except to the extent otherwise required to be paid under applicable California law. If Employee's employment terminates for any reason other than pursuant to the provisions of this Agreement referred to in the immediately preceding sentence, then Employee shall be entitled to receive (i) the Base Salary and other compensation and benefits provided for under this Agreement through the date of termination, and (ii) an amount equal to one and one-half times Employee's then current annual Base Salary. The amount specified in clause (ii) above shall be payable in eighteen (18) equal monthly installments, commencing immediately following the termination of Employee's employment. The Company and Employee both agree that the amount of the severance payment specified by the immediately preceding sentence is reasonable under the circumstances existing at the time of the execution of this Agreement. 7.4 Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, and the amount of any payment or benefit 5 6 provided in this Section 7 shall not be reduced by any compensation earned by Employee as a result of employment by another employer or by any other benefits. 8. General Relationship. Employee shall be considered an employee of the Company within the meaning of all federal, state and local laws and regulations including, but not limited to, laws and regulations governing unemployment insurance, workers' compensation, industrial accident, labor and taxes. 9. Indemnification Agreement. As a material inducement to Employee to execute and deliver this Agreement, concurrently with the execution and delivery of this Agreement, the Company and Employee have executed and delivered an Indemnification Agreement in the form attached to this Agreement as Exhibit A. 10. Miscellaneous. 10.1 Entire Agreement. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 10.2 No Assignment. This Agreement may not be assigned by the Company or Employee without the prior written consent of the other (which consent may be granted or withheld by such party in its sole and absolute discretion), and any attempt to assign rights and duties without such written consent shall be null and void and of no force and effect. Subject to the preceding sentence, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 10.3 Survival. The covenants, agreements, representations and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment, irrespective of any investigation made by or on behalf of any party. 10.4 Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement. 10.5 Waiver. The failure of either party hereto at any time to enforce performance by the other party of any provision of this Agreement shall in no way affect such party's rights thereafter to enforce the same, nor shall the waiver by either party of any breach of any provision hereof be deemed to be a waiver by such party of any other breach of the same or any other provision hereof. 10.6 Section Headings. The headings of the several sections in this Agreement are inserted solely for the convenience of the parties and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof. 10.7 Notices. All notices and other communications required or permitted under this Agreement shall be in writing, served personally on, telecopied, sent by courier or other express private mail service, or mailed by certified, registered or express United States mail postage prepaid, and shall be deemed given upon receipt if delivered personally, telecopied, or sent by courier or other express private mail service, or if mailed when actually received as shown on the return receipt. Notices shall be addressed as follows: If to the Company, to: Commonwealth Energy Corporation 15901 Red Hill Avenue Suite 100 Tustin, CA 92780 6 7 If to Employee, to: James L. Oliver 2548 East Hilda Place Anaheim, CA 92806 Either party may change its address for purposes of this Section by giving to the other, in the manner provided herein, a written notice of such change. 10.8 Severability. All sections, clauses and covenants contained in this Agreement are severable, and in the event any of them shall be held to be invalid by any court, this Agreement shall be interpreted as if such invalid sections, clauses or covenants were not contained herein. 10.9 Applicable Law. This Agreement is made with reference to the laws of the State of California, shall be governed by and construed in accordance therewith, and any court action brought under or arising out of this Agreement shall be brought in any competent court within the State of California, County of Orange. 10.10 Attorneys' Fees. If any legal action, arbitration or other proceeding is brought for the enforcement of this Agreement, or because of any alleged dispute, breach, default or misrepresentation in connection with this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs it incurred in that action or proceeding, in addition to any other relief to which it may be entitled. 10.11 Gender. Where the context so requires, the use of the masculine gender shall include the feminine and/or neuter genders and the singular shall include the plural, and vice versa, and the word "person" shall include any corporation, firm, partnership or other form of association. 10.12 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date hereinabove set forth. COMMONWEALTH ENERGY CORP. EMPLOYEE By: /s/ Ian B. Carter /s/ James L. Oliver ------------------------------ -------------------------- Ian B. Carter, Chairman of the James L. Oliver Board and CEO By: /s/ Robert C. Perkins ------------------------------ Robert C. Perkins, Director Compensation Committee
7 8 Exhibit A - Indemnification Agreement, attached hereto and made a part hereof 8 EX-10.15 20 a74807gex10-15.txt EXHIBIT 10.15 1 EXHIBIT 10.15 JOHN BARTHROP EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of November 1, 2000 between Commonwealth Energy Corporation, a California corporation (the "Company") and John A. Barthrop ("Employee"), with reference to the following: A. Employee has heretofore acted as the Chief Legal Officer to the Company and Secretary to the Company and its affiliated companies, and in that capacity has rendered valuable services to the Company. B. The Company and Employee desire that Employee continue to provide services to the Company as an employee of the Company on the terms provided herein. NOW, THEREFORE, in consideration of the various covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Term of Employment. The Company hereby employs Employee and Employee accepts such employment for a term of fifty-two (52) months, commencing on November 1, 2000 and terminating on December 31, 2004 (the "Initial Term"); notwithstanding the foregoing, however, the term of this Agreement is subject to earlier termination as provided in Section 7 below. 2. Title and Responsibilities. During the term of this Agreement, Employee shall serve as Chief Legal Counsel of the Company. In the performance of such duties Employee shall report directly to (and only to) the Chief Executive Officer of the Company (the "CEO") and shall, subject to the reasonable supervision and control of the CEO, have the duties, responsibilities and authority commensurate with such positions in companies comparable to the Company. Employee's office location shall at all times be in offices of the Company located in Orange County, California. Employee may be required to travel from time to time to the extent reasonably necessary to the performance of his duties hereunder. Employee shall in good faith and consistent with his ability, experience and talent perform the duties set forth in this Section 2, and shall devote substantially all of his productive time and efforts to the performance of such duties; provided, however, that Employee may participate in civic, charitable, and other not-for-profit activities and manage personal and family investments to the extent that the same does not materially conflict with the discharge of his duties hereunder. 3. Compensation and Benefits. The Company shall pay and/or provide the following compensation and benefits to Employee during the term hereof, and Employee shall accept the same as payment in full for all services rendered by Employee to or for the benefit of the Company: 3.1 Base Salary. The Company shall pay Employee a salary of $160,000 per annum for the first twelve months of the term of this Agreement, $185,000 per annum for the second twelve months of the term, $210,000 per annum for the third twelve months of the term, and $240,000 per annum thereafter (the "Base Salary"). Notwithstanding the foregoing, the Base Salary shall be subject to review from time to time (not less frequently than at the end of each fiscal year of the Company) and, as a result thereof, may be increased (but not decreased) at the discretion of the CEO and the Compensation Committee of the Company's Board of Directors. In determining such increases in the Base Salary, if any, the CEO and the Compensation Committee of the Company's Board of Directors shall take into account, among other things, the Company's achievement of the objectives set forth in its business plan and the Company's results of 1 2 operations. The Base Salary shall be payable in accordance with the payroll practices of the Company in effect from time to time. 3.2 Bonus. Employee shall be paid a cash bonus of thirty percent of the Employee's annual salary at that time with respect to each calendar year ending December 31, 2001 provided that the Company or the Company together with its affiliated companies has met or exceeded the projections in its annual business plan for pretax profit for the time period in question or the board of directors determines that either external or internal factors significantly change the business environment beyond the control of the Employee and said factors adversely influence the achievement of the pretax profit objective of the business plan. The bonus with respect to each calendar year shall be due and payable no later than thirty (30) days following the last day of that year. In addition, the Company has to show net income from operations for the year in which the bonus was earned, except in the case of an expansion year, in which case the bonus will be at the discretion of the Company's Board of Directors. 3.3 Bonus Upon Change in Control of the Company. If during the term of this Agreement there is a Change in Control (as defined below), then the Company shall pay to Employee, concurrently with such Change in Control, a cash bonus in an amount equal to the sum of (a) four times the Employee's then current annual Base Salary; and (b) the amount of taxes payable by Employee under Internal Revenue Code Section 280G with respect to the bonus contemplated by this Section 3.3. The bonus contemplated by this Section 3.3 shall be paid to Employee whether or not Employee elects to terminate this Agreement pursuant to any of the terms of this Agreement. For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of (A) the outstanding shares of common stock of the Company, or (B) the combined voting power of the Company's then-outstanding securities entitled to vote generally in the election of directors; (ii) during any period of not more than two consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (iii) below) whose election by the Board or nomination by the Company's shareholders was approved by a vote of at least a majority of the directors still in office who either were in office at the beginning of such period or whose election or nomination for election was previously so approved, ceases for any reason to constitute a majority of the Board; or (iii) the Company is a party to a merger or consolidation which results in the holders of voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the Company sells or disposes of all or substantially all of the Company's assets or any transaction having similar effect is consummated; or the Company is subject to a hostile takeover in the form of a proxy fight or any other means that allows the company to be controlled by a material change in the Board of Directors. In the event the company is taken over, whether hostile or otherwise, all financial payments and options, earned or otherwise, shall be considered due and owing and shall be considered earned as shown in the following paragraphs 3.1, 3.2, 3.3, 3.4, and 3.7. All payments shall be made to the Employee prior to the changeover date of the event that would take over the company. 3.4 Stock Option Plan. Concurrently herewith, the Company shall grant to Employee stock options entitling Employee to purchase 500,000 shares of the Company's common stock, with an exercise price of $2.75 per share (the "Options"). The right to exercise the Options shall be vested as to 125,000 shares covered thereby immediately upon the grant of the Options. The Options shall vest as to an additional 125,000 shares on each of December 31, 2001, December 31, 2002 and December 31, 2003. The Options shall have a term of seven years (regardless of any termination of Employee's employment, except as required by Section 422 of the Internal Revenue Code with respect to those of the Options that are "incentive" stock options within the meaning of that Section), and shall, to the maximum extent permitted by law, be "incentive" stock options within the meaning of Section 422 of the Internal Revenue 2 3 Code. Employee shall be entitled to include the shares purchased or purchasable upon exercise of the Options in any registration statement hereafter filed by the Company under the Securities Act of 1933, as amended, on a basis which is no less favorable to Employee than the basis on which any other shareholder of the Company is entitled to include such shareholder's shares in such registration statement. 3.5 Stock Repurchase Option: In the event the company is taken over through any event that takes control of the company itself or by taking control of the Board of Directors, or a sale of assets as defined herein. Whether such a takeover is considered non-consensual or not; hostile or not: all financial payments due to the Employee and all options due to the Employee, at the sole discretion of the employee, shall be considered due and owing and shall be considered earned as shown in the following paragraphs 3.1, 3.2, 3.3, and 3.4. Employee shall have the absolute right, subject to applicable State and Federal securities laws, to be exercised in his sole discretion and in addition to any other compensation or benefits payable to Employee hereunder, to require the Company to repurchase from Employee all capital stock and stock options of the Company then earned or to be earned by Employee at an aggregate repurchase price (see definition below) equal to two (2) times the then aggregate price value of the Company's capital stock; not to exceed a total price of $10.00 per share. The employee, in the employee's sole and absolute discretion, may exercise such right twenty-four (24) hours prior to the closing of such an event. Prior to the closing, as defined herein, the Employee may elect to sell all or some of the Employee's stocks and/or stock options and the Company shall agree to purchase the same capital stock and stock options earned or to be earned by the Employee, at the Employee's sole discretion. The Employee without any representation or warranty by Employee may exercise this option; other than the Employee has good title thereto free of all liens, encumbrances and adverse interests. By Employee delivering to the Company a certificate or certificates representing such capital stock and stock options, or this employment agreement, in each case duly endorsed for transfer or accompanied by appropriate stock powers, and or notice of the exercise of the right to have the Company repurchase the Employee's options and or stock. In which case the Company shall be obligated to immediately deliver to the Employee certified funds representing payment of the purchase price in full for all of the stock, and with regard to the options an amount equal to the difference between the exercise price owed by the Employee for the options and the above referenced repurchase price payable by the Company for the shares that would otherwise be issued in relation to the Employee's options being repurchased by the Company. The term "aggregate price value" shall mean the value of the optioned shares as set forth by the Company for the purposes of calculating the withholding taxes for the applicable issuance period of the options being repurchased. It is acknowledged that any options which vest due to the Change of Control shall be deemed to have been issued on the date of vesting and thus the latest stock price for such options shall be the price used to determine the value for such accelerated vested options. This clause may be invoked by the Employee in the case of any takeover or any Change of Control. 3.6 Other Fringe Benefits. Employee shall be entitled to participate in all of the Company's incentive and benefit plans and arrangements, including, without limitation, all bonus, compensation and other incentive and benefit plans or arrangements made available now or in the future by the Company to its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements, but on a basis no less favorable than that afforded to any other director, officer or employee of the Company. The Company shall also provide to Employee at the Company's expense all health, medical, hospitalization, life and disability insurance provided to other senior executives of the Company. 3.7 Expenses. The Company shall promptly reimburse Employee for all out-of-pocket expenses actually incurred by him in connection with the performance of his duties hereunder, subject to Employee's furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures (such expenses being commensurate with the office and executive position of Employee hereunder, and including first class hotel and travel arrangements). Employee's right to be reimbursed for expenses incurred prior to the termination of this Agreement shall survive termination of this Agreement. 3.8 Vacation. Employee shall be entitled to the number of paid vacation days in each calendar year determined by the Board from time to time for the Company's senior executive officers, but not less 3 4 than fifteen (15) business days in any calendar year. Employee shall also be entitled to all paid holidays given to the Company's senior executive officers. 3.9 Automobile; Telephone; Etc. During the term hereof the Company shall provide Employee $600 per month for the purposes of the Employee paying for an automobile and related expenses. In addition, the Company shall provide a cell phone and shall reimburse Employee for all charges incurred by him in connection with the use thereof related to the performance of his duties hereunder. 3.10 Withholding and other Deductions. All compensation payable to Employee hereunder shall be subject to such deductions as the Company is from time to time required to make pursuant to law, governmental regulation or order. 4. Representations and Warranties. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder; and (b) Employee is under no physical or mental disability that would hinder the performance of his duties under this Agreement. The Company represents and warrants to Employee that (i) the execution and delivery of this Agreement by the Company and the performance of its obligations hereunder have been duly authorized by the Board and no further corporate action on the Company's part is necessary to authorize this Agreement and the performance of such obligations; and (ii) this Agreement constitutes the valid and binding obligation of the Company, enforceable by Employee against the Company strictly in accordance with its terms (subject to laws in effect with respect to creditors' rights generally and applicable principles relating to equitable remedies). 5. Confidential Information. Employee acknowledges that the nature of Employee's engagement by the Company is such that Employee will have access to Confidential Information (as hereinafter defined) which has value to the Company. During the term of this Agreement and at all times thereafter, Employee shall keep all of the Confidential Information in confidence and shall not disclose any of the same to any other person, except the Company's personnel entitled thereto and other persons designated in writing by the Company or except as otherwise required by law. Employee shall not use the Confidential Information for Employee's personal gain or benefit outside the scope of Employee's engagement by the Company. The term "Confidential Information," as used herein, means all information or material not generally known by non-Company personnel which (a) gives the Company some competitive business advantage or the opportunity of obtaining such advantage or the disclosure of which could be materially detrimental to the interests of the Company; (b) which is owned by the Company or in which the Company has an interest; and (c) which is either (i) marked "Confidential Information," "Proprietary Information" or other similar marking, (ii) known by Employee to be considered confidential and proprietary by the Company, or (iii) from all the relevant circumstances should reasonably be assumed by Employee to be confidential and proprietary to the Company. 6. "Key Man" Insurance. The Company shall have the right to purchase "key-man" life insurance covering Employee, in the name and for the benefit of the Company and at the Company's expense in any amount not exceeding $2,000,000. Employee shall cooperate in all reasonable respects with the Company's efforts to obtain such insurance and shall submit to any required medical or other examination; provided; however, that if such medical or other examination cannot be conducted by Employee's personal physician, then Employee shall have the right to have his personal physician attend the examination. Upon the termination of his employment hereunder, Employee may acquire any such life insurance policy upon paying the Company an amount equal to the insurance policy's cash surrender value, if any, at the time of termination and reimbursing the Company for the pro rata portion of any premium paid applicable to periods subsequent to the termination. 7. Termination; Separation Compensation. 7.1 Termination. Notwithstanding Section 1 above, Employee's employment with the Company shall terminate upon the earliest to occur of any of the following: 4 5 the death of Employee; the "total disability" of Employee (as hereinafter defined); the expiration of ten (10) days after the receipt by Employee of written notice of termination executed by the Company if Employee willfully breaches or habitually neglects the duties which he is required to perform under the terms of this Agreement (unless caused by Employee's disability), provided that such termination is approved by not less than a majority of the then current members of the Company's Board of Directors; the expiration of ten (10) days after the receipt by Employee of written notice of termination executed by the Company if Employee shall make any intentional material misrepresentation to the Company's Board of Directors, commit fraud, embezzlement, misappropriation or any felony or other criminal act with respect to Company, and/or any affiliates thereof, whether or not a criminal or civil charge is filed in connection therewith, provided that such termination is approved by not less than a majority of the then current members of the Company's Board of Directors; the expiration of one hundred eighty (180) days after receipt by the Company of written notice of termination executed by Employee; the expiration of ten (10) days after receipt by the Company of written notice of termination executed by Employee if, without Employee's written consent, there shall have been any adverse change in Employee's status, title, position, duties, responsibilities or authorities contemplated by this Agreement; or the expiration of ten (10) days after receipt by the Company of written notice of termination executed by Employee if there shall have been a material breach by the Company of any of its obligations under this Agreement, which default is not cured within such ten day period. 7.2 Definition of Total Disability. For purposes of this Agreement, Employee shall be deemed to have suffered a "total disability" if he is unable to perform substantially all of the duties theretofore performed by him under this Agreement by reason of any medically determinable physical or mental impairment which has lasted for not less than one hundred twenty (120) consecutive calendar days or for one hundred fifty (150) calendar days (whether or not consecutive) in any one hundred eighty (180) calendar days. Prior to termination of this Agreement as a result of total disability, and notwithstanding any failure or inability of Employee to render services hereunder, the Company shall continue to pay and/or provide to Employee the compensation and benefits specified in Section 3 hereof. 7.3 Separation Compensation. If Employee's employment terminates pursuant to Section 7.1(a), (b), (c), (d) or (e) of this Agreement, Employee shall be entitled to receive the Base Salary and other compensation and benefits provided for under this Agreement through the date of termination, but shall not be entitled to receive any severance pay or non-vested employment benefits or options, or any other termination benefits, except to the extent otherwise required to be paid under applicable California law. If Employee's employment terminates for any reason other than pursuant to the provisions of this Agreement referred to in the immediately preceding sentence, then Employee shall be entitled to receive (i) the Base Salary and other compensation and benefits provided for under this Agreement through the date of termination, and (ii) an amount equal to one and one-half times Employee's then current annual Base Salary. The amount specified in clause (ii) above shall be payable in eighteen (18) equal monthly installments, commencing immediately following the termination of Employee's employment. The Company and Employee both agree that the amount of the severance payment specified by the immediately preceding sentence is reasonable under the circumstances existing at the time of the execution of this Agreement. 7.4 Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, and the amount of any payment or benefit 5 6 provided in this Section 7 shall not be reduced by any compensation earned by Employee as a result of employment by another employer or by any other benefits. 8. General Relationship. Employee shall be considered an employee of the Company within the meaning of all federal, state and local laws and regulations including, but not limited to, laws and regulations governing unemployment insurance, workers' compensation, industrial accident, labor and taxes. 9. Indemnification Agreement. As a material inducement to Employee to execute and deliver this Agreement, concurrently with the execution and delivery of this Agreement, the Company and Employee have executed and delivered an Indemnification Agreement in the form attached to this Agreement as Exhibit A. 10. Miscellaneous. 10.1 Entire Agreement. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 10.2 No Assignment. This Agreement may not be assigned by the Company or Employee without the prior written consent of the other (which consent may be granted or withheld by such party in its sole and absolute discretion), and any attempt to assign rights and duties without such written consent shall be null and void and of no force and effect. Subject to the preceding sentence, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 10.3 Survival. The covenants, agreements, representations and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment, irrespective of any investigation made by or on behalf of any party. 10.4 Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement. 10.5 Waiver. The failure of either party hereto at any time to enforce performance by the other party of any provision of this Agreement shall in no way affect such party's rights thereafter to enforce the same, nor shall the waiver by either party of any breach of any provision hereof be deemed to be a waiver by such party of any other breach of the same or any other provision hereof. 10.6 Section Headings. The headings of the several sections in this Agreement are inserted solely for the convenience of the parties and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof. 10.7 Notices. All notices and other communications required or permitted under this Agreement shall be in writing, served personally on, telecopied, sent by courier or other express private mail service, or mailed by certified, registered or express United States mail postage prepaid, and shall be deemed given upon receipt if delivered personally, telecopied, or sent by courier or other express private mail service, or if mailed when actually received as shown on the return receipt. Notices shall be addressed as follows: If to the Company, to: Commonwealth Energy Corporation 15901 Red Hill Avenue Suite 100 Tustin, CA 92780 6 7 If to Employee, to: John A. Barthrop 29 Willowood Aliso Viejo, CA 92656 Either party may change its address for purposes of this Section by giving to the other, in the manner provided herein, a written notice of such change. 10.8 Severability. All sections, clauses and covenants contained in this Agreement are severable, and in the event any of them shall be held to be invalid by any court, this Agreement shall be interpreted as if such invalid sections, clauses or covenants were not contained herein. 10.9 Applicable Law. This Agreement is made with reference to the laws of the State of California, shall be governed by and construed in accordance therewith, and any court action brought under or arising out of this Agreement shall be brought in any competent court within the State of California, County of Orange. 10.10 Attorneys' Fees. If any legal action, arbitration or other proceeding is brought for the enforcement of this Agreement, or because of any alleged dispute, breach, default or misrepresentation in connection with this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs it incurred in that action or proceeding, in addition to any other relief to which it may be entitled. 10.11 Gender. Where the context so requires, the use of the masculine gender shall include the feminine and/or neuter genders and the singular shall include the plural, and vice versa, and the word "person" shall include any corporation, firm, partnership or other form of association. 10.12 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date hereinabove set forth. COMMONWEALTH ENERGY CORP. EMPLOYEE By: /s/ Ian B. Carter /s/ John A. Barthrop ----------------------------------- ------------------------- Ian B. Carter, Chairman of the John A. Barthrop Board and CEO By: /s/ Robert C. Perkins Robert C. Perkins, Director Compensation Committee 7 EX-10.16 21 a74807gex10-16.txt EXHIBIT 10.16 1 EXHIBIT 10.16 1999 EQUITY INCENTIVE PLAN COMMONWEALTH ENERGY CORPORATION 1999 EQUITY INCENTIVE PLAN FOR EMPLOYEES 1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company and its Subsidiaries, by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock Awards and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 23. 2. SHARES SUBJECT TO THE PLAN. 2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be Seven Million (7,000,000) Shares. Shares that are subject to (a) issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option; (b) an Award granted hereunder but are forfeited or are repurchased by the Company at the original issue price; and (c) an Award that otherwise terminates without Shares being issued will again become available for grant and issuance under the Plan. At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan. 2.2 Adjustment of Shares. In the event that the number of outstanding shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Board. 3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted to employees (including officers and directors who are also employees) of the Company or of a Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any Subsidiary of the Company; provided such consultants, contractors and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. A person may be granted more than one Award under this Plan. 4. ADMINISTRATION. 4.1 Board Authority. This Plan will be administered by the Board based on the recommendations of the Committee. Subject to the general purposes, terms and conditions of this Plan, the Board will have full power to implement and carry out this Plan. Without limitation, the Board will have the authority to: 1 2 (a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan; (b) prescribe, amend and rescind rules and regulations relating to this Plan or any Award; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any parent or Subsidiary of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement; (j) determine whether an Award has been earned; and (k) make all other determinations necessary or advisable for the administration of this Plan. 4.2 Board Discretion. Any determination made by the Board with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Board may delegate to the Committee or one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company. 5. OPTIONS. The Board may grant Incentive Stock Options within the meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs") to eligible persons. The Board shall determine the type of Option which may be granted to an eligible person (ISO or NQSO), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised and all other terms and conditions of the Option, subject to the following: 5.1 Form of Option Grant. Each Option granted under this Plan will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO ("Stock Option Agreement"), and will be in such form and contain such provisions (which need not be the same for each Participant) as the Board may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan. 5.2 Date of Grant. The date of grant of an Option will be the date on which the Board makes the determination to grant such Option, unless otherwise specified by the Board. A Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 Exercise Period. Options shall be exercisable within the times or upon the events determined by the Board as set forth in the Stock Option Agreement governing such Option, subject to the following limitations: 2 3 (a) no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; (b) Options shall be exercisable at the rate of at least 25% of the Option Shares per year over four years from the date the Option Award is granted, with the initial vesting to occur one (1) year after the Option grant date. However, this minimum vesting requirement shall not be applicable with respect to any Option granted to (i) any officers of the Company, (ii) members of the Board or of the board of any Subsidiary or (iii) consultants who provide services to the Company (or any Subsidiary of the Company); and (c) no ISO granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company ("Ten Percent Stockholder") will be exercisable after the expiration of five (5) years from the date the ISO is granted. Subject to the foregoing limitations, the Board may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as it determines. 5.4 Exercise Price. The Exercise Price of an Option will be determined by the Board when the Option is granted; provided that the Exercise Price of an ISO (i) is not less than one hundred percent (100%) of the Fair Market Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO granted to a Ten Percent Stockholder will not be less than one hundred ten percent (110%) of the Fair Market Value of the Shares on the date of grant. 5.5 Method of Exercise. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "Exercise Agreement") in a form approved by the Board (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desired by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased. 5.6 Termination. Notwithstanding the exercise periods set forth in a Stock Option Agreement, exercise of an Option will always be subject to the following: (a) If a Participant is Terminated for any reason except for retirement, death or Disability, then the Participant may exercise such Participant's Options only to the extent that such Options would have been exercisable upon the Termination Date no later than thirty (30) days after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Board, with any exercise beyond three (3) months after the Termination Date deemed to be an NQSO), but in any event, no later than the expiration date of the Options. (b) If a Participant is Terminated because of the Participant's retirement, death or Disability (or the Participant dies within three (3) months after a Termination other than for Cause or because of the Participant's Disability), then the Participant's Options may be exercised only to the extent that such Options would have been exercisable by the Participant on the Termination Date and must be exercised by the Participant (or the Participant's legal representative or authorized assignee) no later than twenty-four (24) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Board, with any Options exercised beyond (a) three (3) months after the Termination Date when the Termination is for any reason other than the Participant's death or Disability, or (b) twelve (12) months after the Termination Date when the Termination is for the Participant's Disability, deemed to be NQSOs), but in any event no later than the expiration date of the Options. 3 4 (c) Notwithstanding the provisions in paragraph 5.6(a) above, if a Participant is terminated for Cause, neither the Participant, the Participant's estate nor such other person who may then hold the Option shall be entitled to exercise any Option with respect to any Shares whatsoever, after termination of service, whether or not after termination of service the Participant may receive payment from the Company or any Subsidiary of the Company for vacation pay, for services rendered prior to termination, for services rendered for the day on which termination occurs, for salary in lieu of notice, or for any other benefits. For the purpose of this paragraph, termination of service shall be deemed to occur on the date when the Company dispatches notice or advice to a Participant that his or her service is terminated. 5.7 Limitations on Exercise. The Board may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent a Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 Limitations on ISOs. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company or any Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISOs and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment. 5.9 Modification, Extension or Renewal. The Board may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Board may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 of this Plan for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 No Disqualification. Notwithstanding any other provision in this Plan, no term of this Plan relating to an ISO will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to sell to an eligible person Shares of Restricted Stock. The Board will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "Purchase Price"), the restrictions to which the Shares will be subject, and all other terms and conditions of the Restricted Stock Award, subject to the following: 6.1 Form of Restricted Stock Award. All purchases under a Restricted Stock Award made pursuant to this Plan will be evidenced by an Award Agreement ("Restricted Stock Purchase Agreement") that will be in such form (which need not be the same for each Participant) as the Board will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. The offer of Restricted Stock will be accepted by the Participant's execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer will terminate, unless otherwise determined by the Board. 4 5 6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a Restricted Stock Award will be determined by the Board on the date the Restricted Stock Award is granted, except in the case of a sale to a Ten Percent Stockholder, in which case the Purchase Price will be 100% of the Fair Market Value of the Shares. Payment of the Purchase Price may be made in accordance with Section 8 of this Plan. 6.3 Restrictions and Conditions. Shares of Restricted Stock transferred to a Participant pursuant to an Award will be subject to the following restrictions and conditions: (a) Subject to the provisions of the Plan and the Award Agreement, during a period established by the Board commencing with the date of such Award (the "Restriction Period"), the Participant will not be permitted to sell, transfer, pledge, or assign shares of Restricted Stock awarded under the Plan. Within these limits the Board, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or in part, based on the completion of a specified number of years of service subject, however, to any requirements under California law, including without limitation the restrictions contained in Section 5.3 hereof. Restriction Periods may overlap and Participants may participate simultaneously with respect to Restricted Stock Awards that are subject to different Restriction Periods and have different performance goals and other criteria. (b) Except as otherwise provided in Section 6.3(a) and this paragraph (b), the Participant will have with respect to shares of Restricted Stock all the rights of a shareholder of the Company, including the right to vote the shares and the right to receive cash dividends. Stock dividends issued with respect to Restricted Stock will be treated as additional shares of Restricted Stock that are subject to the same restrictions and other terms and conditions that apply to the shares with respect to which such dividends are issued. (c) Subject to the applicable provisions of the Award Agreement and this Section 6, and except as otherwise determined by the Board, upon the Participant's Termination during the Restriction Period, or in the event that a performance goal on which the vesting of Restricted Stock is conditioned is not attained by the end of the Restriction Period, all shares still subject to restriction (i) in the case of shares of Restricted Stock that were purchased by the Participant pursuant to a Restricted Stock Award or the exercise of an Option, will be subject for a period of ninety (90) days following the end of the Restriction Period to the Company's right to repurchase all or a portion of such shares, for cash and/or cancellation of purchase money indebtedness, at the price paid by the Participant for such shares, and (ii) in the case of any other Restricted Stock, will be forfeited. (d) If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to the Restriction Period, certificates for an appropriate number of unrestricted Shares will be delivered to the Participant promptly. 7. STOCK BONUSES. 7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares (which may consist of Restricted Stock) for services rendered to the Company or any Subsidiary of the Company. A Stock Bonus may be awarded for past services already rendered to the Company, or any Subsidiary of the Company pursuant to an Award Agreement (the "Stock Bonus Agreement") that will be in such form (which need not be the same for each Participant) as the Board will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. A Stock Bonus may be awarded in such form (which need not be the same for each Participant) as the Board may from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company or Subsidiary and/or individual performance factors or upon such other criteria as the Board may determine. 7.2 Terms of Stock Bonuses. The Board will determine the number of Shares to be awarded to the Participant in connection with a Stock Bonus. If a Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Board will: (a) 5 6 determine the nature, length and starting date of any Performance Period for such Stock Bonus; (b) select from among the Performance Factors to be used to measure the performance, if any; and (c) determine the number of Shares that may be awarded to the Participant. Prior to the payment of any Stock Bonus, the Board shall determine the extent to which such Stock Bonus has been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Board. The Board may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as it deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships. 7.3 Form of Payment. The earned portion of a Stock Bonus may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Board may determine. Payment may be made in the form of cash or whole Shares or a combination thereof, either in a lump sum payment or in installments, all as the Board will determine. 8. PAYMENT FOR SHARE PURCHASES. 8.1 Payment. Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for a Participant by the Board and where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares that either: (1) have been owned by a Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by a Participant in the public market; (c) by tender of a full recourse promissory note having such terms as may be approved by the Board and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not employees or directors of the Company will not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares; (d) by waiver of compensation due or accrued to a Participant for services rendered; (e) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from a Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from a Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (f) by any combination of the foregoing. 6 7 8.2 Loan Guarantees. The Board may help a Participant pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 9. WITHHOLDING TAXES. 9.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require a Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 9.2 Stock Withholding. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Board may in its sole discretion allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Board and be in writing in a form acceptable to the Board. 10. PRIVILEGES OF STOCK OWNERSHIP. 10.1 Voting and Dividends. No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares in question are issued to such Participant. After the Shares in question are issued to the Participant, the Participant will be a stockholder and have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant's Purchase Price or Exercise Price pursuant to Section 12. 10.2 Financial Statements. The Company will provide financial statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company will not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information. 11. TRANSFERABILITY. Awards granted under this Plan, and any interest therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution. During the lifetime of the Participant an Award will be exercisable only by the Participant. 12. RIGHT OF REFUSAL. Until such time as the Shares are first registered under Section 12(g) of the Exchange Act, the Company shall have the right of first refusal with respect to any proposed disposition by a Participant (or any successor in interest) of any Shares sold pursuant to a Restricted Stock Award or issued as a Stock Bonus. Such right of first refusal shall be exercisable in accordance with the terms established by the Board and set forth in the Award Agreement evidencing such Restricted Stock Award or Stock Bonus. 13. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Board may deem 7 8 necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted. 14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's Shares, the Board may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Board, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Board may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of the Participant's obligation to the Company under the promissory note; provided, however, that the Board may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, the Participant will be required to execute and deliver a written pledge agreement in such form as the Board will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid. 15. EXCHANGE AND BUYOUT OF AWARDS. The Board may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Board may at any time buy from a Participant an Award previously granted with payment in cash, Shares (including Restricted Stock) or other consideration, based on such terms and conditions as the Board and the Participant may agree. 16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so. 17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Subsidiary of the Company or limit in any way the right of the Company or any Subsidiary of the Company to terminate a Participant's employment or other relationship at any time, with or without cause. 18. CORPORATE TRANSACTIONS. 18.1 Change in Control. Notwithstanding any other provision of the Plan, in the event of a "Change in Control" as hereinafter defined, and as part of the Change in Control a Participant's employment is terminated in fact or as a result of a "Constructive Termination" as hereinafter defined, each outstanding Option will become exercisable in full. A "Change in Control" shall be deemed to have occurred if: 8 9 (a) any "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than (i) the Company, (ii) any subsidiary of the Company, (iii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or of any subsidiary of the Company, or (iv) any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Section 13(d) of the Exchange Act), together with all Affiliates and Associates (as such terms are used in Rule 12b-2 of the General Rules and Regulations under the Exchange Act) of such person, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (b) the stockholders of the Company approve a merger or consolidation of the Company with any other company, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 51% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (c) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. A "Constructive Termination" shall be deemed to have occurred if: 11. A reduction in base salary below current level. 12. Any material change to the duties and responsibilities of the Participant's position as described in the employment Agreement or other documentation regarding the Participant's duties and responsibilities as an employee absent the Employee's written consent, or removal from such position prior to the termination of the employment agreement absent the Employee's written consent. 13. A change of more than forty (40) miles in the office or location where the Employee is based, provided that a change in the Employee's office location prior to a Change of Control which is directly caused by the relocation of the Company's headquarters office from its present address of 15901 Red Hill Avenue, Suite 100, Tustin, CA 92780 must be more than fifty (50) miles from that address, in order to constitute an event of Constructive Termination. In the event of a merger or consolidation in which the Company is not the surviving corporation or which results in the acquisition of substantially all the Company's outstanding stock by a single person or entity or by a group of persons or entities acting in concert, or in the event of sale or transfer of all or substantially all of the Company's assets (a "covered transaction"), all outstanding Options may be terminated by the Board as of the effective date of the covered transaction, subject to the following: If the covered transaction follows a Change in Control or would give rise to a Change in Control, no Option will be terminated (without the consent of the optionee) prior to the expiration of 20 days following the later of (i) the date on which the Option became fully exercisable and (ii) the date on which the Optionee received written notice of the covered transaction. 18.2 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award under this Plan in substitution of such other company's award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature 9 10 of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assume an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 19. ADOPTION AND STOCKHOLDER APPROVAL. This Plan will become effective on the date on which the Plan is adopted by the Board. This Plan shall be approved by the stockholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the Board. Upon the Effective Date, the Board may grant Awards pursuant to this Plan; provided, however, that: (a) no Option may be exercised prior to initial stockholder approval of this Plan; and (b) no Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board will be exercised prior to the time such increase has been approved by the stockholders of the Company. In the event that initial stockholder approval is not obtained within the time period provided herein, all Awards granted hereunder shall be cancelled, any Shares issued pursuant to any Awards shall be cancelled and any purchase of Shares issued hereunder shall be rescinded. Further, in the event that stockholder approval of an increase in the number of Shares subject to the Plan is not obtained within the time period provided herein, all Awards granted pursuant to such increase will be cancelled, any Shares issued pursuant to any Award granted pursuant to such increase will be cancelled, and any purchase of Shares pursuant to such increase will be rescinded. 20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided herein, this Plan will terminate ten (10) years from the date this Plan is adopted by the Board or, if earlier, the date of stockholder approval. This Plan and all agreements thereunder shall be governed by and construed in accordance with the laws of the State of California. 21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any manner that requires such stockholder approval. 22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board, the submission of this Plan to the stockholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 23. DEFINITIONS. As used in this Plan, the following terms will have the following meanings: "AWARD" means any award under this Plan, including any Option, Restricted Stock or Stock Bonus. "AWARD AGREEMENT" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "BOARD" means the Board of Directors of the Company. "CAUSE" means the commission of an act of theft, embezzlement, fraud, dishonesty or a breach of fiduciary duty to the Company or a Subsidiary of the Company. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the Compensation Committee of the Board. 10 11 "COMPANY" means Commonwealth Energy Corporation or any successor corporation. "DISABILITY" means a disability, whether temporary or permanent, partial or total, as determined by the Board. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXERCISE PRICE" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. "FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in The Wall Street Journal; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal; (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal; or (d) if none of the foregoing is applicable, by the Board in good faith. "INSIDER" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act. "OPTION" means an award of an option to purchase Shares (which consist of Restricted Stock) pursuant to Section 5. "PARTICIPANT" means a person who receives an Award under this Plan. "PERFORMANCE FACTORS" means the factors selected by the Board from among the following measures to determine whether the performance goals established by the Board and applicable to Awards have been satisfied: (a) Net revenue and/or net revenue growth; (b) Earnings before income taxes and amortization and/or earnings before income taxes and amortization growth; (c) Operating income and/or operating income growth; (d) Net income and/or net income growth; (e) Earnings per share and/or earnings per share growth; (f) Total stockholder return and/or total stockholder return growth; (g) Return on equity; 11 12 (h) Operating cash flow return on income; (i) Adjusted operating cash flow return on income; (j) Economic value added; and (k) Individual confidential business objectives. "PLAN" means this Commonwealth Energy Corporation Equity Incentive Plan, as amended from time to time. "RESTRICTED STOCK" means Shares that are subject to the restrictions described in Section 6.3. "RESTRICTED STOCK AWARD" means an award of Shares pursuant to Section 6. "RESTRICTION PERIOD" means the period of service determined by the Board, not to exceed five years, during which years of service or performance are to be measured for Restricted Stock Awards or Stock Bonuses. "SEC" means the Securities and Exchange Commission. "SHARES" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any successor security. "STOCK BONUS" means an award of Shares, or cash in lieu of Shares, pursuant to Section 7. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "TERMINATION" or "TERMINATED" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, officer, director, consultant, independent contractor, or advisor to the Company or a Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Board, provided, that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave of absence, the Board may make such provisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Option agreement. The Board will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "Termination Date"). "UNVESTED SHARES" means "Unvested Shares" as defined in the Award Agreement. "VESTED SHARES" means "Vested Shares" as defined in the Award Agreement. 12 EX-21.1 22 a74807gex21-1.txt EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT The following entities are wholly-owned subsidiaries of Commonwealth Energy Corporation: 14. electricAmerica, Inc., a Delaware corporation formed November 10, 1999. 15. UtiliHost, Inc., a Delaware corporation formed January 22, 2000. 16. electric.com, Inc., a Delaware corporation formed January 12, 2000. -----END PRIVACY-ENHANCED MESSAGE-----