Form 10-K

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days: Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Paragraph 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

As of October 18, 2002, 27,334,032 shares of the registrant’s common stock were outstanding. There was no market for the registrant’s shares at such date.

A number of the matters and subject areas discussed in this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, reflecting management’s current expectations. The discussion of such matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may differ materially from our actual future experience involving any one or more of such matters and subject areas. We wish to caution readers that all statements other than statements of historical fact included in this Annual Report on Form 10-K regarding our financial position and strategy may constitute forward-looking statements. For example, statements herein relating to expansion opportunities for our subsidiaries, extension of our business model to new markets and industries, demand in the market for UtiliHost^TM services, completion of acquisitions of certain assets, growth of retail energy operations and demand for retail energy outsourcing and back office solutions are all forward-looking statements . 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. All of these forward-looking statements are based upon estimates and assumptions made by our management, which although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed on such estimates and statements. No assurance can be given that any of such estimates or statements will be realized and it is likely that actual results will differ materially from those contemplated by such forward-looking statements. Factors that may cause such differences include: (a) regulatory changes in the states in which we operate that could adversely affect our operations; (b) our continued ability to obtain and maintain licenses from the states in which we operate; (c) the competitive restructuring of retail marketing may prevent us from selling electricity in certain states; (d) our dependence upon a limited number of third parties to (i) generate and supply to us electricity and (ii) delay performance of, or fail to perform, their contracts with us; and (e) our dependence upon a limited number of utilities to (i) transmit and distribute the electricity we sell to our customers and (ii) delay performance of, or fail to perform, their contracts with us. We have attempted to identify, in context, certain of the factors that we currently believe may cause actual future experience and results to differ from our current expectations regarding the relevant matter of subject area. In addition to the items specifically discussed above, our business and results of operations are subject to the rules and uncertainties described under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results” contained herein; however, the operations and results of our business also may be subject to the effect of other risks and uncertainties. Such risks and uncertainties include, but are not limited to, items described from time to time in our reports filed with the Securities and Exchange Commission. We assume no obligation to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information.

Commonwealth Energy Corporation (“Commonwealth”) is a provider of retail electric power to residential, commercial, industrial and governmental customers in the deregulated California, Michigan and Pennsylvania electricity markets. We are licensed by the Federal Energy Regulatory Commission (“FERC”) as a power marketer and we are licensed to supply retail electric power by applicable state agencies in California, Pennsylvania, Michigan, New Jersey, New York, Texas and Ohio.

Commonwealth does not have its own electricity generation facilities. The power we sell to our customers is purchased from third party power generators. The electric power sold by the Company to its retail customers is delivered to the Company’s customers by incumbent electric utilities. The incumbent electric utilities measure electric power usage by the Company’s customers and bill most of the Company’s customers on behalf of the Company. The Company plans to enter new deregulated electric power markets and to offer a variety of other energy-related products and services in the future. Commonwealth also sells electric power to wholesale customers in California and Pennsylvania. We use our best efforts to sell the surplus electric power unused by our retail customers to wholesale trading partners, as remaining electric power cannot be stored and will be wasted if not sold.

Commonwealth Energy Corporation has three wholly-owned subsidiaries: electricAmerica, Inc., UtiliHost, Inc. and electric.com, Inc. Each of these subsidiaries is incorporated in the State of Delaware, but as of yet, none of them is operational. We also have made an investment in Summit Energy Ventures, LLC (“Summit”), a joint venture. The consolidated financial statements of the Company include the accounts of Summit and the Company’s wholly-owned subsidiaries. Commonwealth Energy Corporation was incorporated in California on August 15, 1997.

As used in this Report, the terms “we,” “us,” “our,” “the Company” and “Commonwealth” refer to Commonwealth Energy Corporation and its wholly-owned subsidiaries.

Prior to the inception of electricity deregulation in 1998, the retail electric service industry was controlled almost exclusively by utilities. Presently, twenty-four states and the District of Columbia have either enacted enabling legislation or issued a regulatory order to implement retail access. The local utility typically continues to provide transmission and distribution (delivery of energy) services. Retail access allows customers to choose their own supplier of generation energy services, but each state’s retail access schedule varies according to the legislative mandates or regulatory orders.

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.

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. Retail electricity suppliers use this established electricity network for the delivery of energy to their customers. The utility company is paid a fee for use of its wires. Fees paid to established utility companies for use of their infrastructure are collected by the respective independent system operator (“ISO”) or regional transmission organization (“RTO”) for a specific region or state. The ISO or RTO ensures 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, and typically run 5% to 10% of prevailing wholesale electricity market prices.

In addition to this basic service, some states allow the utility company to take on additional responsibilities, such as reading meters, generating bills to customers, collecting bills and taking requests for service

On September 20, 2001, the California Public Utilities Commission (the “CPUC”) issued a ruling suspending “direct access.” “Direct access” refers to the right of retail electricity suppliers like the Company to actively seek new customers in California from incumbent utilities or other electricity service providers. This ruling permits retail electricity suppliers to keep their current customer bases, but prohibits the Company from signing up new non-direct access customers for an undetermined period of time.

Electric service providers procure inventory of power to deliver to retail customers from a variety of wholesale power producers, either through long term bi-lateral contracts with the generators or from the Independent System Operator on a short term basis. The power inventory obtained from the ISO is purchased and sold by the ISO to balance the market and make sure each corresponding sale of electricity is matched to a buyer of electricity. The function of the ISO is to provide system reliability to the market.

Our business activities are comprised primarily of providing retail electricity services. Commencing in August 2001, we expanded our business offerings to include wholesale power sales. The following table shows, for the periods indicated, the percentage of our sales contributed by our principal products and services for the years ended July 31, 2000, 2001 and 2002.

We sell electric power to retail and commercial end-user customers. This electric power is delivered to our customers by the incumbent utility distribution companies (“UDCs”) or electric distribution companies (“EDCs”) depending upon the jurisdiction. They measure electric power usage and bill most of our customers on our behalf. Three UDCs in California, one EDC in Pennsylvania and one UDC in Michigan conduct these activities on our behalf. In California, Pennsylvania and Michigan, the utility companies currently assist us with a portion of the preparation, mailing and collection of our bills to end-use customers. In addition, the utility companies are invoicing and collecting the charges and fees owed by us to them associated with those services as well as the right to use the distribution network.

We offer electric 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.

Due to the variable electricity usage patterns of our retail customers, we may hold “long” or “short” energy positions. A “long” position occurs when we have committed to purchase through long-term contracts more electricity than our customers need and a short position occurs when our customers’ needs exceed the amount of electricity we have committed to purchase through long-term contracts. In both situations, we utilize the wholesale electricity market to sell excess energy when we are “long” and buy additional electricity when we are “short.” In order to better manage and schedule our energy load and our wholesale power purchases, we have established a trading desk that buys and sells our electricity in various regional markets. Excess energy is sold to wholesale entities short on supply, while additional energy is procured from time to time when required to supply our customers’ usage.

Purchases and sales in the wholesale market 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, when

demand and usage are highest. Weather, generation capacity, transmission, distribution and other market issues also are significant factors in determining our wholesale procurement and sale strategies. 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 cannot be stored, effective management of our electricity supply and demand is crucial to wholesale and retail market profitability.

In July 2001, we formed Summit Ventures, LLC (“Summit”), a joint venture with Steven Strasser. Summit was formed to enable Commonwealth to diversify our business by making investments in companies that manufacture products that conserve or manage electricity. Commonwealth made the initial capital contribution of $15 million into Summit, which to date represents the entire capital contribution to Summit. For purposes of financial reporting, the consolidated financial statements of the Company include the accounts of Summit as well as those of the Company’s wholly-owned subsidiaries.

To date, Summit has invested a total of approximately $7.5 million in three companies:


	•	Envenergy, Inc. — Envenergy is a developer of software and hardware for energy and facility management. Envenergy’s products provide the infrastructure to collect information from separate facility systems (e.g., building automation, energy, lighting, access control, metering) and assimilate this raw data into useful information from which energy service companies, facility management providers, equipment and building automation system manufacturers and utilities can assess energy usage and costs. Summit currently owns approximately 8.7% of Envenergy.

	•	Turbocor, LLC — Turbocor, LLC owns 51% of Turbocor, B.V., which, in turn owns 58% of Turbocor, Inc. Turbocor, Inc. manufactures energy-efficient compressors, which features a drive shaft that floats in a magnetic field, for commercial heating, ventilating, air conditioning and refrigeration applications. Summit currently owns approximately 21.2% of Turbocor, LLC., which represents a 6.2% indirect interest in Turbocor, Inc.

	•	Power Efficiency Corporation — Power Efficiency Company designs, develops, assembles and markets its own branded solid state electronic products, called “Performance Controllers” that reduce energy consumption in alternating current (AC) induction motors. Summit currently owns approximately 28.0% of Power Efficiency Corporation.

Our joint venture partner in Summit, Steven Strasser, is the president and sole shareholder in Northwest Power Management (“NPM”), the investment manager of Summit. NPM is responsible for managing the funds that we have invested in Summit. All investments must be approved by Summit’s investment committee, which is comprised of three individuals, all of whom are appointed by Commonwealth. NPM manages the investment until such time as a decision to sell is made. When a sale of an investment to a third-party buyer is proposed, we have the option to buy out Summit’s interest in a specific investment on the same terms as the third-party buyer. We pay an annual management fee of $700,000 to the investment manager.

Commonwealth owns 100% of the preferred membership interest of Summit and 60% of the common membership interest. Steven Strasser owns the other 40% of the Common Membership Interest. Our preferred membership interest entitles us to a distribution preference equal to all of our initial invested capital plus an annual 10% preferred return before any funds are distributed to the holders of the common membership interests; net losses are allocated per capital contribution. In addition, Commonwealth, as the preferred member, has a right of first refusal in the event of any issuance’s of new members interests and the right to purchase any of the investments acquired by Summit at any time during the agreement on terms mutually agreeable to both the investment manager and us.

We have developed software to better manage our electric service customers. TACT^TM (Trans-Action Control Technology) and TRIUMPH^TM (Total Resource Internet Utility Management Power Host) are proprietary software products that we have developed to provide services and manage back office processes.

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. By developing the TRIUMPH system in-house, we have not had to acquire and pay for these services from a third party. We commenced efforts to market our managed back office services to third parties in February 2001 through direct mail, print media and Internet advertising, primarily in deregulated energy markets. We have formed a wholly-owned subsidiary, UtiliHost, Inc., which we plan to use to manage client-related back office processes for third parties, such as municipalities, energy generators and other electric service providers. To date, UtiliHost, Inc. has not generated any revenues from third parties.

We are working to broaden the scope of the energy related services we provide to include energy efficient products, energy management programs and load aggregation. Each of these services are in the development stage and, as yet, have not begun to contribute materially to our financial results.

Load aggregation is the process of combining customers with different electricity usage patterns into a portfolio of customers that can be serviced by our purchases of electric supply. We are currently discussing with several generators and utilities a comprehensive solution for cities and major commercial and industrial customers to meet their energy demands. We are able to assist cities to become municipal utilities or by providing them with all required energy procurement, energy management, customer service and back-office services. We also can provide similar services for major commercial and industrial customers to meet their electricity demand requirements. This program will allow us the opportunity to take a diversified approach to aggregating customers to sell them electricity and bill them through UtiliHost^TM. While we are currently discussing this program with several cities, to date, we have not entered into any contracts to provide load aggregation services.

We sell energy efficient and emergency preparedness products, such as energy management controllers, compact fluorescent lamps, natural gas shut-off valves and other similar devices. These products are targeted to residential, commercial, industrial and governmental customers. We fulfill orders for products and ship most of these products through our warehouse, but some are fulfilled and delivered from the manufacturers or distributors. In either case, we collect payment from our customers and are compensated for order processing and procurement; however, in the case of orders fulfilled and shipped by the manufacturers or distributors, we do not retain payment for shipping costs. All deliveries of products are made only after payment by check or credit card is made from our customers.

Energy management programs consist of energy curtailment programs and distributed generation programs. Energy curtailment programs permit short-term curtailment or cessation of electric service at the discretion of the distributing company under certain circumstances, as specified in the service contract. These programs provide a win-win proposition for our customers and for us by creating a financial incentive for our customers to lower their electrical usage during certain times of the day. In connection with the reduction in energy usage by our customers, we also benefit because we are able to avoid the purchase of expensive power from other suppliers to meet our customers’ excess energy needs. The resulting savings from these energy management programs are 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. The availability of curtailment programs is dependent upon the initiatives set by the ISO and/or the local distribution company. We are presently not involved in any energy curtailment programs; however, we plan to offer this service in the future if ISOs and/or local distribution companies continue these programs.

Distributed generation programs provide customers that have uninterruptible power requirement with on-site electric power generation. We offer to our customers the service of formulating reliable custom energy solutions by equipping them with an alternative, cost-effective source for electricity for seasonal or peak demand power. While we have offered these programs, to date, we have not installed any systems and these programs have not generated any revenues.

We began providing electric service in April 1998 as one of more than 300 licensed electric service providers (“ESPs”) in the state of California by aggregating customers using our call center. As our customer base grew, we began to develop software solutions 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 customers. We expanded our retail electricity services to end users in Pennsylvania in January, 2000 and in Michigan in August 2002. We also established a new tradename, “electricAmerica,” which we use in all markets in which we supply retail electric power, and began aggregating residential, commercial, industrial and governmental customers using our call center. Currently, we sell electric power to approximately 54,000 retail end-use customers in California, approximately 34,000 retail end-use customers in Pennsylvania. and approximately 200 retail customers in Michigan.

In August 2002, we began servicing commercial and industrial customers in the Detroit Edison service territory of Michigan. We also established a sales office in the Detroit area.

From time-to-time, we have purchased more electricity under our bilateral contracts with wholesale producers than is required by our retail customers. When this occurs, we sell our excess inventory of electricity to the local independent system operator, who matches our sale with a purchaser in need of excess electricity.

To procure a supply of electricity for our retail electric service sales, we purchase electricity from third-party generators pursuant to a combination of long-term and short-term wholesale contracts and, prior to fiscal 2001, by spot purchases on regional power exchanges. During the four fiscal year period ending July 31, 2002, as a percentage of total electricity purchased, the amount of electricity that we purchased on the spot market has significantly declined from 84.3% in fiscal 1999 to 1.2% in fiscal 2002. This decline is the result of our entering into long-term and short-term contracts with wholesale power providers.

Historically, the majority of our sales have come from the resale of electricity in California purchased under a contract with Calpine Power Services Company that expired in June 2002. During fiscal 2002, this contract accounted for 46% of the total energy supplied by us and comprised 52% of our revenue. This contract was not capable of renewal on terms as favorable to us as those contained in the original agreement. Beginning in July 2002, we have been purchasing electricity under two new contracts, one with Transalta Energy Marketing, Inc. and one with Reliant Energy Services, Inc. To the extent necessary, we continue to purchase electricity in the spot market from time-to-time in California.

In Pennsylvania, we obtain most of the electricity we sell pursuant to two long-term contracts with Exelon Energy Services. Under those contracts, approximately 50% of our electricity supplied by Exelon is produced by an environmentally-friendly hydroelectric generation facility. To the extent necessary, we also purchase electricity in the spot market from time-to-time in Pennsylvania.

In Michigan, we obtain most of our wholesale power from DTE Energy Trading, pursuant to a long-term contract.

The California marketplace has evolved from a market driven, minute by minute trading forum, operated by the now bankrupt California Power Exchange, to a system which requires parties to obtain more of their power through the use of forward or advance purchase contracts. Power purchases are facilitated by the California Independent System Operator (“CAISO”), a market oversight body. CAISO is responsible for ensuring that all electricity put into the grid has a corresponding exit from the grid and for maintaining system reliability. This matching of power transactions is accomplished in a constant sequence of 15 minute

increments. The Pennsylvania marketplace is governed by a similar structure called the PJM interconnection (“PJM”). The PJM is responsible for matching all power transactions among market participants and ensuring system reliability. The Michigan market is governed by a similar structure called the Michigan Independent System Operator.

The price of electricity can fluctuate significantly. In an attempt to manage this risk, we enter into longer term wholesale power purchase agreements which allows us to purchase fixed daily quantities of electricity at fixed prices.

During certain times and market conditions, such as when the supply of electricity is scarce, the wholesale price of electricity increases and allows us to resell the electricity that we purchased in excess of the amount needed to supply retail and commercial end-use customers, at higher prices to wholesale customers. This condition occurred in California during the summer of 2000 through the winter of 2001. Because of a number of circumstances existing at the time, including weather, market design and conditions and scarcity of supply, we were able to sell electricity into the wholesale market during this period for amounts far in excess of the price at which we purchased the electricity. This allowed us to obtain unusually high revenues and margins for that period. We do not expect this trend to continue and expect that California’s response to the energy crisis of the summer of 2000 through the winter of 2001 will prevent these conditions from recurring in the future.

We market supplies of electricity to end-user customers in the states of California, Pennsylvania and Michigan as “electricAmerica” through multiple channels. We acquire the vast majority of our customers through our in-house telemarketing group which handles inbound calls from customers and makes outbound calls to targeted customers. We have separated our sales employees into two units. We refer to the larger group as our “call center.” Our call center group is responsible for procuring orders from residential or small commercial customers. All customers acquired by the call center agree to our terms of service through a third party voice log system. This sign-up device simplifies the switching process for these customers and shortens the sales cycle.

Our smaller group of telemarketers, which we refer to as “C&I Sales,” is responsible for targeting medium and large commercial, industrial and governmental customers through telephone solicitation as well as face to face meetings. Customers acquired by the C&I Sales group enter into individualized written contracts. For this reason, the sales cycle is typically longer because each agreement is usually customized to meet the customer’s needs. The C&I Sales group also works with third party energy consultants or energy service companies which manage the energy expenses for large commercial and industrial companies to acquire customers.

We also use our electricAmerica website, www.electricAmerica.com, as a tool to help acquire customers. The website provides customers with detailed electric supply information in each territory that we serve and enables customers to complete forms online, send us e-mails or find our toll-free telephone number, 1-800-ELECTRIC.

In California, due to the suspension of direct access on September 20, 2001, we are not allowed to acquire customers that were not with a direct access provider as of that date. This impaired our ability to locate and acquire customers, especially residential and small commercial customers in California. The suspension of direct access in California has impaired the C&I Sales group to a lesser degree because they have been able to acquire a few large customers from other direct access providers. Because the size of the market for potential customers was severely reduced by the suspension of direct access, we implemented a direct mail customer retention program to prevent customer attrition, reinforcing the reasons that our customers originally chose us as their source for electricity.

Our business prospects depend upon our ability to identify and enter into favorable energy markets and to achieve sufficient customer scale to create a profitable operating cost structure. Currently, 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.electricAmerica.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.

	•	Offering additional products and services to our customers, such as energy efficiency and emergency-preparedness products.

	•	Positioning UtiliHost^TM to be a source for our clients to outsource their energy related customer service management.

We believe that as retail energy markets are opened to new participants and new services, competition will be intense in the markets where frameworks for deregulation create attractive opportunities for new entrants. In general, we believe our principal competitor in each market will be the incumbent utility in that market or its unregulated affiliate. Incumbent utilities may have informational advantages, high name recognition in their traditional service territory and long-established customer relationships. In addition to the utilities and their affiliates, we may face competition from a number of other energy service providers, including start-up companies focusing on Internet marketing and online service, other energy industry participants, and possibly other consumer-oriented service providers, any of whom may develop businesses that will compete with us, both in specific markets and nationally. Some of these competitors may be larger and better capitalized than we are.

We generally compete for customers on the basis of price or by delivering more environmentally friendly (not derived from fossil-fuel sources) electricity than our competitors.

We face competition in selling energy efficient and emergency preparedness products from many sources, including traditional hardware retailers and online energy product retailers.

We face competition in managing back office services from application service providers, outsourcing vendors, utility billing vendors and large enterprise-wide software and systems integrators.

Our revenues and operation margin are subject to fluctuations during the year; primarily due to the impact certain seasonal factors have on sales volumes and the wholesale prices of electricity. Electricity sales volumes and operating margins have been historically higher in the summer months than in the fall and spring months, reflecting increased demand due to increased cooling requirements and higher electricity sales tariffs rates. Additionally, electricity sales volumes and operating margins are modestly higher in the winter months than in the fall and spring months, due to increased demand for heating and lighting requirements.

We are subject to regulation by various federal, state and local governmental agencies. Our wholesale trading and marketing operations are subject to the jurisdiction of the Federal Energy Regulatory Commission (“FERC”) under the Federal Power Act. We make sales of electricity commerce at wholesale transactions

pursuant to a Power Marketer certificate issued by FERC. While FERC does not generally regulate the rates, terms or conditions of these electricity sales, FERC has the authority to institute proceedings to identify transactions involving rates that are not just and reasonable due to market manipulation and to reverse or unwind such transactions to ensure just and reasonable rates.

In states that have adopted deregulation, state public utility commissions (“PUCs”) have authority to license and regulate certain of the activities of electric supply retailers. Accordingly, we are subject to regulation by the PUC in each state in which we make retail sales of electric power. The requirements for licensing and the level of regulation varies from state to state. We are currently licensed by the applicable PUCs in California, Michigan, New Jersey, New York, Ohio, Pennsylvania, and Texas. These licenses permit us to sell electrical power to commercial, industrial, governmental and residential customers.

As of July 31, 2002, we employed 158 full-time employees and 3 part-time employees, including: 22 in corporate administration, 13 in corporate finance, 86 in marketing and sales, and 40 in operations. None of the Company’s employees is covered by a collective bargaining agreement or is presently represented by a labor union. The Company has not experienced any work stoppages and considers its employee relations to be good.

The Company’s strategy for protection of its trademarks is to routinely file U.S. federal and foreign trademark applications for the various word names and logos used to market its technology solutions to licensees and the general public. The duration of the U.S. and foreign registered trademarks can typically be maintained indefinitely, provided proper maintenance fees are paid and trademarks are continually used or licensed by the Company.

Our principal executive office is located in Tustin, California. This facility houses our 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 operations in Cherry Hill, New Jersey. This additional space consists of 2,265 square feet pursuant to a lease that expires on June 30, 2005.

We believe that our leased property is in good condition, is well maintained and is adequate for our current and immediately foreseeable operating needs.

On August 16, 2001, Joseph P. Saline, one of our directors, filed an action in California Superior Court for Orange County (Case No. 01CC10657) seeking the production of certain corporate documents. We filed a motion seeking to limit Mr. Saline’s ability to distribute the corporate documents he was seeking. The trial court issued an order that prohibited Mr. Saline from disclosing or discussing those documents with anyone other than his attorney and other members of our Board of Directors. We provided Mr. Saline with copies of certain corporate documents under the protection of the court order. Mr. Saline filed an appeal, seeking to reverse the restrictions on his right to disclose or discuss the documents with third parties. On July 30, 2002, the California Court of Appeals reversed the order of the Superior Court that limited Mr. Saline’s ability to disseminate the documents.

On October 29, 2001, Mr. Saline filed a civil claim against us in California Superior Court for Orange County (Case No. 01CC13887). In his complaint, Mr. Saline alleged that he is the holder of 352,000 shares of preferred stock, with two-for-one conversion and voting rights that differ with the rights set forth in the Certificate of Determination for our Series A Preferred Stock filed with the California Secretary of State. The Company answered and filed a cross-complaint for declaratory relief alleging that Mr. Saline violated federal securities laws, committed fraud and usurped a corporate opportunity in connection with certain purchases of

our securities. We also filed an answer disputing Mr. Saline’s claims. Mr. Saline filed a request for a preliminary injunction prior to the Company’s 2001 annual meeting of shareholders. On November 14, 2001, the court issued an interim court order prohibiting us from refusing to recognize that Mr. Saline owns 352,000 of our preferred stock, convertible into common stock and entitled to vote on a two-for-one basis, pending final resolution of the case. On May 15, 2002, in connection with another pending lawsuit filed by Mr. Saline and others, which is described below, we entered into a settlement agreement with the plaintiffs, pursuant to which, among other things, we agreed to submit these pending lawsuits that Mr. Saline has filed against us to professional mediation. The parties attended a mediation proceeding, but were unable to reach a settlement. We continue to vigorously defend this lawsuit. This lawsuit is still pending.

On February 23, 2001, thirteen former employees filed a lawsuit against us in the Superior Court of the State of California in the County of Orange Superior Court (case number 01CC02611). The complaint was filed by David James and twelve other former employees. The plaintiffs’ complaint alleges claims for (a) unfair business practices, (b) breach of contract, and (c) fraud and intentional deceit. The plaintiffs allege, in summary, that they were formerly employed by the Company and are owed commissions and stock options from the Company under their alleged employment agreements and based on alleged representations that were made to them in the course of their employment. The Company filed a cross-complaint against the original plaintiffs asserting claims for (a) breach of contract; (b) unfair business practices; (c) misappropriation of trade secrets; (d) intentional interference with prospective economic advantage; (e) negligent interference with prospective economic advantage; (f) conversion; (g) slander; (h) prohibitory injunctive relief; (i) mandatory injunctive relief; and (j) declaratory relief. These claims are based upon written confidentiality agreements signed by the majority of the plaintiffs which the Company believes have been breached by the plaintiffs who are alleged to be wrongfully soliciting the Company’s investors and clients utilizing proprietary company materials and information. In addition, the Company filed a first amended cross-complaint that asserts additional cross-claims against plaintiff David James for rescission and restitution, fraud, money had and received, unjust enrichment and declaratory relief. In summary, the new claims asserted against Mr. James allege that Mr. James’ alleged employment contract and stock options were void or voidable and subject to rescission based on misrepresentations made to the Company by Mr. James. The plaintiffs are seeking, among other relief, damages in the amount of up to $10 million, plus costs and attorney fees. Commonwealth believes that it has satisfied its contractual obligations with respect to the plaintiffs and that there is no factual basis for the plaintiffs’ claim for damages. Our cross-complaint seeks injunctive relief and damages. Commonwealth is vigorously defending this lawsuit.

On February 1, 2002, Joseph Saline, Kevin Biswell, Joseph O’Gundiji and Michael Doak filed a complaint in California Superior Court for Orange County against us to determine the validity of the election of the Company’s directors at the annual meeting of shareholders held in November 2001. On May 15, 2002, we entered into a confidential working settlement agreement with the plaintiffs, pursuant to which the parties agreed, among other things (a) to set the exact number of directors within the established range at seven until at least the end of the terms of the directors elected at the Company’s next annual meeting of shareholders; (b) to a set of procedures for the appointment of two new mutually acceptable directors to the Board of Directors; (c) that Mr. Saline will be entitled to receive compensation for his service as a nonemployee director; (d) that Mr. Biswell will be appointed to our advisory committee; (e) to mediate the pending lawsuits between Mr. Saline and us; and (f) to dispute resolution procedures and to the payment of costs related the disputes. On June 5, 2002, the court issued an order approving and implementing the settlement agreement. Pursuant to the procedures agreed upon in the working settlement agreement, William Popejoy and Eugene Sullivan were appointed as members of the Board of Directors on September 13, 2002.

On March 22, 2002, we filed a complaint against Mr. Saline (Case No. 02-02442, U.S. District Court Central District of California), which was amended on August 23, 2002, alleging that Mr. Saline violated federal securities laws, committed libel, committed unfair business practices and breached his fiduciary duties

in connection with his actions and statements he made in connection with the proxy contest with respect to our 2001 annual meeting of shareholders and in connection with certain purchases of our securities. We are seeking to recover damages and to recover certain preferred shares Mr. Saline claims to have purchased prior to the shareholder meeting and election.

We are currently, and from time to time may become, involved in litigation concerning claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings, including the legal proceedings described above, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position.

No matters were submitted to a vote of the Company’s stockholders during the fourth quarter of Fiscal 2002.

There is currently no established public trading market for any class of our equity securities.

As of October 18, 2002, there were approximately 2,574 holders of our Common Stock and 61 holders of our Series A Convertible Preferred Stock.

Our Series A Convertible Preferred Sock provides for cumulative dividends that accrue at a rate of 10% per annum. During fiscal 2001 and fiscal 2002, we have declared and paid cash dividends of $216,548 and $30,195, respectively, on our Series A Convertible Preferred Stock. As of July 31, 2002, accrued cumulative unpaid dividends on our Series A Convertible Preferred Stock were $137,970.

We have not declared or paid a cash dividend on our common stock, and we do not anticipate paying any cash dividend for the foreseeable future. We presently intend to retain earnings to finance future operations, expansion and capital investment.

Information concerning securities authorized for issuance under our equity compensation plans is set forth in Part III, Item 12 of this Report, under the caption “Equity Compensation Plan Information,” and that information is incorporated herein by reference.

We have sold or issued the following securities during fiscal 2002 in reliance upon the exemption from registration provided by Section 3(a)(11) of the Securities Act of 1933, as amended:


	•	In August and November 2001, we issued an aggregate of 10,000 shares of our common stock upon the exercise of employee stock options at a price per share of $0.01, receiving gross proceeds in the amount of $100 in cash.

	•	In January 2002, we issued 11,000 shares of our common stock upon the exercise of an employee stock option at a price per share of $0.05, receiving gross proceeds in the amount of $550 in cash.


	•	In January 2002, we issued 20,000 shares of our common stock upon the exercise of a director’s stock option at a price per share of $1.00, receiving gross proceeds in the amount of $20,000 in cash.

	•	In July 2002, we issued 10,961 shares of our common stock upon the exercise of an employee stock option at a price per share of $0.50, receiving gross proceeds in the amount of $5,480 in cash.

At the time of each sale, and for the most recent fiscal year immediately preceding each such sale, we were a California corporation, maintained our principal office in California, derived at least 80% of our gross revenues from operations within California, had at least 80% of our assets located in California, intended to use, and did use, at least 80% of the net proceeds from the sales of the securities in the operation of our business in California and had a reasonable basis for believing that each purchaser resided in, and was doing business in, California. In addition, none of the purchasers had given us notice of any resales of the securities to persons residing outside of California.

The following selected financial data as of and for the dates and periods indicated have been derived from our consolidated financial statements. The selected financial data with respect to the consolidated statement of operations data for the period August 15, 1997 (date of incorporation) through July 31, 1998 and each of the four years in the period ended July 31, 2002 and our consolidated balance sheet data at July 31, 1998, 1999, 2000, 2001 and 2002 set forth below are derived from audited consolidated financial statements of the Company. The consolidated financial statements as of July 31, 2001 and 2002 and for each of the three years in the period ended July 31, 2002 and the independent auditors’ report thereon, are included elsewhere herein.


	Because there is no established trading market in shares of our common stock, in each of fiscal 2001 and 2002, we valued our shares for financial reporting purposes at $3.05 per share and $1.86 per share, respectively. The stock-based compensation charges for the unvested portion of these performance-based options in fiscal 2001 was reversed in fiscal 2002.

(2)	No cash dividends have been paid on our common stock. Our convertible preferred stock provides for cumulative dividends, which accrue at the rate of 10% per annum and are payable at the discretion of our Board of Directors. Such dividends have been accrued as follows:


(3)	Per share information and weighted average shares outstanding for the period from August 15, 1997 through July 31, 1998 and for the years ended July 31, 1999 and 2000 have been restated to reflect the resolution of the status of our common stock issued to our founder as more fully disclosed in Notes 1 and 11 of the Notes to Consolidated Financial Statements included elsewhere herein.

Our primary business has been the sale of electric power to retail and commercial end-users in California and, beginning in January 2000, in Pennsylvania and the sale of electric power to wholesale customers in California and Pennsylvania. We are licensed by FERC as a power marketer and by the California, Michigan, Pennsylvania, New Jersey, New York, Texas and Ohio public utilities commissions as an electric services or electric generation supplier.

As of July 31, 2002, we delivered electricity to approximately 89,000 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.

We do not have our own electricity generation facilities. The power we sell to our customers is purchased from third-party power generators. During fiscal 2000, in both California and Pennsylvania, we purchased electricity both under long-term contracts and in the spot market. By the end of fiscal 2001 and throughout most of fiscal 2002, substantially all of our electricity was purchased under long-term contracts.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period.

The following represents a summary of our critical accounting policies, defined as those policies that we believe are: (a) the most important to the portrayal of our financial condition and results of operations, and (b) that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.


	•	Independent system operator costs — Included in direct energy costs along with electric power purchased and scheduling coordination costs are the independent system operator (“ISO”) fees. The actual ISO costs are not finalized until a settlement process by the ISO is performed of each day’s activities of all grid participants. Prior to the completion of settlement, we estimate these costs based on historical trends and preliminary settlement information. The historical trends and preliminary information may differ from actual fees resulting in the need to record additional costs.

	•	Allowance for doubtful accounts — We maintain allowances for doubtful accounts for estimated losses resulting from non-payment of customer billings. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. In addition, as a result of market conditions in California during fiscal 2001, the credit worthiness of several participants in the marketplace with whom we conduct business has deteriorated significantly. For example, PG&E, which declared bankruptcy, has withheld payments of approximately $1.1 million from their remittances to us. Although we have filed a Proof of Claim in PG&E’s bankruptcy proceedings to recover these amounts, we have established an allowance for doubtful accounts in the amount of these withholdings. If other utilities declare bankruptcy, additional allowances may be required.

	•	Unbilled receivables — Our 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 are estimated by the Company as the number of kilowatt-hours delivered times 95% of the individual Utility Purchased Energy cost as published by each individual utility for residential customers. Unbilled receivables from sales in Pennsylvania are estimated in the same manner, except using the average current customer sales price per kilowatt-hour.


	•	Legal claims — From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We regularly evaluate our exposure to threatened or pending litigation and other business contingencies and accrue for estimated losses on such matters in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” To date, we have not been affected by any litigation or other contingencies that have had, or are currently anticipated to have, a material impact on the Company’s results of operations or financial position. As additional information about current or future litigation or other contingencies becomes available, management will assess whether such information warrants the recording of additional expense relating to its contingencies. Such additional expense could potentially have a material impact on our results of operations and financial position.

We make our estimates and judgments based on, among other things, knowledge of operations, markets, historical trends and likely future changes, and when appropriate, the opinions of advisors with knowledge and experience in certain fields. However, due to the nature of certain assets and liabilities, there are risks and uncertainties associated with some of the estimates and judgments which are required to be made. Actual results could differ from these estimates under different assumptions or conditions.

Electricity sales to retail and commercial end-users decreased by $3.0 million, or 3.0%, to $97.0 million for fiscal 2002 from $100 million for fiscal 2001. The decrease resulted primarily from a decrease in California electricity retail sales, partially offset by an increase in Pennsylvania electricity retail sales. The decrease in California electricity retail sales was due primarily to a drop in retail energy prices. The average retail price per kWh in California during fiscal 2002 was $.085, as compared to $.145 during fiscal 2001. Total kilowatt-hours of electricity billed in California during fiscal 2002 was 775.6 million compared to 563.4 million billed in the prior year. The year-to-year increase in kilowatt-hours billed in California was due to an increase in commercial end-users that the Company began servicing in October 2001. The average retail price per kWh in Pennsylvania during fiscal 2002 was $.058 compared to $.05 during fiscal 2001. Total kilowatt-hours of electricity billed in Pennsylvania during fiscal 2002 was 468.9 million compared to 378.6 million billed in the prior year. The year-to-year increase in kilowatt-hours billed in Pennsylvania was due to an increase in commercial end-users that the Company began servicing in June 2002.

On September 20, 2001, the CPUC issued a ruling suspending “direct access” pursuant to legislation by the California state legislature requiring the CPUC to suspend “direct access” in California. The suspension of “direct access” means that retail electricity suppliers, such as the Company, will not be allowed to actively seek customers. This ruling permits the Company to keep its current customer base, but prohibits the Company from signing up new non direct access customers for an undetermined period of time. During June through September 2001, we entered into new long-term electric service agreements with several large commercial and industrial customers in California. The contracts were all completed prior to the September 20, 2001 CPUC ruling to suspend “direct access.” Based on the historical consumption data of these commercial and industrial customers, we expect these new contracts to add approximately 600 million kWhs annually at sales contract rates in the aggregate of $.089 per kWh. Delivery to these customers began in October 2001 and all the new customer meters were on-line by January 2002. Revenues related to these contracts was $14.9 million for fiscal 2002.

At July 31, 2002, we have approximately 89,000 customers compared to approximately 88,000 customers at July 31, 2001.

Wholesale electricity sales decreased by $60.6 million, or 76.3%, to $18.8 million during fiscal 2002 from $79.3 million during fiscal 2001. The decrease was primarily due to a decrease in California wholesale energy

sales, partially offset by an increase in Pennsylvania wholesale electricity sales. The year-to-year decrease in wholesale energy sales was attributable primarily to the decrease in wholesale energy prices during fiscal 2002, partially offset by an increase in total kilowatt-hours of wholesale energy sold. Total kilowatt-hours of wholesale electricity sold in California was 313.8 million in fiscal 2002 compared to 404.7 million in fiscal 2001. Total kilowatt-hours of wholesale electricity sold in Pennsylvania was 463.2 million in fiscal 2002 compared to 268.3 million in fiscal 2001. The average wholesale price per kWh in California during fiscal 2002 was $.02 compared to $.17 during fiscal 2001. The average wholesale price per kWh in Pennsylvania during fiscal 2002 was $.02 compared to $.03 during fiscal 2001. The decrease in California wholesale energy kWh sales in fiscal 2002 is attributable to increasing our commercial and industrial customer base which reduced the excess kWhs that had to be sold in the wholesale market. The increase in Pennsylvania wholesale energy kWh sales in fiscal 2002 was the result of excess kWhs acquired under a fixed quantity energy purchase contract entered into to cover summer demand. Cooler than expected weather in Pennsylvania during August and September and warmer winter months resulted in an increase in excess energy that was sold in the wholesale energy market.

Green power credit revenue decreased by $1.9 million, or 48.5%, to $2.1 million during fiscal 2002 from $4.0 million during fiscal 2001. The green power credit decrease is due to the expiration of the green power credit program in December 2001. The California legislature has approved the continuation of the program beginning January 1, 2003.

Direct energy costs increased to $86.2 million for fiscal 2002, an increase of $9.6 million, or 12.5%, from $76.6 million for fiscal 2001. This increase is a result of increased direct energy costs in Pennsylvania during fiscal 2002, partially offset by decreased direct energy costs in California. The increase in direct energy costs in Pennsylvania was due to an increase in total kilowatt-hours purchased resulting from the need to service new retail customers. Total kilowatt-hours purchased in Pennsylvania during fiscal 2002 was 992.9 million, at an average price of $.04 per kWh, compared to purchases made during fiscal 2001 of 662.5 million at an average price of $.04 per kWh. The decrease in direct energy costs in California resulted from a decrease in the price per kWh in California, partially offset by an increase in the number of kWh purchased. Total kilowatt-hours purchased in California during fiscal 2002 was 1.2 billion at an average price of $.03 per kWh compared to purchases during fiscal 2001 of 980.1 million kilowatt-hours at an average price of $.04 per kWh. A decrease in scheduling costs to deliver energy to our customers also contributed to the decrease in direct energy costs for California. California scheduling costs decreased to $.1 million for fiscal 2002 from $4.6 million for fiscal 2001. California’s reduced scheduling costs were a result of credits for direct energy costs.

Selling and marketing expenses decreased $0.1 million, or 2.4%, to $3.5 million for fiscal 2002 from $3.6 million for fiscal 2001. The decrease is due primarily to a decrease in payroll of $0.2 million offset by an increase in consulting expenses of $0.1 million. The decrease in payroll expenses was the result of call center attrition. The increase in consulting expenses was the result of market research for our expansion into other states.

General and administrative expenses decreased $0.9 million, or 4.2%, to $20.3 million for fiscal 2002 from $21.2 million for fiscal 2001. The decrease is due to decreases in legal expenses, consulting expenses and bad debt expenses, partially offset by increases in payroll expenses, management fees for Summit Energy Ventures LLC (“Summit”), Pennsylvania gross receipts tax and depreciation expenses. The decrease in legal expenses is due to the higher expenses in fiscal 2001 related to the settlement with our founder which are not present in fiscal 2002. The increase in payroll expenses is due to the hiring of software development employees who were formerly consultants to the Company and bonuses paid in excess of the bonus accrual. Summit management

fees are an additional expense in fiscal 2002. The increase in Pennsylvania gross receipts tax is a result of higher retail sales in Pennsylvania in fiscal 2002 compared to fiscal 2001. The increase in depreciation expense is the result of fiscal 2002 software development costs of the TRIUMPH system.

Stock-based compensation charges decreased by $1.8 million, or 94.4%, to $(0.7) million for fiscal 2002 from $1.1 million for fiscal 2001. The decrease is due to the reversal of stock-based compensation related to unvested variable stock options due to the decrease in value of our Common Stock in fiscal 2002.

Interest income decreased by $0.7 million, or 42.5%, to $0.9 million for fiscal 2002 from $1.6 million for fiscal 2001. The decrease is attributable to the decrease in cash flow available for investments provided from operations, partially offset by the reduction in interest expense due to the termination of our line of credit during fiscal 2002. The average interest rate during fiscal 2002 was 2.02% compared to 4.62% during fiscal 2001. The average balance earning interest during fiscal 2002 was $47.1 million compared to $48.9 million during fiscal 2001.

The provision for income taxes decreased by $17.7 million, or 81.1%, to $4.1 million for fiscal 2002 from $21.9 million during fiscal 2001. The decrease is due primarily to the lower net taxable income in fiscal 2002 compared to fiscal 2001.

Net income decreased by $55.4 million, or 91.5%, to $5.2 million for fiscal 2002 from $60.5 million for fiscal 2001. This decrease in net income is primarily attributable to a decrease in gross margin, partially offset by the decrease in provision for income taxes and stock-based compensation charges. The principal reason for the decrease in gross margin was the significant decrease in California electricity wholesale and retail prices. The average wholesale electricity price in California during fiscal 2002 was $.02 per kWh compared to $.17 per kWh during fiscal 2001. The average California retail electricity price was $.085 per kWh compared to $.145 per kWh during fiscal 2001. Fiscal 2002 prices are in alignment with historical prices. Fiscal 2001 prices were abnormally high as a result of the energy crisis during that period.

Electricity sales to retail and commercial end-users increased by $12.7 million, or 14.5%, to $100.0 million for fiscal 2001 from $87.3 million for fiscal 2000. The increase resulted primarily from an increase in Pennsylvania electricity retail sales, partially offset by a decrease in California electricity retail sales. The increased Pennsylvania retail sales were attributable to having a full year of electricity sales in fiscal 2001 compared to seven months of sales in the comparable period of 2000. The average retail price per kWh in Pennsylvania during fiscal 2001 was $.052 compared to $.0475 during fiscal 2000. Total kilowatt-hours of electricity billed in Pennsylvania during 2001 was 378.6 million compared to 3.2 million in the prior year. The decreased California retail sales were attributable to a reduction in kilowatt-hours billed in California resulting from the commercial and industrial customers that were returned to their incumbent utilities during June and July 2000 because their energy consumption requirements would have created significant credit exposure for us. Many of the customers that we returned to their incumbent utility used the majority of their energy during peak hours which required us to purchase electricity in the spot market during the portions of the day when it was most expensive, often at a price in excess of our selling price. The return of these customers to their incumbent utilities enabled us to bring our electricity supply requirements in California at or below the quantity of electricity that we had secured under our long-term purchase contract and reduced the average amount we paid for electricity by approximately $.01 per kWh for fiscal 2001 as compared to fiscal 2000. Total

kilowatt-hours of electricity billed in California during 2001 was 563.4 million compared to 1.7 billion billed in the prior year. The decrease in kilowatt-hours billed was partially offset by an increase in retail electricity prices. The average retail price per kWh in California during fiscal 2001 was $.145 compared to $.0501 during fiscal 2000. At July 31, 2001, we had approximately 88,000 customers compared to approximately 81,000 customers at July 31, 2000.

Wholesale electricity sales commenced in fiscal 2001. The $79.3 million wholesale sales revenue consisted of California sales of $70.7 million and Pennsylvania sales of $8.6 million. Our major California wholesale customer during 2001 was the State of California Department of Water Resources and Power. Our other significant wholesale customers included Sempra Energy and San Diego Gas and Electric. The California supply and demand conditions that drove up the wholesale electricity prices during fiscal 2001 began moving toward equilibrium in the fourth quarter as wholesale prices began to decline.

Green power credit revenue decreased by $8.3 million, or 67.7%, to $4.0 million for fiscal 2001 from $12.3 million for fiscal 2000. The green power credits decreased due to a rate reduction from $.015 to $.01 per kWh beginning in June 2000 and reduced sales of electricity subject to the credit caused by the reduction in the number of customers eligible to obtain the credit beginning in June 2000.

Direct energy costs decreased by $10.1 million, or 11.7%, to $76.6 million for fiscal 2001 from $86.7 million for fiscal 2000. This decrease was a result of lower costs in California, partially offset by increased costs in Pennsylvania. Decreased costs in California during fiscal 2001, as compared to fiscal 2000, were due to reduced requirements for the purchase of electricity created by the return of certain commercial and industrial customers to their incumbent utilities in June and July 2000, partially offset by an increase in wholesale electricity costs in the spot market. Increased costs in Pennsylvania are due to having only seven months of costs for fiscal 2000 compared to a full year of costs for fiscal 2001. In Pennsylvania, for the seven months in fiscal 2000 that we operated there, our average monthly purchase of electricity was 8.8 million kWh increasing to 55.3 million kWh monthly for fiscal 2001, as we established our customer base. Direct energy costs, as a percent of net revenues, decreased from 87.1% fiscal 2000 to 41.8% for fiscal 2001.

Selling and marketing expenses decreased $2.6 million, or 42.1%, to $3.6 million for fiscal 2001 from $6.2 million for fiscal 2000. This decrease was primarily a result of a decrease in promotional activities as we reduced our activities in connection with the solicitation of new customers. Advertising costs decreased $1.9 million and telemarketing payroll decreased $0.4 million due to the reduction of personnel in that department.

General and administrative expenses increased $5.8 million, or 37.7%, to $21.2 million for fiscal 2001 from $15.4 million for fiscal 2000. This is primarily the result of increased legal expenses of $5.3 million and bad debt expenses of $1.3 million compared to fiscal 2000. The increase in legal expenses is primarily related to the settlement with our founder of $4.8 million and the increase in bad debt expense is related to our providing for amounts due from PG&E and California Power Exchange, both of which have declared bankruptcy. These increases were partially offset by a decrease in customer termination cost of $0.7 million incurred in fiscal 2000. There were no additional customer termination costs in fiscal 2001.

Stock-based compensation charges increased from $0.4 million for fiscal 2000 to $1.1 million for fiscal 2001. The stock-based compensation charges for fiscal 2001 resulted from performance-based stock options granted to our Chairman and Chief Executive Officer.

Interest income grew to $1.6 million for fiscal 2001, an increase of $1.1 million or 220%, from $0.5 million for fiscal 2000. The increase was attributable to the increase in cash flow available for investments provided from operations, offset in part by a $0.6 million increase in interest expense due to borrowings which were outstanding on our line of credit during fiscal 2001.

The provision for income taxes increased to $21.9 million during fiscal 2001 compared to no provision for income taxes for fiscal 2000 for which we reported a loss before income taxes. The income tax rate for fiscal 2001 was 26.6% which was below the expected income tax rate primarily due to a reversal of the valuation allowance on our deferred tax asset in the amount of $13.6 million.

Net income increased to $60.5 million for fiscal 2001, an increase of $69.2 million, or 800.1%, from the $8.6 million loss for fiscal 2000. This increase in net income was primarily due to a $93.8 million increase in gross margin, offset in part by the provision for income taxes of $21.9 million. The principal reason for the $93.8 million increase in gross margin was the significant increase in California electricity prices. California revenues rose substantially while the average cost per kWh of the electricity that we sold was lower than in the prior year. Because we were able to acquire electricity in California during fiscal 2001 under a fixed price electricity procurement contract which extended through June 2002, the higher prices at which we were able to recall the electricity significantly increased our gross margin.

As of July 31, 2002, cash and cash equivalents were $43.0 million compared to $41.1 million as of July 31, 2001. Our principal source of liquidity to fund ongoing operations for the year ended July 31, 2002 was cash provided by operations.

Cash flow from operations for fiscal 2002 was $3.5 million, a decrease of $58.3 million compared with cash flow from operations in fiscal 2001 of $61.8 million. The primary reason for the decrease in cash flow from operations was a decrease of $55.4 million in net income to $5.2 million for fiscal 2002 from $60.5 million for fiscal 2001.

Cash flow used in investing activities for fiscal 2002 was $9.2 million, an increase of $8.1 million, compared with cash used in investing activities in fiscal 2001 of $1.1 million. The primary reason for the increase was $7.4 million used for Summit Energy investments in Envenergy Inc., Turbocor, LLC, and Power Efficiency Corporation. Purchase of property, equipment and intangibles consumed $1.8 million.

Cash flow provided by financing activities for fiscal 2002 was $7.7 million, an increase of $31.5 million, compared with cash used in financing activities of $23.8 million in fiscal 2001. Restricted cash decreased by $14.0 million as a result of our use of $8.2 million to fund investments and management fees for Summit Energy Ventures LLC (“Summit”), release of the $5.7 million letter of credit related to our energy supply contract with Calpine Power Service Company and the $1.7 million letter of credit related to our energy supply contract with Connectiv Energy Supply, Inc. that were transferred to short-term investments, offset by the $1.5 million letter of credit established pursuant to the Reliant Energy Services contract and interest earned of $0.3 million of which $0.2 million was transferred to short-term investments. Borrowings under the Coast Business Credit Agreement decreased $3.9 million as a result of the termination of the line of credit at

Cash flow from operations for fiscal 2001 was $61.8 million, an increase of $76.9 million, compared with cash used in operations in fiscal 2000 of $15.0 million. The primary reason for this increase was that net profit for fiscal 2001 was $60.5 million, compared to a net loss of $8.6 million for fiscal 2000. California’s higher retail and wholesale prices were the key factors relating to our profitability. Investing activities for fiscal 2001 consisted of purchases of property and equipment in the amount of $1.1 million, a decrease of $0.6 million compared to fiscal 2000.

Cash used in financing activities for fiscal 2001 was $23.8 million, compared to cash provided by financing activities of $14.7 million for fiscal 2000. The change of $38.4 million was attributable to (a) our $15.0 million investment in Summit which is classified as restricted cash; (b) the absence of sales of our common stock during fiscal 2001, which provided $12.1 million in net proceeds during fiscal 2000; (c) an increase in restricted cash of $4.8 million used to establish letters of credit required by energy suppliers to support increased purchases of electricity in fiscal 2001; and (d) the use of $5.3 million in fiscal 2000 from borrowings under our credit facility.

The most significant trend that has adversely effected our liquidity and capital resources during fiscal 2002 was the return to historical energy prices in the retail and wholesale markets in California. We believe that consumer energy prices have leveled off and will remain at their current level for the foreseeable future and that the wholesale energy market has stabilized after significant fluctuations during fiscal 2000 and 2001. Based on these factors, we believe that our liquidity and capital resources will not be adversely affected in fiscal 2003.

As a result of market conditions in California during fiscal 2002, the credit worthiness of several participants in the marketplace with whom we conduct business deteriorated significantly. PG&E has withheld payments of approximately $1.1 million from their remittances to us. Although we have filed a proof of claim in PG&E’s bankruptcy proceedings to recover these amounts, there is no assurance that we will recover any of the payments withheld. Accordingly, we have established an allowance for doubtful accounts in the amount of these withholdings.

As of January 31, 2002, $15 million in cash was invested in Summit. Under certain circumstances, we may, at our discretion, invest an additional $10 million in Summit. If this additional cash were invested with Summit, it would reduce the amount of cash that would otherwise be used for our growth initiatives. We are not obligated to make any further investment in Summit. In the event that the investment manager desires to cause Summit to issue membership interests to any other party, we shall have the right of first refusal to make the additional capital contribution on terms not less favorable as those proposed to such other party.

On January 4, 2002, the Board of Directors of the Company approved a $10 million stock repurchase program. Under this program, the Company may purchase up to $10 million of its common stock, options and warrants, from time to time over an 18 month period, in open market or privately negotiated, subject to market conditions and other factors. As of October 28, 2002, no purchases of common stock, options or warrants have been made pursuant to this authority.

We have entered into two new electricity supply contracts to replace a substantial portion of the electricity which we purchased in California under the Calpine Power Services Company contract which expired on June 30, 2002. The contracts are aligned to meet our projected load service requirements. Pursuant to the terms of these new agreements, we are obligated to minimum electric purchases of $20 million during the year ending July 31, 2003.

The following table shows our contractual cash obligations and commercial commitments as of July 31, 2002:

Based upon our current plans, level of operations and business conditions, we believe that our cash and cash equivalents together with cash generated from operations will be sufficient to meet our capital requirements and working capital needs for at least the next 12 months. However, there can be no assurance that we will not be required to seek other financing sooner or that such financing, if required, will be available on terms satisfactory to us.

If competitive restructuring of the electric markets is delayed or does not result in viable competitive market rules, our business will be adversely affected.

The Federal Energy Regulatory Commission (“FERC”) has maintained a strong commitment over the past six years to the deregulation of electricity markets. This movement would seem to indicate the continuation and growth of a competitive electric retail industry. As of October 2002, 24 states and the District of Columbia have either enacted enabling legislation or issued a regulatory order to implement retail access. In 18 of these states retail access is either currently available to some or all customers, or will soon be available. However, in many of these markets the market rules adopted have not resulted in energy service providers being able to compete successfully with the incumbent utilities and customer switching rates have been low. Only recently have a small number of markets opened to competition under rules that we believe may offer attractive competitive opportunities. Our business model depends on other favorable markets opening under viable competitive rules in a timely manner. In any particular market, there are a number of rules that will ultimately determine the attractiveness of that market. Markets that we enter may have both favorable and unfavorable rules. If the trend towards competitive restructuring of retail energy markets does not continue or is delayed or reversed, our business prospects and financial condition could be materially adversely impaired.

Retail energy market restructuring has been and will continue to be a complicated regulatory process, with competing interests advanced not only by relevant state and federal utility regulators, but also by state legislators, federal legislators, incumbent utilities, consumer advocacy groups and potential market participants. As a result, the extent to which there are legitimate competitive opportunities for alternative energy suppliers in a given jurisdiction may vary widely and we cannot assure shareholders that regulatory structures will offer us competitive opportunities to sell energy to consumers on a profitable basis. The regulatory process could be negatively impacted by a number of factors, including interruptions of service, significant or rapid price increases. The legislative and regulatory processes in some states take prolonged periods. In a number of jurisdictions, it may be many years from the date legislation is enacted until restructuring is completed.

In addition, although most retail energy market restructuring has been conducted at the state and local levels, bills have been proposed in Congress in the past that would preempt state law concerning the restructuring of the retail energy markets. Although none of these initiatives has been successful, we cannot assure shareholders that federal legislation will not be passed in the future that could materially adversely affect our business.

We may incur substantial operating losses and we cannot assure shareholders that we will continue to be profitable.

We have recognized significant revenue and our ability to generate such revenue is subject to uncertainty. In addition, we intend to increase our operating expenses to develop our business, including brand development, marketing and other promotional activities and the continued development of our billing,


	•	Our ability to attract and to retain a critical mass of customers at a reasonable cost;

	•	Our ability to develop internal corporate organization and systems;

	•	The continued competitive restructuring of retail energy markets with viable competitive market rules; and

	•	Our ability to manage effectively our energy requirements and to sell our energy at a sufficient margin.

We anticipate that we will incur significant costs as we enter new markets and pursue customers by utilizing a variety of marketing methods. In order for us to recover these expenses, we must attract and retain a large number of customers to our service.

We may experience difficulty attracting customers because many customers may be reluctant to switch to a new company for the supply of a commodity as critical to their well-being as electric power. A major focus of our marketing efforts will be to convince customers that we are a reliable provider with sufficient resources to meet our commitments. If our marketing strategy is not successful, our business, results of operations, and financial condition will be materially adversely affected.

If the Company can not obtain sufficient amounts of credit, our future growth and profitability could be adversely impacted.

The Company must obtain credit from a combination of sources to support future growth and profitability. This includes financial institutions, trade credit, strategic alliances, and others.

We depend upon internally developed systems and processes to provide several critical functions for our business, and the loss of these functions could materially adversely impact our business.

We have developed our own systems and processes to operate our back-office functions, including customer enrollment, metering, forecasting, settlement and billing. Problems that arise with the performance of our back-office functions could result in increased expenditures, delays in the launch of our commercial operations into new markets, or unfavorable customer experiences that could materially adversely affect our business strategy. Also, any interruption of these services could be disruptive to our business.

Substantial fluctuations in electricity prices or the cost of transmitting and distributing electricity could have a material adverse affect on us.

To provide electricity to our customers, we must, from time to time, purchase electricity in the short-term or “spot” wholesale energy markets, which are often highly volatile. In particular, the wholesale electric power market often experiences enormous price fluctuations during peak load periods. Furthermore, to the extent that we enter into contracts with customers that require us to provide energy at a fixed price over an extended period of time, we may incur losses caused by rising wholesale electricity prices. Periods of rising electricity prices may reduce our ability to compete with incumbent utilities because their regulated rates may not immediately increase to reflect these increased costs. The Energy Service Provider takes on the risk of purchasing power for an uncertain load and if the load does not materialize it leaves the ESP in a “long” position. Or, if unanticipated load appears, requiring the ESP to meet its energy requirements by purchasing additional energy leaving the ESP in a short position, the Company could be exposed to the price volatility of the wholesale spot markets. Historically, electricity has been the most volatile commodity in the world. Any of these contingencies could substantially increase our costs of operation if we are forced to purchase electricity at very high prices. Such factors could have a material adverse effect on our financial condition.

We also are required to arrange for the scheduling and transmission of wholesale electricity to the local utilities for distribution over their distribution networks. In some circumstances we may be unable to deliver the energy to the local distribution point in a particular market at the appropriate time. If we are unable to meet our delivery requirements to the local utilities, we may be subject to fines and penalties.

We continue to actively manage our counterparty credit portfolio to attempt to reduce the impact of a potential counterparty default. As of July 31, 2002, the majority of our courterparties are rated investment grade or above by the major rating agencies. These ratings are subject to change at any time and with no advance warning. This situation could have an adverse impact on the source of our electricity purchases.

If the wholesale price of electricity decreases, we may be required to post letters of credit to secure our obligations under our long term energy contracts.

Since the price of the electricity we purchase under long-term contracts is fixed over the term of the contracts, if the market price of wholesale electricity decreases below the contract price, the power generator may require us to post security in the form of a letter of credit to hedge against our defaulting on the contract and purchasing lower cost energy on the market. If we are required to post such security a portion of our cash would become restricted, which could adversely affect our liquidity.

We will be required to rely on utilities with whom we will be competing to perform some functions for our customers.

Under the regulatory structures adopted in most jurisdictions, we will be required to enter into agreements with local incumbent utilities for use of the local distribution systems, and for the creation and operation of functional interfaces necessary for us to serve our customers. Any delay in these negotiations or our inability to enter into reasonable agreements could delay or negatively impact our ability to serve customers in those jurisdictions, which could have a material negative impact on our business, results of operations and financial condition.

We will also be dependent on local utilities for maintenance of the infrastructure through which electricity is delivered to our customers. We are limited in our ability to control the level of service the utilities provide to our customers. Any infrastructure failure that interrupts or impairs delivery of electricity to our customers could have a negative effect on the satisfaction of our customers with our service, which could have a material adverse effect on our business.

Regulations in many markets require that the services of reading our customers’ energy meters and the billing and collection process be retained by the local utility. In those states, we will be required to rely on the local utility to provide us with our customers’ information regarding energy usage and to pay us for our customers’ usage based on what the local utility collects from our customers. We may be limited in our ability to confirm the accuracy of the information provided by the local utility and we may not be able to control when we receive payment from the local utility. We also may be limited in our ability to create a supplier relationship with our customers. If we do not receive payments from the local utility on a timely basis, our working capital may be impaired.

In some markets, we will be required to bear credit risk and billing responsibility for our customers.

In some markets, we are responsible for the billing and collection functions for our customers. In many of these markets, we may be limited in our ability to terminate service to customers who are delinquent in payment. Even if we terminate service to customers who fail to pay their utility bill in a timely manner, we may remain liable to our suppliers of electricity for the cost of the electricity and to the local utilities for services related to the transmission and distribution of electricity to those customers. The failure of our customers to pay their bills in a timely manner or our failure to maintain adequate billing and collection programs could materially adversely affect our business.

We may face strong competition from incumbent utilities and other competitors.

In most markets, our principal competitor may be the local incumbent utility company or its unregulated affiliates. The incumbent utilities have the advantage of long-standing relationships with their customers and they may have longer operating histories, greater financial and other resources and greater name recognition in

their markets than we do. In addition, incumbent utilities have been subject to regulatory oversight, in some cases for close to a century, and thus have a significant amount of experience regarding the regulators’ policy preferences as well as a critical economic interest in the outcome of proceedings concerning their revenues and terms and conditions of service. Incumbent utilities may seek to decrease their tariffed retail rates to limit or to preclude the opportunities for competitive energy suppliers and otherwise seek to establish rates, terms and conditions to the disadvantage of competitive energy suppliers.

Some of our competitors, including incumbent utilities, have formed alliances and joint ventures in order to compete in the restructured retail electricity industry. Many customers of these incumbent utilities may decide to stay with their long-time energy provider if they have been satisfied with its service in the past. Therefore, it may be difficult for us to compete against incumbent utilities and their affiliates for customers who are satisfied with their historical utility provider.

In addition to competition from the incumbent utilities and their affiliates, we may face competition from a number of other energy service providers, and other energy industry participants who may develop businesses that will compete with us in both local and national markets. We also may face competition from other nationally branded providers of consumer products and services. Some of these competitors or potential competitors may be larger and better capitalized than us.

Our revenues and results of operations are subject to market risks that are beyond our control.

We sell electricity that we purchase from third-party power generation companies into competitive wholesale power markets or on a contractual basis. We are not guaranteed any rate of return through mandated rates, and our revenues and results of operations are likely to depend, in large part, upon prevailing market prices for electricity in our regional markets and other competitive markets. These market prices may fluctuate substantially over relatively short periods of time. These factors could have an adverse impact on our revenues and results of operations.

Volatility in market prices for electricity results from multiple factors, including:


	•	weather conditions,

	•	seasonality,

	•	usage,

	•	illiquid markets,

	•	transmission or transportation constraints or inefficiencies,

	•	availability of competitively priced alternative energy sources,

	•	demand for energy commodities,

	•	natural gas, crude oil and refined products, and coal production levels,

	•	natural disasters, wars, embargoes and other catastrophic events, and

	•	federal, state and foreign energy and environmental regulation and legislation.

Our quarterly operating results have fluctuated in the past and will continue to do so in the future as a result of a number of factors, including variations in levels of demand due to weather and seasonality and volatility of market prices.

We do not have or use any derivative instruments to hedge the financial risks of our investments, nor do we have any plans to enter into such instruments. We generally invest cash equivalents in high-quality, short-term 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 investments 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 and we do not currently incur significant expenses denominated in foreign currencies. Accordingly, we believe that we are not currently subject to significant risk as a result of currency fluctuations.

Since we do not generate any of the electricity that we sell, our business has exposure to market volatility in prices of electricity. To mitigate risks relative to the movements in electricity prices, we have entered into primarily fixed-priced contracts for the purchase of electricity through the wholesale electricity market. Nevertheless, to the extent demand from our customers exceeds the supply we have obtained through fixed-price contracts, we are subject to risks relative to the movements in electricity prices.

An electricity price change of per $.01 kWh, has an estimated annual impact on our net revenue of:

The financial statement information, including the report of independent accountants, required by this Item 8 is set forth on pages F-1 to F-26 of this Annual Report on Form 10-K and is hereby incorporated into this Item 8 by reference. The Quarterly Financial Information required by this Item 8 is set forth on page F-25 of this Annual Report on Form 10-K and is hereby incorporated into this Item 8 by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

The following table sets forth information regarding our directors, including their age as of October 18, 2002 and business experience during the past five years. Each of our directors has served continuously as a director of the Company since the date indicated in his or her biography below, and each is currently serving a one year term expiring at the Company’s next annual meeting or until his or her respective successor is elected and qualified.

The following table sets forth certain information regarding our executive officers, including their respective ages and their business experience during the last five years, as of October 18, 2002. Executive officers are elected by, and serve at the pleasure of, the Board of Directors.

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who beneficially own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

With the exception of Joseph P. Saline, Jr., one of the Company’s directors, who, to our knowledge has yet to file a Form 3 indicating his initial ownership of shares of our Common Stock, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required during the fiscal year, our officers, directors and greater than 10% beneficial owners complied with all Section 16(a) filing requirements.

Directors who also are our employees are not paid any fees or remuneration, as such, for their service on the Board of Directors or on any Board committee.

Cash Compensation. Each non-employee (outside) director is paid a quarterly retainer in the amount of $6,250 and a fee of $500 for each Board Meeting which the Board member attends. Directors who serve on Board Committees (other than the chairman of such committee) are paid $300 for each committee meeting the Board member attends. Committee Chairpersons are paid $500 for each such committee meeting the Chairperson attends.

Stock Options. In connection with their election to our Board, Mr. Perkins, Ms. Jonas and Mr. Goodman each are entitled to receive an annual grant of options to purchase up to 50,000 shares of our common stock at an exercise price set by the Company from time to time.

The Company is required by the SEC to disclose compensation paid by the Company during the last three fiscal years to (a) the Company’s Chief Executive Officer; (b) the Company’s four most highly compensated executive officers, other than the Chief Executive Officer, who were serving as executive officers at the end of fiscal 2002; and (c) up to two additional individuals for whom such disclosure would have been provided under clause (a) and (b) above but for the fact that the individual was not serving as an executive officer of the Company at the end of fiscal 2002; provided, however, that no disclosure need be provided for any executive officer, other than the Chief Executive Officer, whose total annual salary and bonus does not exceed $100,000.

Accordingly, the following sections disclose information regarding compensation paid by the Company during the last three fiscal years to (a) Mr. Carter, the Company’s Chief Executive Officer; and (b) Richard Paulsen, James L. Oliver, John A. Barthrop, and Scott A. Petterson, the four most highly-compensated executive officers, other than the Chief Executive Officer, who were serving as executive officers at the end of fiscal 2002 and whose salary and bonus exceeded $100,000. All of these officers are referred to in this Proxy

The following table sets forth for each of the past three fiscal years, all compensation received for services rendered in all capacities by the Named Executive Officers.


(1)	Bonus compensation is determined pursuant to employment contracts and/or by the Compensation Committee and is generally based upon performance measured on a calendar year basis.

(2)	For Mr. Carter, the amount attributable to perquisites in Fiscal 2002 consists of an automobile allowance of $15,600, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $46,953. The amount attributable to perquisites in Fiscal 2001 consists of an automobile allowance of $15,600, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $20,641. The amount attributable to perquisites in Fiscal 2000 consists of an automobile allowance of $7,800, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $2,367.

(3)	For Mr. Paulsen, the amount attributable to perquisites in Fiscal 2002 consists of an automobile allowance of $9,600, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $12,446. The amount attributable to perquisites in Fiscal 2001 consists of an automobile allowance of $2,865, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $2,792.

(4)	For Mr. Barthrop, the amount attributable to perquisites in Fiscal 2002 consists of an automobile allowance of $7,200, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $9,003. The amount attributable to perquisites in Fiscal 2001 consists of an automobile allowance of $4,800, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $5,606. The amount attributable to perquisites in Fiscal 2000 consists of reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $877.

(5)	For Mr. Oliver, the amount attributable to perquisites in Fiscal 2002 consists of an automobile allowance of $8,600, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $11,396. The amount attributable to perquisites in Fiscal 2001 consists of an automobile allowance of $4,800, and reimbursement for medical expenses (including gross up payments


	to pay income taxes on reimbursements) of $7,366. The amount attributable to perquisites in Fiscal 2000 consists of an automobile allowance of $2,800.

(6)	For Mr. Petterson, the amount attributable to perquisites in Fiscal 2002 consists of reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $9,619. The amount attributable to perquisites in Fiscal 2001 consists of reimbursement for medical expenses (including gross up payments to

The following table shows stock option grants to the Named Executive Officers during fiscal 2002.


(1)	The Company is required by the SEC to use 5% and 10% assumed rate of appreciation over the ten year option term. This does not represent the Company’s estimate or projection of the future Common Stock price. If the Common Stock does not appreciate, the Named Executive Officers will receive no benefit from the options.

(2)	These options were granted pursuant to the terms of Mr. Carter’s employment agreement, which provides for the granting of options to purchase up to 300,000 shares of the Company’s Common Stock each January from 2001 through 2004 upon meeting or exceeding the Company’s financial performance objectives as set forth in its business plan. The Company exceeded the applicable performance goals by at least 10% in 2001, entitling Mr. Carter to an option to purchase 300,000 shares of the Company’s Common Stock. These options were fully vested on the date of grant.

The following table shows stock option exercises and the value of unexercised stock options held by the Named Executive Officers during fiscal 2002.


(1)	Represents the positive difference between the Company valuation of $1.86 per share of Common Stock as of July 31, 2002 and the exercise price of the options. There is no market value for the Common Stock. This valuation was made by the Company for accounting and financial reporting purposes and does not reflect actual transactions.

Ian B. Carter. Mr. Carter serves as Chairman and Chief Executive Officer of the Company pursuant to an employment agreement originally entered into on January 1, 2000, as amended and restated on November 1, 2000. The agreement provides for Mr. Carter’s employment through January 31, 2005.

Mr. Carter is entitled to a minimum base salary of $275,000 for the first year of his employment, with annual increases of $50,000 per year for each of the first four years, followed by a $75,000 increase for the fifth year of the contract. In addition, Mr. Carter is entitled to receive a bonus of $100,000 and any additional discretionary cash bonus based on the Company’s results of operation. In addition, Mr. Carter’s base salary may be increased from time-to-time by the Board of Directors. Under his employment agreement, Mr. Carter is eligible to earn options to purchase, in the aggregate, up to 3,600,000 shares of the Company’s common stock on the terms and subject to the conditions described under the heading “Stock Options Granted to Company’s Chairman and Chief Executive Office and Related Stock-based Compensation” in Note 9 to the Consolidated Financial Statements, which is incorporated herein by reference.

If during the term of the agreement, Mr. Carter is terminated, leaves, or is replaced as a result of: (a) 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 being acquired by any one person or entity not then affiliated with the Company; (b) control of the Company being taken over by a group of shareholders when no significant change of ownership has taken place; or (c) a merger, acquisition, strategic alliance or any other event that could bring substantial capital into the Company, the Company will pay Mr. Carter an amount equal to eight times the annual base salary due him plus the amount of taxes payable by Mr. Carter. In such events, Mr. Carter has the right to require the Company to repurchase all of his stock and all stock options referenced in his agreement, whether earned or unearned, at a value two times the then aggregate price value of the Company’s stock.

The Company may terminate Mr. Carter’s employment upon Mr. Carter’s death, total disability, or for cause. Upon a termination for death or total disability, the Company will continue to pay Mr. Carter for a period of one year thereafter or until expiration of the term of the agreement, whichever occurs first, his then current base salary and bonus. “For cause” is limited to a conviction, entry of plea of guilty or nolo contendere for any felony that would materially and adversely interfere with his ability to perform his services of his employment. In the event of a termination for cause, Mr. Carter is entitled to receive all compensation and benefits payable to him through the date of termination.

Mr. Carter may terminate his employment only upon (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 without Mr. Carter’s consent or (b) the Company’s material breach of the agreement. In the case of a termination resulting from a sale of assets or change of control, Mr. Carter is entitled to receive a payment equal to eight times his then current base salary. In the case of termination due to the Company’s material breach of contract, Mr. Carter is entitled to receive a payment equal to the monetary value of all of the compensation and benefits payable to him for the remainder of the term.

If at the expiration of the term, the Company has met or exceeded the projections set forth in the business plan, and the Company does not offer to extend Mr. Carter’s employment on terms no less favorable than those stated in the agreement, the Company will pay Mr. Carter a sum of $100,000 for a period of ten years. Mr. Carter will consult to the Company during that period and be Vice-Chairman of the Board.

Richard L. Paulsen. Mr. Paulsen serves as Chief Operating Officer of the Company pursuant to an employment agreement entered into on November 1, 2000. The agreement provides for Mr. Paulsen’s employment through December 31, 2004.

Mr. Paulsen will receive a base salary according to the following schedule, subject to increases which the Chief Executive Officer and the Compensation Committee may grant from time to time: $275,000 for the first twelve months of his employment, $325,000 for the second twelve months, $375,000 for the third twelve months and $425,000 per annum thereafter. Mr. Paulsen will be entitled to an annual cash bonus of $75,000 for calendar years 2001 and 2002, and $100,000 thereafter based upon the number of meters then under contract.

If during the term of the agreement there is a change in control, then the Company will pay Mr. Paulsen a cash bonus equal to the sum of eight times his then annual base salary plus the amount of certain applicable taxes payable by him. Mr. Paulsen has the right to require the Company to repurchase all of his stock and all stock options referenced in his agreement, whether earned or unearned, at a value two times the then aggregate price value of the Company’s stock, not to exceed $10.00 per share.

The agreement will terminate upon the occurrence of any of the following: Mr. Paulsen’s death, total disability, material breach of the agreement or fiduciary duty by Mr. Paulsen or written notice of Mr. Paulsen’s decision to terminate his employment. If Mr. Paulsen’s employment is terminated in any of the reasons described above, he will be entitled to receive the base salary and benefits earned through the date of termination. If Mr. Paulsen’s employment is terminated for any other reason, then he will be entitled to receive (a) his base salary and benefits earned through the date of termination and (b) an amount equal to one and one-half times his then current annual base salary.

James L. Oliver. Mr. Oliver serves as Chief Financial Officer of the Company pursuant to an employment agreement entered into on November 1, 2000. The agreement provides for Mr. Oliver’s employment through December 31, 2004.

Mr. Oliver will receive a base salary according to the following schedule, subject to increases which the Chief Executive Officer and the Compensation Committee may grant from time to time: $150,000 for the first twelve months of his employment, $180,000 for the second twelve months, $210,000 for the third twelve months and $240,000 per annum thereafter. Mr. Oliver will be paid an annual cash bonus of 30% of his then current annual salary provided that the Company has met or exceeded the projections in its annual business plan or as the board of directors deems appropriate.

If during the term of the agreement there is a change in control, as defined in the agreement, then the Company will pay Mr. Oliver a cash bonus equal to the sum of four times Mr. Oliver’s then current annual base salary plus the amount of certain taxes payable by Mr. Oliver. In the event of a sale of assets or any change of control as defined therein, Mr. Oliver shall have the right to require the Company to repurchase all of his stock and stock options, then earned or to be earned, at two times the then aggregate price value of the Company’s stock not to exceed $10.00 per share.

The agreement will terminate upon the occurrence of any of the following: Mr. Oliver’s death, total disability, material breach of the agreement or fiduciary duty by Mr. Oliver or written notice of Mr. Oliver’s decision to terminate his employment. If Mr. Oliver’s employment is terminated in any of the manners described above, he will be entitled to receive the base salary and benefits earned through the date of termination. If Mr. Oliver’s employment is terminated for any other reason, then he will be entitled to receive (a) his base salary and benefits earned through the date of termination and (b) an amount equal to one and one-half times his then current annual base salary.

John A. Barthrop. Mr. Barthrop serves as Chief Legal Officer of the Company pursuant to an employment agreement dated on November 1, 2000. The agreement provides for Mr. Barthrop’s employment through December 31, 2004.

Mr. Barthrop will receive a base salary according to the following schedule, subject to possible increases which the Chief Executive Officer and the Compensation Committee may grant from time to time: $160,000

for the first twelve months of his employment, $185,000 for the second twelve months, $210,000 for the third twelve months and $240,000 per annum thereafter. Mr. Barthrop will be paid an annual cash bonus of 30% of his then current annual salary provided that the Company has met or exceeded the projections in its annual business plan or as the Board of Directors deems appropriate.

If during the term of the agreement there is a change in control, as defined in the agreement, then the Company will pay Mr. Barthrop a cash bonus equal to the sum of four times Mr. Barthrop’s then current annual base salary plus the amount of certain taxes payable by Mr. Barthrop.

The agreement will terminate upon the occurrence of any of the following: Mr. Barthrop’s death, total disability, material breach of the agreement or fiduciary duty by Mr. Barthrop or written notice of Mr. Barthrop’s decision to terminate his employment. If Mr. Barthrop’s employment is terminated in any of the manners described above, he will be entitled to receive his base salary and benefits earned through the date of termination. If Mr. Barthrop’s employment is terminated for any other reason, then he will be entitled to receive (a) the base salary and benefits earned through the date of termination and (b) an amount equal to one and one-half times his then current annual base salary.

Pursuant to the employment agreements dated November 1, 2000, Messrs. Paulsen, Barthrop and Oliver, have been or granted option to purchase an aggregate of 900,000, 500,000 and 500,000 shares, respectively, of the Company’s 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.

Scott A. Petterson. We have entered into a Change of Control Agreement dated November 1, 2000 with Scott A. Petterson, our Vice President and Corporate Controller. If during the term of the agreement there is a change in control, as defined in the agreement, then the Company will pay Mr. Petterson a cash bonus equal to Mr. Petterson’s then current annual base salary. In the event of a sale of assets of any change of control as defined therein, Mr. Petterson shall have the right to require the Company to repurchase all of his stock and stock options, then earned or to be earned, at two times the then aggregate price of the Company’s stock.

Executive compensation is determined by a Compensation Committee elected by our Board of Directors. The Compensation Committee is currently comprised of: Robert Perkins, Craig Goodman and Junona Jonas. 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. Goodman and Ms. Jonas were appointed in January 2002 and replaced Mr. Gates (a former board member), and Mr. Carter on the Compensation Committee. The Compensation Committee meets periodically or on an as needed basis and decides compensation structure and 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. None of the current Compensation Committee members are or has been an officer or employee of Commonwealth Energy Corporation. Prior to his replacement on the compensation committee, Mr. Carter recused himself on compensation issues relating to himself. No member of the Compensation Committee is or has been a director or member of the compensation committee of another entity, one of whose executive officers serves or has served on our Compensation Committee. In addition, no member of the Compensation Committee is or has been the member of a compensation committee of another entity, one of whose executive officers is or has been a member of our Board of Directors.

The following table contains certain information as of the Record Date regarding all persons who were the beneficial owners of more than 5% of the outstanding shares of Common Stock, each of the directors of the Company, each nominee for election to become a director, each of the executive officers named in the Summary Compensation Table set forth below under the caption “Compensation of Executive Officers” (we refer to all these officers as the “Named Executive Officers”) and all directors and executive officers as a group. The persons named hold sole voting and investment power with respect to the shares shown opposite their respective names, unless otherwise indicated. The information with respect to each person specified is as supplied or confirmed by such person, based upon statements filed with the Securities and Exchange Commission, or based upon the actual knowledge of the Company.


(1)	Subject to applicable community property and similar statutes.

(2)	Includes shares beneficially owned, whether directly or indirectly, individually or together with associates.

(3)	Represents shares of Common Stock issuable upon exercise of stock options or upon conversion of other convertible securities held by such persons that are exercisable within 60 days of October 18, 2002.

(4)	The number of shares of preferred stock outstanding used in calculating the percentage for each listed person includes 226,000 disputed shares of preferred stock that Mr. Saline claims to own that are not reflected as outstanding in our records. See footnote (6) to the table below and “Item 3 — Legal Proceedings.”

(5)	Represents shares of common stock issuable upon the disputed shares of preferred stock that Mr. Saline claims to own, assuming a two-for-one conversion ratio. See footnote (6) below. The Certificate of Determination relating to the Company’s Series A Convertible Preferred Stock provides for one-for-one voting and conversion rights. The Superior Court of the State of California for the County of Orange has issued a preliminary injunction requiring Commonwealth to recognize Mr. Saline’s ownership of


	352,000 shares of preferred stock with two-for-one voting and conversion rights pending final resolution of the matter. See “Item 3 — Legal Proceedings.” Under the rules of Securities and Exchange Commission, Mr. Saline is deemed to be the beneficial owner of these shares because, pursuant to the court order, he has the power to vote these shares.


(6)	Represents disputed shares of stock that Mr. Saline claims to own. Our position is that Mr. Saline does not beneficially own any shares of our capital stock. The shares listed in the table consist of shares that Mr. Saline claims (a) are owned by him and (b) are shares of preferred stock with two-for-one voting and conversion rights. Of the listed shares, 126,000 shares represent outstanding preferred stock held of record by a third party that Mr. Saline claims to have purchased; and 126,000 represent shares of outstanding common stock held of record by a third party that Mr. Saline claims to have purchased (and further claims should be considered preferred stock). The remaining shares are not reflected as outstanding on our books. Mr. Saline has filed a lawsuit against us seeking to require us to recognize his alleged ownership of these disputed shares. The Superior Court for the County of Orange has issued a preliminary injunction requiring Commonwealth to recognize Saline’s ownership of 352,000 shares of preferred stock with two-for-one voting and conversion rights pending final resolution of the matter. We are vigorously contesting the underlying lawsuit. See “Item 3 — Legal Proceedings.” Under the rules of the Securities and Exchange Commission, Mr. Saline is deemed to be the beneficial owner of these shares because, pursuant to the court order, he has the power to vote these shares.

(7)	Includes 25,000 shares of common stock issuable upon conversion of shares of Series A Convertible Preferred Stock held by Mr. Perkins at a ratio of one-for-one.

(8)	Includes the shares of common stock issuable upon conversion of the disputed shares of preferred stock that Mr. Saline claims to own, assuming a two-for-one conversion ratio. See footnote (5) above.

(9)	Includes the disputed shares of preferred stock that Mr. Saline claims to own. See footnote (6) above.

Our 1999 Equity Incentive Plan has been approved by our shareholders. We do not have any equity compensation plans other than the 1999 Equity Incentive Plan approved by our shareholders, with the exception of one-time grants of warrants or options made by the our Board of Directors from time to time.

The following table sets forth information regarding the number of shares of our common stock that may be issued pursuant to our equity compensation plans or arrangements as of the end of fiscal 2002.


(2)	Represents shares of common stock that may be issued pursuant to options available for future grant under the 1999 Equity Incentive Plan. Excludes outstanding options to purchase 3,900,000 shares of common stock with respect to which the documentation is inconclusive as to whether the options were granted pursuant to the 1999 Equity Incentive Plan. The Company is in the process of analyzing the documentation in order to make a definitive determination as to whether such options were granted pursuant to the 1999 Equity Incentive Plan.

(3)	Represents stock options granted by our Board of Directors to various employees, directors and consultants pursuant to stand-alone agreements and not pursuant to any plan. Includes outstanding options to purchase 3,900,000 shares of common stock with respect to which the documentation is inconclusive as to whether the options were granted pursuant to our 1999 Equity Incentive Plan. The Company is in the process of analyzing the documentation in order to make a definitive determination as to whether such options were granted pursuant to the 1999 Equity Incentive Plan.

On November 9, 2001, we entered into an agreement with Technical Service Group, Inc., doing business as Symcas-TSG (“Symcas”) for the right to hire employees of, or independent contractors to, Symcas. Additionally, as part of the same agreement, Symcas transferred, interest in and to all of the software that Symcas has developed for us. The agreement prohibits Symcas and its affiliates from developing any computer software for use in the natural gas or electricity industries that are similar to this software for a period of two years. Symcas previously performed substantially all of our software development, information technology support and maintenance, and procurement of hardware and software. We continue to utilize Symcas on a limited basis for our IT maintenance. In the fiscal year ended July 31, 2002, we paid to Symcas a total of $2,090,929. On December 15, 2001, after the close of agreement with Symcas, we hired Linda Guckert, an employee and officer of Symcas, to be our Vice President of Information Technology.

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.

No reports on Form 8-K were filed during the fourth quarter of the fiscal year covered by this Report.


(1)	Each of these exhibits is incorporated herein by reference to Commonwealth Energy Corporation’s Form 10 filed with the Securities and Exchange Commission on August 9, 2001 (File No. 000-33069).

(2)	Each of these exhibits is incorporated by reference to Commonwealth Energy’s Form 10/A filed with the Securities and Exchange Commission on November 14, 2001 (File No. 000-33069).


(3)	Each of these exhibits is incorporated by reference to Commonwealth Energy Corporation’s Form 10/A filed with the Securities and Exchange Commission on June 10, 2002.

(4)	Each of these exhibits is incorporated by reference to Commonwealth Energy’s Form 10/A filed with the Securities and Exchange Commission on April 10, 2002 (File No. 000-33069).

(5)	Each of these exhibits is incorporated by reference to Commonwealth Energy’s Form 10-Q filed with the Securities and Exchange Commission on December 17, 2001 (File No. 000-33069).


†	Confidential treatment is being sought with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


	1. I have reviewed this annual report on Form 10-K of Commonwealth Energy Corporation;

	2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

	3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.


	1. I have reviewed this annual report on Form 10-K of Commonwealth Energy Corporation;

	2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

	3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

We have audited the accompanying consolidated balance sheets of Commonwealth Energy Corporation as of July 31, 2001 and 2002, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended July 31, 2002. Our audit also included the financial statement schedule listed in the index at Item 15(a)(2). 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, 2001 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended July 31, 2002, 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.

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 in January 2000, in Pennsylvania and, beginning in August 2000, the sale of electric power to wholesale customers in California and Pennsylvania. 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 incumbent utilities that are called Utility Distribution Companies (“UDCs”) in California and Electric Distribution Companies (“EDCs”) 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.

The consolidated financial statements of the Company include the accounts of the Company’s wholly-owned subsidiaries and Summit Energy Ventures, LLC (“Summit”). All inter-company transactions have been eliminated in consolidation.

Adjustment of Number of Outstanding Common Shares and Restatement of Per Share Information

As more fully discussed in Note 11, the Company disputed whether certain shares of its common stock issued to its founder were validly issued. Litigation ensued between the Company and its founder regarding this and other matters. A settlement of this litigation was approved by the court having jurisdiction over the case on August 15, 2001 and stipulated that 4,720,000 of the founder’s disputed common shares were void. The Company’s counsel has advised that such shares should be considered void ab initio, or having never been issued. Accordingly, the Company has restated its prior years’ financial statements to reflect the terms of this settlement. The only change to the Company’s results of operations is in the reported net loss per share information for the years ended July 31, 1999 and 2000, which has been restated as follows:

The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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 property and equipment and intangible assets. Actual results could differ from those estimates.

Net revenue from sales of electric power is recognized as the power is delivered to the Company’s customers. Net revenue represents proceeds from energy sales. Direct energy costs include electric power purchased, independent system operator fees and scheduling coordination fees. Selling and marketing expenses include salaries of sales and marketing personnel and promotional and advertising costs. General and administrative expenses include salaries for corporate support personnel, rent expenses, insurance expenses, bad debts expenses, depreciation expenses and other costs of the corporate office.

The Company’s net revenue is derived from sales to the following class of customers:

On January 20, 2000, the Board of Directors of the Company directed that, in consideration of the purchase price being paid in a nominal amount of cash by an officer of the Company on behalf of the Company’s other shareholders, the Company shall grant on a pro rata basis 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 retroactively adjusted to reflect this stock grant of 11,205,150 common shares, including 939,000 common shares related to the convertible preferred stock, which had the same effect as a stock split.

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. 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 95% of the PX cost amount with 95% of the individual Utility Purchased Energy cost as published by each individual utility. Unbilled receivables from sales in Pennsylvania are estimated in the same manner, except using the average current customer sales price per kilowatt-hour.

Cash and cash equivalents consist of cash and short-term investments with original maturities of three months or less.

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.

Intangible assets are carried at cost. Amortization of intangible assets is provided over their estimated useful life of 2 and 20 years.

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.

Advertising costs, consisting primarily of media advertising, are expensed as incurred. Advertising costs were $2,175,400, $253,120 and $128,925 for 2000, 2001 and 2002, respectively.

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 determined 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.

The Company has also granted performance-based stock options for which vesting is contingent upon the occurrence of certain events or the achievements of certain levels of financial performance by the Company. The difference between the exercise price of these stock options and the estimated fair value of the Company’s common stock as estimated by the Company’s management for financial reporting purposes is recorded as stock-based compensation charges over the period prior to the selling of the options which are expected to eventually vest.

Stock options were granted to certain service providers to the Company. These options were recorded at their fair values using the Black-Scholes option pricing model method, in accordance with SFAS No. 123.

As of July 31, 2002, 53.3% of the Company’s billed and unbilled receivables are due from a large number of retail and commercial end users in California and Pennsylvania who are billed by and make remittances to the UDC’s or the EDC that deliver their electricity which, in turn, forward such remittances to the Company.

One of the UDC’s, Pacific Gas and Electric (“PG&E”), filed for bankruptcy in April 2001 and has withheld from payment to the Company a portion of the remittances due to the Company. The Company has filed a Proof of Claim in PG&E’s bankruptcy proceedings to recover these amounts which approximated $1,100,000 at July 31, 2001 and 2002. The Company has provided fully for these disputed amounts in its allowance for doubtful accounts. The Company does not have any similar disputes with its other UDC’s.

The remainder of the Company’s billed and unbilled accounts receivable represent the Company’s direct billing of certain large commercial and industrial customers amounting to $2,666,124. The Company also has receivables from two wholesale customers in the amount of $431,117.

No customer has accounted for more than 10% of net revenue in 2000, 2001 or 2002, except for two wholesale customers, the state of California Department of Water Resources and the PX, which represented 22.0% and 10.6%, respectively, of net revenue in 2001.

Long-lived assets to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment loss is measured by the amount by which the carrying amount of the assets exceeds fair values.

In June 1998, the Financial Accounting Standards Board (“FASB”) 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 and sale of electricity are considered “normal purchases” and “normal sales,” respectively, within the context of SFAS No. 133 and related pronouncements.

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS No. 141”), and No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). These statements change the accounting for business combinations, goodwill and intangibles. SFAS No. 141 eliminates the use of the pooling-of-interests method for all business combinations completed after June 30, 2001. It also provides new criteria to determine whether an acquired intangible asset should be recognized separately from goodwill. SFAS No. 142 eliminates the amortization of goodwill and intangible assets with an indefinite life. It also introduces a new impairment-only approach, which should be tested annually, to goodwill. The Company does not expect SFAS No. 141 or SFAS No. 142 to have any material effect on the Company’s financial position or results of operations.

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.

California has been experiencing significant fluctuations in the cost of wholesale energy since May 2000. During the summer of 2000 and winter of 2001, the price of electricity in wholesale markets reached unprecedented highs. Since the winter of 2001, the price of electricity has returned to near historical levels. In reaction to this crisis, FERC, the California Public Utilities Commission (“CPUC”), the State Legislature and the Governor have proposed a varying number of methods to help restore price stability to the California electricity marketplace. On September 20, 2001, the CPUC issued a ruling suspending “direct access” in California. The suspension of “direct access” means that retail electricity suppliers, such as the Company, will not be allowed to actively seek new customers. This ruling permits the Company to keep its current customer base, but prohibits the Company from signing up new customers for an undetermined period of time. The Company is actively seeking relief from this ruling. There is no assurance that any legislative or legal appeal will give the Company relief from the state’s suspension of direct access.

In addition to regulatory and legislative risks, one of the UDCs in California, PG&E, with which the Company interacts to conduct its business has filed for bankruptcy protection. Other utilities in California also could seek protection of bankruptcy in the future.

In July 2002, the California Public Utilities Commission (“CPUC”) issued an interim order approving an alternate proposal implementing a Historical Procurement Charge (“HPC”) sought by Southern California Edison (“SCE”). The original proposal submitted by SCE would allow the utility to recover losses SCE claimed accrued during last year’s energy crisis, from Direct Access (“DA”) customers. Rejecting this proposal and alternately voting in favor of a revised measure authored by commissioners Brown and Peavey, the CPUC reduced the charges SCE aimed to place on direct access customers.

The Alternative Proposed Decision authorizes SCE to collect $391 million in HPC charges from all DA customers by reducing their Procured Energy Credit (“PE Credit”) two and seven-tenths cents ($0.027) per kWh beginning July 27, 2002. The lowered PE Credit will continue until an exit fee for DA customers has been approved by the CPUC, which will then be reduced to 1 cent ($0.01) per kWh until the $391 million is fully collected. While we expect that this charge will significantly impact our revenue and cash flow, we do not expect that it will preclude us from participating in the California Market. Commonwealth Energy Corporation’s retail electricity business, along with other DA participants, are currently evaluating all options to actively respond to this decision. SCE is currently seeking to change the terms of the interim order to seek to recover additional procurement shortfall revenue by increasing the HPC. The CPUC has not yet made a determination with respect to SCE’s request.

For the California market, the Company’s primary purchase contract with Calpine Power Services Company, to acquire 3,000 kWh of electric power per day expired on June 30, 2002. The Company has entered into a series of new contracts to purchase electricity energy covering approximately 55% of the current load servicing requirements. The Company is obligated to minimum electric purchases of $23.9 million for the year ending July 31, 2003 under these commitments.

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 $32.6 million for the year ending July 31, 2003, and $20.1 million thereafter under these contracts.

Since the prices at which the Company purchases this electric power are fixed during the terms of the contracts, 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.

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. Energy capacity charges for servicing electric power in the Pennsylvania market varies significantly from month to month and can effect gross profit margins.

The state of California enacted the Public Purpose Program (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 December 31, 2001, is at a rate 1.0 cent per kWh. “Green Power” is defined by the Program as electricity produced by at least 50% renewable energy resources. The Company received Green Power Credits of $3,978,989 and $2,050,856 for the years ended July 31, 2001 and 2002, respectively. The benefit of Green Power Credits has been passed through to the Company’s customers. The subsidy ended December 31, 2001, and has not been extended by the state legislature.

Basic and diluted net income (loss) per common share, restated as described in Note 1, is computed as follows:

For the year ended, July 31, 2000, the effects of the exercise of potentially dilutive stock options and warrants and the assumed conversion of preferred stock into common stock have been excluded from the calculation of dilutive earnings per share information because the effect of their inclusion would be anti-dilutive. For the year ended July 31, 2001 and 2002 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.

In July 2001, the Company invested $15,000,000 in Summit and, if Summit invests 75% of the initial $15,000,000 investment, the Company may, solely at its discretion, invest up to an additional $10,000,000 in Summit. Summit was formed in July 2001 for the purpose of investing in energy and energy related companies. The term of Summit’s existence is through June 29, 2006, which date may be extended for up to two additional one year periods by mutual agreement of the parties. Summit’s Investment Committee, which is comprised of three members appointed by the Company’s management, must approve of any investments to be made by Summit. Accordingly, because of this control over Summit’s investments, Summit’s financial statements are included in the Company’s consolidated financial statements.

As of July 31, 2002, the Company’s interest in Summit is a 100% preferred membership interest and, after the Company receives its original capital and a 10% preferred return, profits of Summit are to be allocated 60% to the Company and 40% to its partner, Northwest Power Management (“Northwest”); net losses are allocated per capital contribution. Northwest receives no return until after the Company receives return of its investment and a 10% preferred annual return on its investment. The Company shall have the option to purchase any of Summit’s investments on such terms and conditions that are established between the Company and Northwest.

As of July 31, 2002, Summit had made three investments in energy related companies as follows:

Based on the percentage ownership levels, the Company accounts for Envenergy, Inc. at cost as an available for sale equity investment, and Turbocar, LLC and Power Efficiency Corporation under the equity method (“APB 18”). Under the equity method of accounting, the Company reports their proportionate amount of income and losses from the investment companies.

Condensed balance sheet information for Summit at July 31, 2001 and 2002, which is included in the Company’s consolidated financial statements, is as follows:

The effect of Summit’s results of operations for the year ended July 31, 2002 on the Company’s consolidated results of operations was a net loss of $0.8 million, comprised of $160,000 of losses in investment companies, $850,000 of professional and management fees paid, partially offset by $200,000 of interest income.

The Company settled all claims and counterclaims between the Company and its founder and former Chairman and Chief Executive Officer. On August 10, 2001, a settlement was reached with the founder which was approved by the court having jurisdiction over the case on August 15, 2001. The material terms of the settlement provided that the Company pay the founder $4,790,000 in damages and an additional $2,400,000 to purchase 1,175,160 shares of the Company’s common stock claimed to be held by the founder. The settlement agreement also provided that the remaining 4,720,000 shares of the Company’s common stock claimed to be held by the founder were void. The Founder also agreed to release his claims to the shares of the Company’s common stock held by the Company pursuant to the Accommodation Agreement and to the Company’s obligation to him under a severance agreement. The founder also agreed that he would have no future ownership in the Company. The loss on the settlement of $4,790,000 which is net of the previously accrued severance payable to the founder of $927,554, was recorded as of July 31, 2001.

On August 30, 2001, the Company entered into a strategic alliance with Calpine Energy Services, LP (“Calpine”) to sell energy to Exodus Communications (“Exodus”), subsequently acquired and succeeded by Cable & Wireless Inc. The specific nature of the agreement provides for Calpine to sell electricity energy to Commonwealth, who in turn will sell the electricity and provide additional services to Exodus. The gross profit, if any, after payment of energy delivered, ISO fees and ancillary service costs is allocated and distributed in the following proportions: 75% to Calpine and 25% to the Company. The portion of unallocated gross profits payable to Calpine of $795,071 was accrued as of July 31, 2002.

The Company is required to pledge an amount equivalent to 45 days of energy purchases under the contracts for the purchase of electric power. The funds in Summit are committed to the purpose of investing in energy and energy related companies.

The Company’s intangible assets represent the net unamortized costs of purchasing, in July 1999, the 1-800-Electric telephone number and the rights to eight internet domain names. The initial cost of these intangible assets was $1,050,000. Amortization expense for these intangible assets was $52,500 in 2001 and 2002.

In addition, the Company purchased certain rights to hire employees and contractors of their primary Information Technology vendor Symcas-TSG. The purchase agreement provided for a covenant prohibiting the principles of Symcas from competing or assisting either directly or indirectly any party in the development of any software for use in natural gas or electricity industries that provides similar functionality to any material module of the Company’s software for a period of 2 years. The cost of $177,500 related to this covenant was capitalized as an intangible asset and is to be amortized over the 2 year period.

On June 29, 2000, the Company entered into a three-year, $15 million line of credit. Borrowings under the line of credit, which were collateralized by accounts receivable, inventory and other assets. In connection with obtaining the line of credit, the Company agreed to pay a commitment 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% and the average effective interest rate on borrowings outstanding during the years ended July 31, 2001 and 2002 was 13.0% and 8.5%, respectively.

On August 10, 2001, the Company restructured its line of credit to shorten the maturity date to June 29, 2002 and to reduce the amount of the line of credit to $10 million. This line of credit expired on June 29, 2002.

The convertible preferred stock, which was initially issued on September 15, 1997, 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 $137,970 as of July 31, 2002. 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. During 2001, all holders of the convertible preferred stock were offered the option to rescind their initial purchase of convertible preferred stock at the initial offering price of $1.00 per share. Holders of 114,000 shares of convertible preferred stock, who had also received 114,000 shares of the Company’s common stock subsequently as part of the stock grant described in Note 1, elected to rescind their initial purchase and the Company repurchased both their preferred and common shares.

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 determined by the Company for financial reporting purposes. All other costs related to these employees were charged to expense.

At July 31, 2002, 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:

See Note 11 for a description of the legal status of common shares issued to the Company’s founder.

The Company’s Board of Directors has approved grants of options to acquire a total of 13,206,325 shares of the Company’s common stock to the Company’s employees, outside directors and service providers. As of July 31, 2002, 10,490,231 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 December 1999 and expire in December 2004 through 2010 for the options granted after December 1999.

The Company’s 1999 Equity Incentive Plan (“Plan”) approved by the shareholders provides 7,000,000 shares available for grant and issuance. There are no other equity compensation plans other than this Plan, with the exception of one-time grants of warrants or options made by the Company’s Board of Directors from time to time. At July 31, 2002, the Company had issued options to purchase 2,904,500 shares under the Plan, which does not include an outstanding option to purchase 3,900,000 shares of common stock to which the documentation is inconclusive as to whether the options were granted pursuant to the Plan. The Company is in the process of analyzing the documentation in order to make a definitive determination as to whether such options were granted pursuant to the Plan.

The weighted average remaining contractual life and weighted average exercise price of options outstanding and of options exercisable as of July 31, 2002 were as follows:

Stock Options Granted to Company’s Chairman and Chief Executive Officer and Related Stock-based Compensation

On January 1, 2000, as part of an employment agreement with a term expiring January 31, 2005, the Company granted 3,600,000 stock options to the Company’s Chairman and Chief Executive Officer which have an exercise price of $2.50 per share and expire on January 1, 2010. As of January 1, 2000, 300,000 of the options were vested and 100,000 options vest annually on January 1 of each year from 2001 through 2004. The remaining 2,900,000 options are performance-based and vest upon the occurrence of certain events. When granted, the terms for 2,000,000 of these performance-based options provided for the vesting upon completion of a successful Initial Public Offering by the Company. Subsequently, on November 1, 2000, the terms of the vesting of these 2,000,000 stock options were modified to the performance criteria indicated with an (A) below.

Performance criteria which were met during the year ended July 31, 2001, the number of related stock options vested and not earned, and stock-based compensation recognized during the year ended July 31, 2001 are as follows:

Performance criteria which were not met as of July 31, 2001, the number of related stock options which vest upon meeting the performance criteria and stock-based compensation recognized during the year ended July 31, 2001 and reversed during the year ended July 31, 2002 are as follows:

Because there is no established trading market in shares of the Company’s common stock, in each of fiscal 2002 and 2001, the Board of Directors valued our shares for financial reporting purposes at $1.86 per share and $3.05 per share, respectively. The stock-based compensation charges for the unvested portion of these performance-based options in fiscal 2001 were reversed in fiscal 2002.

If during the term of the employment agreement, the Company makes a public offering of its shares or if the Company supports any other form of liquidity event, then all stock options related to this employment agreement, whether earned or not, shall be considered vested prior to such event.

The employment agreement also provides that in the event the Company terminates the agreement early or a change in control of the Company occurs, the Company’s Chairman and Chief Executive Officer has the right to require the Company to repurchase all his capital stock and stock options of the Company, then earned or to be earned, at a repurchase price equal to two times the then price of value of the Company’s common stock.

During the year ended July 31, 2002, the Company granted 300,000 stock options to its Chairman and Chief Executive Officer. As part of Mr. Carter’s employment agreement, the stock option grant was for exceeding the Company’s financial objectives as set forth in the business plan for 2001. These stock options expire on January 1, 2010. All other performance criteria which were not met as of July 31, 2001 in the table above have also not been met as of July 31, 2002.

In January 2002, the Company adopted a Stockholder Rights Plan that is triggered whenever an Acquiring Person accumulates 15% or more of the Company’s stock or if an Adverse Person acquires 10% or more of the Company’s stock and intends to implement measures which the Board of Directors believes to be adverse to the Company’s interests. An Acquiring Person is a person or group, together with the person’s or group’s affiliates, that has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of the Company’s Common Stock. An Adverse person is a person, alone or with affiliates, that has become the beneficial owner of more than 10% of the outstanding shares of Common Stock and (A) such beneficial ownership is intended to cause the Company to repurchase the Common Stock owned by such person or pressure the Company to take action or enter into transactions intended to provide such person with short-term financial gain under circumstances where the Company’s Board of Directors determine that the Company’s best long-term interests would not be served by taking such action or entering into such transactions or (B) such beneficial ownership is causing or reasonably likely to cause a material adverse impact on the Company’s business or prospects, provided, however, that the Company’s Board of Directors does not have the right to declare a person to be an Adverse Person if such person has reported or is

required to report its ownership of the Company’s Common Stock on Schedule 13G under Securities Exchange Act of 1934, as amended, or on Schedule 13D if that schedule does not state any intention to, or reserve the right to, control or influence the Company or engage in certain other actions, so long as such person neither reports nor is required to report such ownership. Once the rights vest, shareholders other than the Acquiring Person or Adverse person will be able to purchase at a predetermined price two shares of Common Stock for the price of one share of Common Stock.

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 determined 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 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 123,500 shares of the Company’s common stock owned by him to an officer of the Company in 2000. 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 $423,500 was included in stock-based compensation charges in 2000.

As part of a $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 information regarding results of operations and net income (loss) per common share is required by SFAS No. 123 for stock-based awards to employees, which are comprised of stock options for the purchase of the Company’s common stock, 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 options to employees and outside directors were valued using the minimum value method assuming no expected dividends, an average expected life through the option expiration dates, 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 were expensed at the date of grant of the stock options for options that were fully vested at date of grant and was expensed over the vesting period of stock options that vest over a period of time. 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 income (loss) and net income (loss) per common share for each year.

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:

For the year ended July 31, 2002, the Company’s provision for income taxes was comprised of the following:

For the year ended July 31, 2001, the Company’s provision for income taxes was comprised of the following:

A reconciliation of the federal statutory income tax rate to the Company’s provision for income taxes as a percentage of income (loss) before income taxes is as follows:

As of July 31, 2000, the valuation allowance increased $2,840,000 and was recorded to reflect the uncertainty of realization of the deferred tax asset. During 2001, the valuation allowance increased by $362,000 for a change in the federal income tax rate applied to the Company’s temporary differences and decreased by $13,595,000 for the release of the valuation allowance due to the Company’s profitable operations during the year ended July 31, 2001. During 2002, the valuation allowance decreased by $23,000 and reflected the uncertainty of the deferred tax asset related to the net operating loss carryforward, the use of which is limited as described in the following paragraph.

At July 31, 2002, the Company had net operating loss carryforwards of approximately $2,330,000 and $2,071,000 for federal and state income tax purposes, respectively, that begin to expire in years 2018 and 2006, respectively. The timing of the utilization of federal net operating loss carryforwards is subject to an annual limitation due to the “change of ownership” provision of the Tax Reform Act of 1986. As a result of the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce future income tax liabilities.

On September 11, 2002, the Governor of California signed into law new tax legislation that suspends the use of net operating loss carryforwards into tax years beginning on or after January 1, 2002 and 2003. Should the Company have taxable income for the year ending July 31, 2003, it may not look to California net operating losses generated in prior years to offset taxable income. This suspension will not apply to tax years beginning on or after 2004.

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 two 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 as of July 31, 2002:

Rent expense for operating leases amounted to $786,300, $697,498, and $703,935 in 2000, 2001 and 2002, respectively.

The Company has entered into employment contracts with four of its executives which provide for aggregate base salaries as follows during the term of the contracts:

Two of the contracts provide that in the event of a change in control as defined in the contracts, the executive is to receive an amount equal to eight times the annual base salary plus the amount of income taxes payable under Internal Revenue Service (“IRS”) Code § 280G whereas the other two contracts provide that, in the event of a change in control as defined in the contracts, the executive is to receive an amount equal to four times the annual base salary plus the amount of income taxes payable under IRS Code § 280G.

Three of the agreements provide that if the executive’s employment is terminated for other than death, disability, material breach of agreement or voluntary termination, the executive will be entitled to receive one and one-half times his then current base salary. The other agreement provides that the Company may only terminate the executive’s employment for death, disability or cause. In the event of death or disability, the executive is entitled to receive his then current base salary and bonus for a period of one year or until the expiration of the term of the agreement, whichever comes first.

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 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. In February 2001, upon the payment of $150,000 by the Company to the DOC, this investigation was closed.

In 1999, the Consumer Services Division of the 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 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 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).

The Company’s corporate records state 8,000,000 shares of the Company’s common stock were issued to its founder on August 15, 1997 in exchange for $140,000 in the form of cash payments totaling $90,000 and personal property having a value of $50,000; however, the Company was unable to verify that all of this consideration 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 only a portion of the shares issued the founder be recognized as validly issued.

Previously, at the time the Company entered into the severance agreement with the founder as more fully described in Note 5, the founder and the Company entered into an Accommodation Agreement pursuant to which 1,200,000 of the founders’ common shares were placed into an escrow account for a period of three years from which the Company could use shares to settle claims of former employees of the Company. At the end of the three year period, any shares remaining in the escrow account were to be released to the founder.

Subsequent to the actions described above, claims and counterclaims were filed by the Company and the founder. On August 10, 2001, a settlement was reached with the founder which was approved by the court having jurisdiction over the case on August 15, 2001. The material terms of the settlement provided that the Company pay the founder $4,790,000 in damages and an additional $2,400,000 to purchase 1,175,160 shares of the Company’s common stock claimed to be held by the founder. The settlement agreement also provided that the remaining 4,720,000 shares of the Company’s common stock claimed to be held by the founder were void. The founder agreed to release his claims to 828,500 shares of the Company’s common stock held in the escrow account pursuant to the Accommodation Agreement and to the Company’s obligation to him under the severance agreement described in Note 5. The founder also agreed that he would have no future ownership in the Company. The loss on the settlement of $4,790,000, which is net of the previously accrued severance payable to the founder of $927,554, was recorded as of July 31, 2001 and is included in general and administrative expenses for the year then ended.

options from the Company under their alleged employment agreements and based on alleged representations that were made to them in the course of their employment. The Company filed a cross-complaint against the original plaintiffs asserting claims for (1) breach of contract; (2) unfair business practices; (3) misappropriation of trade secrets; (4) intentional interference with prospective economic advantage; (5) negligent interference with prospective economic advantage; (6) conversion; (7) slander; (8) prohibitory injunctive relief; (9) mandatory injunctive relief; and (10) declaratory relief. These claims are based upon written confidentiality agreements signed by the majority of the plaintiffs which the Company believes have been breached by the plaintiffs who are alleged to be wrongfully soliciting the Company’s investors and clients utilizing proprietary company materials and information. In addition, the Company filed a first amended cross-complaint that asserts additional cross-claims against plaintiff David James for rescission and restitution, fraud, money had and received, unjust enrichment and declaratory relief. In summary, the new claims asserted against Mr. James allege that Mr. James’ alleged employment contract and stock options were void or voidable and subject to rescission based on misrepresentations made to the Company by Mr. James. The plaintiffs are seeking, among other relief, damages in the amount of up to $10 million, plus costs and attorney fees. Commonwealth believes that it has satisfied its contractual obligations with respect to the plaintiffs and that there is no factual basis for the plaintiffs’ claim for damages. Our cross-complaint seeks injunctive relief and damages. Commonwealth is vigorously defending this lawsuit.

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.

On November 9, 2001, the Company entered into an agreement with Technical Service Group, Inc., doing business as Symcas-TSG (‘Symcas”) for the right to hire employees of, or independent contractors to, Symcas. Additionally, as part of the same agreement, Symcas transferred interest in and to all of the software that Symcas has developed for the Company. The agreement prohibits Symcas and its affiliates from developing any computer software for use in the natural gas or electricity industries that are similar to this software for a period of two years. Symcas previously performed substantially all of the Company’s software development information technology support and maintenance, and procurement of hardware and software. The Company continues to utilize Symcas on a limited basis for its IT maintenance. In the fiscal year ended July 31, 2002, the Company paid to Symcas a total of $2,090,929. On December 15, 2001, after the close of the agreement with Symcas, the Company hired Linda Guckert, an employee and officer of Symcas, to be the Company’s Vice President of Information Technology.


(1)	Each of these exhibits is incorporated herein by reference to Commonwealth Energy Corporation’s Form 10 filed with the Securities and Exchange Commission on August 9, 2001 (File No. 000-33069).

(2)	Each of these exhibits is incorporated by reference to Commonwealth Energy’s Form 10/A filed with the Securities and Exchange Commission on November 14, 2001 (File No. 000-33069).

(3)	Each of these exhibits is incorporated by reference to Commonwealth Energy Corporation’s Form 10/A filed with the Securities and Exchange Commission on June 10, 2002.

(4)	Each of these exhibits is incorporated by reference to Commonwealth Energy’s Form 10/A filed with the Securities and Exchange Commission on April 10, 2002 (File No. 000-33069).

(5)	Each of these exhibits is incorporated by reference to Commonwealth Energy’s Form 10-Q filed with the Securities and Exchange Commission on December 17, 2001 (File No. 000-33069).


†	Confidential treatment is being sought with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.

EX-3.4 3 a84640exv3w4.txt EXHIBIT 3.4 EX - 3.4 BYLAWS* 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 Bylaws 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. 156, its Shareholders may enter into a Shareholders, Agreement as provided in Sec. 300 (b). Said agreement may provide for the exercise of corporate powers and the management of the business and - ---------- * Sections of these Bylaws which have been amended are noted throughout the document by asterisks and stated in Annex A hereto. 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 Bylaws, adopted by the vote or written assent of the Shareholders entitled to exercise majority voting power as provided in Sec. 212.]* 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 Bylaws 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. - ---------- * Initially amended by the vote of the shareholders in connection with the Annual Meeting of Shareholders held on December 7, 1998. Article I, Section 2 was subsequently amended by the vote of the shareholders in connection with the Annual Meeting of Shareholders held on November 27, 2001. The version of Article I, Section 2 related to such action is set forth in Annex A. -2- 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: Time of Regular Meeting: 11:00 a.m. Date of Regular Meeting: First Monday in August -3- 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 (1) 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, (2) 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 (3) 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 Bylaws 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. - ---------- * Article I, Section 7 was amended and restated in its entirety by the Board of Directors at a Board Meeting held on September 13, 2002. The version of Article I, Section 7 related to the action taken on September 13, 2002 is set forth in Annex A. -4- 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 Bylaws 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 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 -5- 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. 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 Bylaws 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 -6- 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 Bylaws 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 Bylaws. 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 Bylaws. 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 Bylaws. -7- 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 Bylaws 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 Bylaws. 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 Bylaws. -8- 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 following day: 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.]* 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 - ---------- * Initially amended and restated by the Board of Directors at a Board Meeting held on November 16, 2000 and then amended again on October 8, 2001, Article I, Section 7 was subsequently amended and restated in its entirety by the Board of Directors at a Board Meeting held on September 13, 2002. The version of Article I, Section 7 related to the action taken on September 13, 2002 is set forth in Annex A. -9- meeting may give notice thereof in the manner provided by these Bylaws 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 -10- 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). 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 Bylaws. If, however, such majority shall not be present or represented at any meeting of the Shareholders, the Shareholders entitled to vote thereat, -11- 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 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. -12- 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 any; a statement as to the redemption or conversion, if any; a statement of liens or restrictions upon transfer or -13- 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: -14- 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. 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. 418c. 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. -15- Section 3. Certification and Inspection of Bylaws. The original or a copy of these Bylaws, 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 Bylaws 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. 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. -16- ARTICLE VII AMENDMENTS TO BYLAWS Section 1. By Shareholders. New Bylaws may be adopted or these Bylaws 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 Bylaws, 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 Bylaws other than a Bylaw 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 Bylaws, in the appropriate place. If any Bylaws; 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 Bylaws 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 - ---------- * Amended by the vote of the shareholders at the Annual Meeting of Shareholders held on November 27, 2001. The version of Article VII, Section 2 related to such action is set forth in Annex A. -17- agreement cannot waive or alter Secs. 158, (defining close corporations), 202 (requirements, of Articles of Incorporation), 500 and 501 relative to distributions, ill (merger), 1201 (c) (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 Bylaws may be altered or waived thereby, but to the extent they are not so altered or waived, these Bylaws 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. -18- ANNEX A AMENDMENTS TO THE BYLAWS OF COMMONWEALTH ENERGY CORPORATION CERTIFICATE OF SECRETARY The undersigned, John A. Barthrop, being the duly elected, qualified and acting secretary of the Corporation, does hereby certify that the amendment set forth below which became effective on December 7, 1998 has been repealed and is no longer in force and effect. The version of Article I, Section 2 which replaced the Amendment to Article I, Section 2 set forth below was adopted by a vote of the shareholders in connection with the Annual Meeting of Shareholders held on November 27, 2001 and became effective on June 5, 2002. Dated: June 5, 2002 /S/ JOHN A. BARTHROP -------------------------------- John A. Barthrop, Secretary AMENDMENT TO BYLAWS OF COMMONWEALTH ENERGY CORPORATION DATED DECEMBER 7, 1998 Article I, Section 2 of the Bylaws of the Corporation has been amended to read in full as follows: "Section 2. Number and Qualification. "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." A-2 CERTIFICATE OF SECRETARY The undersigned, John A. Barthrop, being the duly elected, qualified and acting secretary of the Corporation, does hereby certify that the following amendments to the Bylaws of Commonwealth Energy Corporation (the "Corporation") were duly adopted as one proposal by a vote of the shareholders at the Annual Meeting of Shareholders held on November 27, 2001(1) and are still in force and effect: Dated: June 5, 2002 /S/ JOHN A. BARTHROP -------------------------------- John A. Barthrop, Secretary AMENDMENT TO BYLAWS OF COMMONWEALTH ENERGY CORPORATION DATED JUNE 5, 2002 Article I, Section 2 of the Bylaws of the Corporation has been amended and restated in its entirety to read as follows: "Section 2. Number and Qualification. "The authorized number of Directors of the corporation shall not be less than five (5) and not more than (9). The exact number of Directors within these limits shall be fixed and may be changed from time to time by the Board of - ---------- (1) On June 5, 2002 by written order, the Honorable James L. Brooks, Judge of the Superior Court of the State of California, pursuant to a proceeding in his court under 709 under the California Corporations Code, permitted the holders of the proxies representing the Commonwealth Shareholders' Group to change their vote on the proposal from "Disapprove" to "Approve," thereby effecting the adoption by the shareholders of these amendments. The effective date of these amendments is deemed to be June 5, 2002, the date of Judge Brooks' Order. A-3 Directors or Shareholders in the manner provided in these Bylaws." Article VII, Section 2 of the Bylaws of the Corporation has been amended and restated in its entirety to read as follows: "Section 2. Powers of Directors. "Subject to the right of the Shareholders to adopt, amend or repeal Bylaws, as provided in Section 1 of this Article VII, and the limitations of Section 204 (a)(5) and Section 212 of the California Corporations code, the Board of Directors may adopt Bylaws and may amend or repeal any of these Bylaws unless the Bylaw, amendment, or repeal in any way changes Section 2 of Article I of these Bylaws." A-4 CERTIFICATE OF SECRETARY The undersigned, John A. Barthrop, being the duly elected, qualified and acting secretary of the Corporation, does hereby certify that the amendments set forth below which become effective on November 16, 2000 and October 8, 2001, respectively, have each been repealed and are no longer in force and effect. The version of Article III, Section 2 which is currently in effect was adopted by the directors of the Corporation at a meeting held on September 13, 2002 and is currently set forth herein. Dated: September 13, 2002 /S/ JOHN A. BARTHROP -------------------------------- John A. Barthrop, Secretary AMENDMENT TO BYLAWS OF COMMONWEALTH ENERGY CORPORATION DATED NOVEMBER 16, 2000 Article III, Section 2 of the Bylaws of the Corporation has been amended and restated in its entirety to read as follows: "Section 2. Annual Meeting. "The annual meeting of the shareholders shall be held, each year, at the time and on the following day "Time of Meeting: 10:00 a.m. "Date of Meeting Fourth Tuesday in November "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." A-5 AMENDMENT TO BYLAWS OF COMMONWEALTH ENERGY CORPORATION DATED OCTOBER 8, 2001 Article III, Section 2 of the Bylaws of the Corporation has been amended and restated in its entirety to read as follows: "Section 2. Annual Meeting. "The annual meeting of the shareholders shall be held, each year, on a date between October 15th and December 30th at a time, designated by the Board of Directors. "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." A-6 CERTIFICATE OF SECRETARY The undersigned, John A. Barthrop, being the duly elected, qualified and acting secretary of the Corporation, does hereby certify that the following amendments to the Bylaws of Commonwealth Energy Corporation (the "Corporation") were adopted by the Board of Directors of the Corporation at a meeting held on September 13, 2002, became effective upon the vote of the directors and are still in force and effect. Dated: September 13, 2002 /S/ JOHN A. BARTHROP -------------------------------- John A. Barthrop, Secretary AMENDMENT TO BYLAWS OF COMMONWEALTH ENERGY CORPORATION DATED SEPTEMBER 13, 2002 Article III, Section 2 of the Bylaws of the Corporation has been amended and restated in its entirety to read as follows: "Section 2. Annual Meeting. "The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. At each annual meeting, directors shall be elected, and any other proper business may be transacted." Article I, Section 7 of the Bylaws of the Corporation has been amended and restated in its entirety to read as follows: "Section 7. Annual Organizational Meeting and Other Regular Meetings. "Immediately following each annual meeting of shareholders, the Board of Directors shall hold a regular meeting for the purpose of organization, any desired A-7 election of officers, and the transaction of other business. Notice of this meeting shall not be required. Other regular meetings of the Board of Directors shall be held without call at such time as shall from time to time be fixed by the Board of Directors. Such regular meetings may be held without notice." A-8 EX-10.7 4 a84640exv10w7.txt EXHIBIT 10.7 EXHIBIT 10.7 CHANGE OF CONTROL AGREEMENT THIS CHANGE OF CONTROL AGREEMENT (the "Agreement") is entered into as of November 1, 2000, between Commonwealth Energy Corporation, a California corporation (the "Company"), and Scott Allen Petterson (the "Employee"). In consideration of the various covenants and agreements hereinafter set forth and for other valuable consideration, the parties hereto agree as follows: 1. DUTIES AND TERM. 1.1 Position. Employee shall serve as full-time Controller for the Company. Employee shall devote his full business time, energy and ability exclusively to the business affairs and interests of the Company and its affiliates and subsidiaries, and matters related thereto, and shall use his best efforts and abilities to promote the Company's interests. Employee shall perform such duties as are assigned to him by the Chief Financial Officer and other assigned tasks consistent with his position as Controller. 1.2 Term of Employment. The Company agrees to employ Employee and Employee accepts such employment on an at will basis. 2. COMPENSATION AND BENEFITS. 2.1 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: (a) Base Salary. The Company shall pay Employee a base salary of $110,000 per annum, payable in accordance with the Company's payroll practices in effect from time to time. The Company may, in its sole discretion, increase Employee's base salary. (b) Bonus. During the term of this Agreement, Employee shall be considered annually for a discretionary performance bonus. The amount of the performance bonus, if any, shall be determined by the Company, in its sole discretion. (c) Stock Option Plan. During the term of this Agreement, Employee will be awarded 15,000 stock options per year for each 12 month period that the employee is employed by Commonwealth under the Commonwealth Energy Corporation Stock Option Plan, in accordance with the terms and conditions set forth in the Employee Stock Option Agreement. The option price for the stock options for the year starting January 2000 shall be $2.50. This option price will change from time to time based on the aggregate price value as determined by the accounting department. (d) Other Fringe Benefits. Employee shall be entitled to participate in the retirement, medical payment, disability, health, life insurance and other similar benefit plans that are generally available to management level employees of the Company, provided, however, that Employee shall be required to comply with the conditions attendant to coverage by such plans and arrangements and shall comply with and be entitled to benefits only in accordance with the terms and conditions of such plans and arrangements. The Company retains the right to modify and/or discontinue any or all fringe benefit plans and arrangements, in the Company's sole discretion. (e) Vacation. During the term of this Agreement, Employee shall receive fifteen (15) days per year of paid vacation. Such vacation shall accrue pro rata in accordance with the Company's vacation pay policies. Vacation days may be taken by Employee only with the advance approval of the Company. 2.2 Expenses. The Company shall pay on Employee's behalf, or reimburse Employee, for reasonable business expenses incurred by Employee in furtherance of the business of the Company and in the performance of Employee's duties hereunder. Employee agrees to submit receipts and other documentation to support such expenses as a condition of reimbursement therefor in accordance with the policies, practices and procedures for reimbursement established from time to time by the Company. Employee shall not incur a business expense in excess of $500.00 without first obtaining the consent of the Chief Operating Officer. 2.3 Withholding and Other Deductions. All compensation payable to Employee hereunder shall be subject to such deductions and withholding of taxes as the Company is from time to time required to make pursuant to law, governmental regulation or order. 3. DUTY OF LOYALTY. 3.1 Full Energies. During the term of this Agreement, Employee shall devote his full energies and productive time to the performance of this Agreement and shall not render services of a business, professional or commercial nature, to any other person or entity, directly or indirectly, whether for compensation or otherwise, or engage in any other business activities without the prior written consent of the President of the Company. Notwithstanding this provision, Employee may make and manage personal business investments of Employee's choice and serve in any capacity with any civic, educational or charitable organization without seeking or obtaining approval of the President of the Company, provided that such activities and services do not interfere or conflict with the performance of Employee's duties hereunder or create any conflict of interest with such duties. 3.2 Confidential Information. As used in this Agreement "Confidential Information" means information (a) that is not known by actual or potential competitors of Company or is generally unavailable to the public, (b) that has been created, discovered, developed, or otherwise become known to the Company, or in which property rights have been assigned or otherwise conveyed to the Company, and (c) that has economic value to the Company's present or future business. "Confidential Information" includes trade secrets (as defined under California Civil Code Section 3426.1) and all other discoveries, developments, designs, improvements, inventions, formulas, methods, software programs, processes, techniques, marketing materials, know-how, Page 2 of 9 data, research, technical data, customer and supplier lists (past and present), customer preferences, financial information, contacts, brokers, lead sources, marketing materials, and personnel information, and any modifications or enhancements of any of the foregoing, and all program, marketing, sales, personnel, or other financial or business information disclosed to Employee by the Company, either directly or indirectly, in writing or orally or by drawings or observations, which has actual or potential economic value to the Company. 3.3 Duty of Trust and Confidentiality. Employee's employment with the Company creates a duty of trust and confidentiality to the Company with respect to the Confidential Information, or any other information: (a) related, applicable, or useful to the business of the Company, including its anticipated research and development; or (b) resulting from tasks assigned to Employee by the Company; or (c) resulting from the use of equipment, supplies, or facilities owned, leased, or contracted for by the Company; or (d) related, applicable, or useful to the business of any of the Company's clients or customers, which may be made known to Employee by the Company or by such client or customer, or learned by Employee during the course of his employment. 3.4 Nondisclosure of Proprietary Information. At all times, both during employment and after cessation of employment, whether cessation is voluntary or involuntary: (a) Employee will keep in strictest confidence and trust all Confidential Information; and (b) Employee will not disclose, use, or induce or assist in the use or disclosure of any Confidential Information without the Company's prior express written consent, except as may be necessary in the ordinary course of performing Employee's job duties for the Company. In addition to the foregoing, Employee agrees to promptly advise the Company if Employee learns of any unauthorized release or use of the Company's Confidential Information, and Employee will take reasonable measures to prevent unauthorized persons or entities from having access to, obtaining, or being furnished with any Confidential Information. 3.5 Confidential and Proprietary Information of Third Parties. The Company has received and in the future will receive from third parties their confidential or proprietary information, subject to a duty to maintain the confidentiality of such information and to use it only for certain limited purposes. Employee agrees to hold all such confidential or proprietary information in strictest confidence, and will not disclose, use, or induce or assist in the use or disclosure of any such confidential or proprietary information without the Company's prior express written consent, except as may be necessary in the ordinary course of performing Employee's job duties for the Company, consistent with its agreement with such third party. 3.6 Return of Documents Upon Termination. All records, files, lists, drawings, documents, equipment and similar items relating to the Company's business which employee has prepared for or received from the Company, and/or will prepare for or receive from the Company, during the course of Employee's employment hereunder, shall remain the Company's sole and exclusive property and Employee shall not acquire any interest therein. Upon termination of employment, and in any event at the request of the Company at any time, Employee shall promptly return to the Company all property of the Company in his possession and all documents, records, diskettes, hard drives, notebooks, work papers, and all similar Page 3 of 9 material containing any Confidential Information, whether prepared by Employee, the Company, or anyone else. 3.7 Non-solicitation of Employees Following Termination. During the term of this Agreement and for a period of three (3) years after the cessation of employment for any reason, whether with or without cause, Employee shall not directly or indirectly, either alone or in concert with others, solicit, entice, or in any way divert any employee of or consultant to the Company to leave the Company or work for anyone in competition with the Company. 3.8 Non-solicitation of Customers Following Termination. During the term of this Agreement and for a period of three (3) years after the cessation of employment for any reason, whether with or without cause, Employee shall not directly or indirectly, either alone or in concert with others, (a) contact any of the customers of the Company for the purpose of soliciting, inducing or encouraging such customers to divert or direct their business away from the Company and to Employee or any other person or entity, or (b) in any way attempt to disrupt the relationship between the Company and any of its customers, vendors or suppliers. 3.9 Equitable Remedies. Employee expressly acknowledges and agrees that irreparable injury will result to the Company from Employee's violation of any of the provisions set forth in Paragraphs 3.1 through 3.8 or this Agreement. Employee expressly agrees that the Company will be entitled, in addition to damages and any other remedies provided by law, to an injunction or other equitable remedy respecting any such violation or continued violation. 4. TERMINATION. 4.1 Termination. Notwithstanding Section 1 above, Employee's employment with the Company shall terminate upon the earliest to occur of any of the following: (a) Death of Employee. The Agreement shall terminate in the event of Employee's death. In such event, the Company will pay Employee's estate or beneficiaries Employee's base salary and accrued vacation through the end of the month in which his death occurs. (b) Disability of Employee. In the event of Employee's incapacity (as defined below) during employment, the Company may, in its sole discretion, terminate Employee's employment hereunder upon thirty (30) days written notice. "Incapacity" shall mean any illness or mental or physical incapacity or disability which prevents Employee from performing Employee's duties hereunder for a continuous period of one hundred twenty (120) consecutive days or for shorter periods aggregating one hundred eighty (180) days within any consecutive twelve (12) month period. In the event that this Agreement is terminated due to Employee's incapacity, the Company shall pay Employee's base salary and accrued vacation through the date of termination. (c) Termination by Employee. The Employee may terminate his employment with three (3) months' advance written notice to Company. Employee shall be obligated to continue to provide services in the normal course of business during such three-month period. Page 4 of 9 (d) Termination by Company for Cause. The Company may terminate Employee without liability other than for payment of Employee's accrued but unpaid base salary and vacation through the date termination, for "cause." The term for "cause" shall mean (i) the failure by Employee to perform any of his duties or obligations hereunder, which failure shall have continued for at least ninety (30) days after notice of such failure shall have been given to Employee by the Company; (ii) Employee's conviction of, guilty plea or plea of nolo contendere concerning any felony or misdemeanor (other than minor traffic violations or similar offenses); (iii) any act of fraud, embezzlement, theft or gross malfeasance on the part of Employee with respect to the Company or any of its assets; (iv) any of the representations and warranties made by Employee herein shall prove to have been materially false or misleading as of the time made; or (v) Employee's material breach of his obligations under this Agreement (other than as a result of incapacity). The Company shall have the right to terminate Employee's employment with the Company hereunder immediately upon the occurrence of any grounds for termination for "cause," upon written notice to the Employee. in the event that this Agreement is terminated for "cause," the Company shall pay Employee's base salary and accrued vacation through the date of termination. (e) Termination by Company Without Cause. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Employee's employment without cause at any time. A termination without cause shall include any termination for any reason, other than as provided in Paragraphs 4.1(a) through 4.1(d) hereinabove. In such event, the Company shall pay Employee at the time of his termination the base salary and accrued vacation earned through the effective date of Employee's termination. (f) Change in Control. In the event that the Company has a non-consensual Change of Control or sale of assets as defined herein, Employee is hereby granted and shall have the absolute right, subject to applicable State and Federal securities laws, 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 Employee all capital stock and stock options of the Company then owned by or owing to Employee at an aggregate repurchase price equal to two (2) times the 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 within twenty-four (24) hours prior to the closing of the Change of Control. Stock Options shall be considered earned by the Employee up to and including the year in which the Change of Control occurs. In addition, the Employee shall receive one times their annual income for that calendar year. Prior to the closing Employee shall sell and the Company shall purchase the capital stock and stock options earned as of that date, as the Employee, at Employee's sole discretion shall elect to be repurchased under the terms of this clause which sale and repurchase may include all of Employee's shares and options, or any combination thereof, without any representation or warranty by Employee other than that they have good title to such stock and such options free of liens, encumbrances and adverse interests, by Employee's delivery to the Company of a certificates or certificates representing such capital stock and stock options, duly endorsed for transfer or accompanied by appropriate stock powers, and/or notice of the exercise of the right to have Company repurchase Employee's options, in which event the Company shall be obligated to immediately deliver to Employee a certified check representing Page 5 of 9 payment of said aggregate 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 in the Company's minutes for 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 non-consensual Change of Control shall be deemed to have been issued on the date of vesting and thus the latest stock price for such options determined by Company as set forth in its minutes shall be used in determining the price for such accelerated vested options. This clause may only be invoked by the Employee in the case of a non-consensual takeover or a non-consensual Change of Control. This clause may not be invoked if the Board in place prior to the referenced action has approved the takeover or the takeover is considered to be friendly. 4.2 Exclusive Remedy. Employee agrees that the payments expressly provided herein in the event of termination shall constitute the sole and exclusive obligations of the Company in the event of Employee's termination, and the payment thereof shall be the sole and exclusive remedy for any termination of Employee's employment. 4.3 Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in this Section 4.1(e) or 4.1(f) by seeking other employment or otherwise, and the amount of payment or benefit provided under Section 4.1(e) or 4.1(f) shall not be reduced by any compensation earned by Employee as a result of employment by another employer or by any other benefits. 5. MISCELLANEOUS. 5.1 Entire Agreement. This Agreement constitutes and contains the entire agreement and final understanding between the parties concerning Employee's employment and the other matters addressed herein. This Agreement is intended by the parties as a complete and exclusive statement of the terms of their agreement regarding Employee's employment and the other matters addressed herein, and it supersedes all prior negotiations and agreements, proposed or otherwise, whether written or oral, concerning Employee's employment and the other matters addressed herein. Any representation, promise or agreement not specifically included herein shall not be binding upon or enforceable against either party. This is a fully integrated document. 5.2 Modification. This Agreement may be modified or amended only by an instrument in writing signed by Employee and the Company and any provision hereof may be waived only by an instrument in writing signed by the party hereto against whom any such wavier is sought to be enforced. 5.3 Succession. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns and any such successor or assignee shall be deemed substituted for the Company under the terms of this Agreement for all purposes. As used herein, "successor" and "assignee" shall include any person, firm, corporation or other business entity Page 6 of 9 which at any time, whether by purchase, merger or otherwise, directly or indirectly acquires the stock of the Company or to which the Company assigns this Agreement by operation of law or otherwise. The obligations and duties of Employee hereunder are personal and not assignable by Employee. Employee's obligations and representation under this Agreement will survive the termination of Employee's employment, regardless of the manner of termination. 5.4 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. 5.5 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 or any other breach of the same or any other provision hereof. 5.6 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. 5.7 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 (b) If to Employee, to: Scott Allen Petterson 4901 Cartien Drive Placentia, CA 92870 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. 5.8 Severability. All sections, clauses and covenants contained in this Agreement are severable, and in the event an 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. Page 7 or 9 5.9 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. 5.10 Mutual Drafters. Each party has cooperated in the drafting and preparation of this Agreement. Hence, this Agreement shall not be construed against any party on the basis that the party was the drafter. 5.11 No Restriction. Employee warrants and represents that he is not restricted or prohibited, contractually or otherwise, from entering into and performing each of the terms and covenants contained in this Agreement, and that his execution and performance of this Agreement will not violate any rule or law or breach any other agreement between Employee and any other person or entity. 5.12 Arbitration. In connection with any dispute between the parties arising out of or relating to this Agreement which cannot be resolved by the parties, either party shall be entitled to have the dispute resolved by exclusive binding arbitration to be conducted in the County of Orange, California, in accordance with the rules and procedures for arbitration as are from time to time prescribed by the American Arbitration Association (the "AAA"). If a dispute exists, the parties shall negotiate in good faith for a period of fifteen (15) days in an attempt to resolve such dispute. If the dispute is not resolved within that period, either party may submit the dispute to arbitration upon ten (10) days' prior written notice to the other party. The arbitration shall be conducted by one arbitrator mutually acceptable to Employee and the Company. If the parties are unable to agree on an arbitrator, the arbitrator shall be selected by alternately striking names from a panel of potential arbitrators designated by the AAA. The determination by the Arbitrator shall be conclusive and binding on the parties and shall not be subject to appeal or other judicial review. The Arbitrator shall not be authorized to change or modify any provision of this Agreement. The Arbitrator shall be entitled to award to the prevailing party in the arbitration, the reimbursement of such party's reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and expenses, the compensation payable to the Arbitrator and fees payable to the AAA) incurred in connection with such arbitration. The prevailing party shall be entitled to enforce the determination of the Arbitrator in any court of competent jurisdiction and the other party hereby unconditionally and irrevocably waives any right to challenge or contest such enforcement. The prevailing party shall be entitled to reimbursement of such party's reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred in attempting to enforce any such determination. Notwithstanding anything to the contrary set forth herein and in furtherance of the rights and remedies afforded to the Company pursuant to Section 5 hereof, the Company shall be entitled to seek injunctive relief in any court of competent jurisdiction for any breach or threatened breach of any of Employee's duties, covenants, agreements or obligations thereunder. Page 8 of 9 5.13 Counterparts. This Agreement may be executed in two counterpart copies, each of which may be executed by one of the parties hereto, but both of which, when taken together, shall constitute a single agreement binding upon each of the parties hereto. 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/ SCOTT ALLEN PETERSON -------------------------- ---------------------------------------- Ian B. Carter Scott Allen Peterson Chief Executive Officer Page 9 of 9 EX-10.22 5 a84640exv10w22.txt EXHIBIT 10.22 [RELIANT ENERGY LOGO] Exhibit 10.22 05/23/2002 Commonwealth Energy Corporation 15901 Red Hill Avenue, Suite 100 Tustin, CA 92780 Fax No. (714) 259-2553 CONFIRMATION LETTER, 001 This confirmation letter is being provided pursuant to and in accordance with the Master Power Purchase and Sale Agreement dated May 18, 2002 (the "Master Agreement") between Reliant Energy Services, Inc. ("RES") and Commonwealth Energy Corporation ("Counterparty"). Terms used but not defined herein shall have the meanings ascribed to them in the Master Agreement. This Confirmation Letter shall confirm the Transaction agreed to on May 23, 2002 ("Trade Date") regarding the sale of the Product under the terms and conditions that follow: Seller: RES Buyer: Counterparty Product: CAISO Energy Delivery Period: [Confidential treatment requested]* Hours ending 0100 through 2400, Pacific Prevailing Time, Monday through Sunday, including NERC holidays. Contact Quantity: Varies by the day and hour during the Delivery Period, as specified in Attachment A Delivery Point: SP-15, however, in the event that SP-15 is split into multiple zones or otherwise redefined, deliveries will be made to the Zone(s), Node(s) and/or Delivery Point(s) that most nearly resemble SP-15 as it exists on the Trade Date. Contract Price: [Confidential treatment requested]* per MWh Special Provisions 1. As a condition precedent to the obligation of the Seller of this Transaction, within five (5) Business Days following the Trade Date, Counterparty shall provide RES with a letter of credit which shall be in form and substance acceptable to RES ("Letter of Credit"). The Letter of Credit shall be in the amount of [Confidential treatment requested]*, and must be maintained with RES through July 31, 2002. For the remaining months in the Contract Term (see below). Counterparty shall provide RES with a new Letter of Credit or amend the original Letter of Credit, in any event no later than ten (10) Business Days before the beginning of each month so that RES is in possession of a Letter of Credit in an amount which corresponds to the applicable month. The Letter of Credit must be maintained with RES throughout each month, for the amount specified below. Should the Letter of Credit ever cease to be in effect for the relevant Letter of Credit Amount during the Contract Term for any reason, this shall constitute an Event of Default pursuant to Section 5 1(c) of the Master Agreement. For the purposes of this Confirmation Letter 001, and Confirmation Letter 002, the three (3) Business Day "grace period" set forth in Section 5.1(c) shall be deemed not to apply and Counterparty shall be considered the "Defaulting Party". - ------- * The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2. [RELIANT ENERGY LOGO]

2. Notwithstanding 6.1 of the Master Agreement, Counterparty shall pay RES for any amounts due under this Transaction every two weeks rather than a calendar month, pursuant to the following payment schedule:

- ------- * The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2. ** Prior Business Day convention [RELIANT ENERGY LOGO] 3. Collateral Threshold: Notwithstanding Section 6.1(c) and 8.2(c) of the Master Agreement, neither party shall be required to provide performance Assurance in an amount in excess of [Confidential treatment requested]*. Please confirm that the terms stated herein accurately reflect the agreement reached on the Trade Date between you and RES by returning an executed copy of this Confirmation by facsimile to RES at (713) 393-0212. Your responses should reflect the appropriate party in your organization who has the authority to enter into this transaction. If you have any questions, please call (713) 207-5855. RELIANT ENERGY SERVICES COMMONWEALTH ENERGY CORPORATION By: [Signature Illegible] By: [Signature Illegible] ------------------------------- ------------------------------------ Name: [Illegible] Name: [Illegible] ----------------------------- ---------------------------------- Title: V.P. Title: C.O.O. ---------------------------- --------------------------------- - ------- * The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2. EX-10.23 6 a84640exv10w23.txt EXHIBIT 10.23 [DTE ENERGY LETTERHEAD] EXHIBIT 10.23 Date: July 25, 2002 To: Commonwealth Energy Corp. 15901 Red Hill Ave., Suite 100 Tustin, CA 92780 Attn: Dick Paulsen Phone: 714.259.2523 Fax: 714.259.2563 Re: CONFIRMATION OF TRANSACTION WITH COMMONWEALTH ENERGY FOR WHOLESALE ELECTRICITY TO SUPPLY COMMONWEALTH ENERGY'S RETAIL CUSTOMER LOAD IN DETROIT EDISON'S SERVICE TERRITORY This Confirmation memorializes the oral Transaction agreement between Steve Sheppard of DTE Energy Trading, Inc. ("DTEET") and Dick Paulsen of Commonwealth Energy ("CE") dated July 25, 2002 regarding the Transaction set forth below. AGREED TO ECONOMIC TERMS BUYER: CE SELLER: DTEET PRODUCT: [Confidential treatment requested]* [Confidential treatment requested]* [Confidential treatment requested]* DELIVERY PERIOD: As defined in Sections 2.2 and 2.3 of the Operating Agreement between Seller and Buyer, effective July 24, 2002 ("Operating Agreement") and with respect to this Transaction: - [Confidential treatment requested]* - [Confidential treatment requested]* from the date the last CE Customer begins taking Energy supplied by CE under the terms of this Transaction WHOLESALE CONTRACT QUANTITY: As defined in Sections 2.2, 2.3, and 3.1 of the Operating Agreement and with respect to this Transaction: - Maximum demand of [Confidential treatment requested]* - Estimated Energy [Confidential treatment requested]* - ------------ * The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2. 1 [DTE ENERGY LOGO] - Actual Energy volume, as provided by ITC/MISO and reduced by ITC/Detroit Edison transmission and distribution losses, will determine the actual Wholesale Contract Quantity delivered. TRANSMISSION & SCHEDULING REQUIREMENTS: Seller will function as CE's Marketer in accordance with the Marketer Agreement for Electric Choice Program between The Detroit Edison Company and Seller. Seller will schedule point-to-point transmission service and schedule ancillary services up to the CE Customer meter(s). CONTRACT PRICE: As defined in Sections 2.2 and 3.2 of the Operating Agreement and with respect to this Transaction; [Confidential treatment requested]* DELIVERY POINT: CE Customer meter(s) PRODUCT FIRMNESS: Physical, Firm Energy with Liquidated Damages. SCHEDULING REQUIREMENTS: Seller will schedule and deliver Energy according to the Wholesale Contract Quantity. Further, Seller will develop it's own day-ahead forecast for energy scheduling. SPECIAL CONDITIONS: Buyer will function as the AES/Retailer in accordance with the AES/Retailer Agreement for Electric Choice Program between The Detroit Edison Company and Buyer. Buyer will select Optional Retail Access Backup Service when enrolling CE Customers in Detroit Edison's Electric Choice Program. Buyer is responsible for all expenses, including taxes, after the Delivery Point. Seller is responsible for all expenses, including taxes, before the Delivery Point. REGULATORY OR RULE CHANGES: If any of the following occurrences have material adverse economic consequences to Seller or Buyer, then the parties agree to use their best efforts to negotiate in good faith to restore the original economic value of this Transaction: 1) a change in existing rules, regulations, procedures or protocols of the entity governing the transmission of Energy, capacity, scheduling or ancillary services, or 2) a change in the obligations of load serving entities in the ITC (or its successor entity) control area. SECURITY FOR CE'S PERFORMANCE: In connection with Energy provided by DTEET under this Transaction, CE will grant DTEET a security interest in, and lien on (and right of setoff against), and assignment of, all account receivables relating to the sale of Energy by CE to certain CE Customers (the "Secured Party Accounts Receivable") pursuant to that certain Security Agreement dated July 24, 2002, which is hereby incorporated by reference ("the Security Agreement"). SPECIAL PAYMENT TERMS: CE will pay DTEET for the Energy pursuant to the terms of that certain Escrow Agreement dated July 24, 2002, which is incorporated by reference (the "Escrow Agreement"). - ------------ * The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2. 2 [DTE ENERGY LOGO] CE's REPRESENTATIONS AND WARRANTIES: CE represents and warrants that there are no encumbrances limiting or interfering with DTEET's rights in the Secured Party Accounts Receivable; CE represents and warrants that it will undertake no action to negate or diminish DTEET's interest in the Secured Party Accounts Receivable and will cooperate fully with DTEET to protect DTEET's interest arising under this Transaction; CE represents and warrants that it has irrevocably instructed each CE Customer receiving the Energy and all other persons or entities paying CE for the Energy, and shall so instruct all future CE Customers receiving the Energy and all other persons or entities at any time paying CE for the Energy, to make payment to the Lockbox (as defined in the Escrow Agreement), and that it will use all commercially reasonable efforts to cause all such persons or entities to agree to make payments to the Lockbox; provided, however, that CE may, subject to the terms and conditions of the Escrow Agreement, Security Agreement, and EEI Master Power Purchase and Sale Agreement, instruct each CE Customer receiving the Energy and all other persons or entities paying CE for the Energy to make payment to a different account upon the termination of this Transaction or the Escrow Agreement); and CE represents and warrants that it will promptly notify DTEET if it is aware that any person or entity instructed to make payment to the Lockbox has refused or failed to make any such payment to the Lockbox, and will as promptly as possible deposit such payments received by CE into the Lockbox. CE represents and warrants that it will only use the Products purchased hereunder to serve its retail customer load under the Detroit Edison Electric Choice Program, and that it will not be resold in the wholesale market. This Transaction Letter shall be governed by the terms and conditions set forth herein and the EEI Master Power Purchase and Sale Agreement between DTEET and Buyer, effective May 11, 2001 (the "Master Agreement") which is incorporated by reference and made a part here of. In the event of a conflict between this Transaction Letter and the terms and conditions of the Master Agreement, including, but not limited to, the product definitions in Schedule P of the Master Agreement, this Transaction Letter shall govern. Please execute this Transaction Letter by signing below and returning a coy to Joseph Gallagher, Risk Monitor, by facsimile at 734.887.2056. 3 CONFIDENTIAL & PROPRIETARY [DTE ENERGY LOGO] If this Transaction Letter is not executed and returned within two (2) Business Days, it shall be deemed correct as sent. Questions should be referred to Joseph Gallagher, of DTEET, at 734.887.2004. Sincerely, DTE Energy Trading, Inc. Approved /s/ RANDALL D. BALHORN - ------------------------------------- Randall D. Balhorn, President 7/25/02 - ------------------------------------- Date ACCEPTED AND AGREED: Commonwealth Energy Corporation /s/ DICK PAULSEN - ------------------------------------- Dick Paulsen, Chief Operating Officer 7/26/02 - ------------------------------------- Date 4 EX-10.24 7 a84640exv10w24.txt EXHIBIT 10.24 EXHIBIT NO. 10.24 TransAlta Energy Marketing (U.S.) Inc. 110-12 Avenue SW (T2-3E) Calgary, Alberta T2P 2M1 CONFIRMATION OF MULTI-BLOCK ELECTRIC POWER TRANSACTION 16APR02 TransAlta Ref.#: AEH522-F2881 Broker: DECISION STRATEGIES LLC This Confirmation sets forth the specific terms of the Transaction orally agreed to by the representatives of TransAlta Energy Marketing (U.S.) Inc. ("TransAlta") and Counterparty pursuant to the WSPP Agreement effective March 1, 2002. Trade Date: 11APR02 Buyer: COMMONWEALTH ENERGY CORPORATION Attn: MAX CARPENTER Tel: Fax: 714-259-2592 Seller: TEMUS Attn: Manager, Financial Operations Tel: 403-267-6995 Fax: 403-267-6908 Obligation: FIRM - SERVICE SCHEDULE "C" Contract Quantity: [CONFIDENTIAL TREATMENT REQUESTED]* MWH during term Energy: PHYSICAL POWER Delivery/Receive Point(s): NORTH PATH 15 North Path 15 - "NP15" means California ISO Zone NP-15 as currently defined, until such time that the definition of NP-15 changes or the zone ceases to exist, when the Delivery Point shall be that zone, or any physical location or bus, that reasonably resembles, in terms of liquidity and homogeneity and physical location, PGE3, and specifically excluding the proposed "North Bay and Greater Bay Area Zones" as identified in Figure 1 on page 10 of Appendix H (located at http:www.caiso.com/docs/09003a6080/06/ec/09003a608006ec61.pdf) to the document entitled "Congestion Management Reform Recommendations" (Draft Proposal) dated July 28, 2000 issued by the California ISO on its official website: http://www.caiso.com. Special Terms and Exceptions: Seller has initially granted Buyer [CONFIDENTIAL TREATMENT REQUESTED]* of open-line credit based on Seller's current credit policy and analysis and Buyer's financial statements. This [CONFIDENTIAL TREATMENT REQUESTED]* open-line credit amount may be increased, reduced, or removed by Seller at any time in its sole discretion and without notice to Buyer. For greater certainty, nothing contained in this confirmation shall waive, reduce, or limit the Seller's rights pursuant to Section 27 of the WSPP Agreement to request - ------------ * The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2. any additional assurances of Purchaser's ability to perform. ================================ TRADE DETAILS =================================

To give or receive operational notices, contact scheduling desk at tel: 403-267-6956 TransAlta Energy Marketing (U.S.) Inc. /s/ R.W. CRAIG - ----------------------------- R.W. Craig Manager, Financial Operations COMMONWEALTH ENERGY CORPORATION /s/ [ILLEGIBLE SIGNATURE] - ----------------------------- If you agree that this Confirmation accurately reflects our agreement, please execute and return a copy by fax to TransAlta Energy Marketing (U.S.) Inc. (Contract Administration) at fax 403-267-6908; otherwise, please contact us immediately by telephone and facsimile transmission as failure by recipient to execute and return this Confirmation or to notify sender of its disagreement within five (5) business days of receiving this Confirmation shall constitute the recipient's agreement to the terms set forth herein. - ------------ * The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2. EX-10.25 8 a84640exv10w25.txt EXHIBIT 10.25 EXHIBIT 10.25 AGREEMENT OF LEASE between CHERRY TREE INVESTORS, L.P. Landlord and COMMONWEALTH ENERGY CORPORATION Tenant LEASE AGREEMENT DATED AUGUST 9, 2002. BETWEEN CHERRY TREE INVESTORS, L.P., a New Jersey limited partnership ("Landlord"), having an office at GSB Building, Suite 401, One Belmont Avenue, Bala Cynwyd, PA 19004 and COMMONWEALTH ENERGY CORPORATION, a California corporation ("Tenant"), having an address at Cherry Tree Corporate Center, Suite 123, Cherry Hill, New Jersey 08002. PREAMBLE BASIC LEASE PROVISIONS AND DEFINITIONS. In addition to other terms elsewhere defined in this Lease, the following terms whenever used in this Lease should have only the meanings set forth in this Preamble, unless such meanings are expressly modified, limited or expanded elsewhere herein. l. Demised Premises: Suite 350 as outlined on the floor plan annexed hereto and made a part hereof as EXHIBIT A consisting of approximately 2,265 square feet of Gross Rentable Area on the 3rd floor, to be delivered on the Commencement Date together with all fixtures, equipment, improvements and installations attached thereto in the building located at Cherry Tree Corporate Center, 535 Route 38, Cherry Hill Township, Camden County, New Jersey and having 139,044 square feet of Gross Rentable Area, (the "Building"). 2. Term: Three (3) years. 3. Commencement Date: The date the Demised Premises is delivered to Tenant as set forth in Article 4 of this Lease. 4. Fixed Rent Commencement Date: The Commencement Date. 5. Expiration Date: Noon on the last day of the calendar month in which the day immediately prior to the three (3) year anniversary of the Commencement Date occurs. 6. Permitted Use: General office use. 7. Fixed Rent:

(For the purposes of Rent calculations, Year 1 shall begin on the Fixed Rent Commencement Date). 8. Late Charge: Four percent (4%) of the amount of the payment due. 9. Tenant's Proportionate Share of Excess Expenses: One and sixty-three one-hundredths percent (1.63%) of the amount by which Expenses during any Lease Year exceed Base Year Expenses. Such percentage is arrived at by dividing the Gross Rentable Area of the Demised Premises by (ii) the Gross Rentable Area of the Building (which for the purposes of this Lease is agreed to be 139,044 square feet). 10. Base Year: Calendar Year 2002 ll. Security Deposit: $0.00 12. Tenant's S.I.C. Code and Address for Environmental Information (as per most recent S.I.C. Manual as published by the United States Office of Management & Budget):_______________. 13. Designated Brokers: Cushman & Wakefield of Pennsylvania. 14. Landlord's Work: in accordance with EXHIBIT B attached hereto and made a part hereof. The parties hereby agree to the following terms and conditions: 1. Premises, Term and Purpose. (a) Landlord does hereby lease to Tenant, and Tenant does hereby lease from Landlord, the Demised Premises located in the Building for the term commencing on the "Commencement Date" and ending on the Expiration Date, or such earlier date upon which the term may expire or be terminated pursuant to the provisions of this Lease or pursuant to Law (as defined below). The parcel of land on which the Building is located is hereinafter called the "Land" and is more particularly described on Exhibit A-1 annexed hereto and made a part hereof. (b) The Demised Premises shall be used by Tenant for the Permitted Use and for no other use or purpose. Tenant shall not use or occupy the Demised Premises or any part thereof, for any purpose deemed unlawful, disreputable, or extra-hazardous on account of fire or other casualty, or for any purposes which shall impair the character of the Building. Tenant, at its sole cost and expense shall obtain any consents, licenses, permits or approvals required to conduct its business at the Demised Premises. (c) The "Common Areas" of the Building shall be those parts of the Building and other improvements designated by Landlord from time to time for the common use of all tenants, including among other facilities, halls, lobbies, delivery passages, drinking fountains, public toilets, and the like, and all garages, parking lots, service buildings or similar improvements operated, owned or maintained, in whole or in part, by Landlord, and all parkways, drives, greenspaces, parks, fountains or other facilities owned, operated or maintained, in whole or in part, by Landlord, or otherwise made available by Landlord for use by all tenants of the Building, whether used in conjunction with the use of such space by the occupants of other buildings or used exclusively by tenants of the Building, all of which facilities shall be subject to Landlord's reasonable management and control and shall be operated and maintained for the benefit of all tenants in a first class manner. Tenant, and its employees and invitees, shall have the non-exclusive right to use the Common Areas, such use to be in common with Landlord, other tenants of the Building and other persons entitled to use the same. (d) Notwithstanding any provision to the contrary contained herein, Landlord has the right, either prior to the Commencement Date or at any time during the term of this Lease, to relocate Tenant to comparable space located in the Building on at least sixty (60) days prior written notice to Tenant. In the event that Tenant is so relocated, Landlord will pay all of the expenses of preparing and decorating the new premises so that the new premises will be substantially similar to the Premises, the expense of moving Tenant's furniture and equipment, telephone service and signs to the relocated premises and the cost of changing Tenant's letterhead to reflect Tenant's new address. In the event of such relocation, Landlord and Tenant shall enter into an agreement supplementing this Lease which supplemental agreement shall amend the definition of "Demised Premises" as used in this Lease to reflect the space in which Tenant is relocated. All other provisions of this Lease shall remain in full force and effect. (e) If Landlord is unable to perform the Landlord's Work (as defined below) or deliver possession of any portion of the Demised Premises because of the holding over or retention of possession by the current occupants or for any other reason whatsoever, Landlord shall not be subject to any liability for failure to perform the Landlord's Work or deliver possession and the validity of this Lease shall not be impaired under such circumstances. Promptly after the occurrence of the Commencement Date, the parties shall enter into a written agreement confirming such date. -2- 2. Rent. To the extent provided herein the rent payable by Tenant pursuant to this Lease is intended to be absolutely net to Landlord, and all other charges and expenses imposed upon the Demised Premises incurred in connection with its use, occupancy, care, maintenance, operation and control shall be paid by Tenant, except as otherwise expressly provided herein. (a) The rent reserved under this Lease for the Term hereof shall be and consist of (a) the Fixed Rent payable in equal monthly installments in advance to be paid on the first day of each and every calendar month during the Term (except that Tenant shall pay the first monthly installment upon signing this Lease); plus (b) such additional rent ("Additional Rent") in an amount equal to Tenant's Proportionate Share of Excess Expenses (as such terms are defined in Paragraph 3 of this Lease) and all separate charges for services and utilities expressly provided in Paragraph 15 hereof, and any other charges as shall become due and payable hereunder, which Additional Rent shall be payable as hereinafter provided, all to be paid to Landlord at its office stated above, or such other place as Landlord may designate, in lawful money of the United States of America; provided, however, that if the Fixed Rent Commencement Date shall occur on a date other than the first calendar day of a month, the rent for the partial month commencing on the Fixed Rent Commencement Date shall be appropriately pro-rated on the basis of the monthly rent payable during the first year of the Term. (b) Tenant does hereby covenant and agree promptly to pay the Fixed Rent, Additional Rent and any other charges herein reserved as and when the same shall become due and payable, without demand therefor, and without any set-off or deduction whatsoever. All Additional Rent and other charges payable hereunder, which are not due and payable on a monthly basis during the Term, unless otherwise specified herein, shall be due and payable within twenty (20) days of delivery by Landlord to Tenant of notice to pay the same. (c) In the event that any payment of Fixed Rent, Additional Rent or any other charges shall be paid after the due date for same provided herein, Tenant shall pay, together with such payment, the Late Charge. In addition, such unpaid amount shall bear interest until paid beginning on the due date at the lesser of the prime rate established by First Union National Bank or its successors plus five percent (5%) per annum or the maximum rate permitted by law. 3. Operating Expenses. (a) For purposes of this Paragraph, the following definitions shall apply: "Base Year Expenses" shall mean the actual Expenses (as defined in this Paragraph 3) incurred during the Base Year and, if the Building is less than ninety-five percent (95%) occupied at any time during the Base Year, such expenses shall be adjusted to the extent necessary to reflect ninety-five percent (95%) occupancy throughout such twelve (12) month period. "Lease Year" shall mean each calendar year (or portion thereof) occurring during the Term. "Real Estate Taxes" shall mean all taxes, assessments, general and special, ordinary as well as extraordinary, charges (including, but not limited to, water and sewer rents and charges), levies, impositions and payments wholly or partly in lieu thereof however denominated, now or hereafter in effect, which are or may be imposed upon or made liens upon the Land, the Building and other real property included with or located upon the Land. If, due to a change in the method of taxation or assessment, any franchise, income, profit, gross receipts or other tax, however designated, shall be substituted by the applicable taxing authority in whole or in part, for the Real Estate Taxes now or hereafter imposed on the Land, the Building or other real property included in the Land, such franchise, income, profit, gross receipts or other tax shall be deemed to be included in the term "Real Estate Taxes." -3- "Expenses" shall mean (i) Real Estate Taxes and (ii) the total of all the costs and expenses paid or incurred by Landlord with respect to the management, operation, maintenance, and repair of the Building and the Land and the services provided tenants therein (excepting electrical energy expenses paid directly by tenants (including Tenant) pursuant to Paragraph 15 of this Lease and equivalent provisions of other leases) including, but not limited to, the cost and expenses incurred for and with respect to: all utilities, including without limitation, water, electricity, gas, lighting, sewer and waste disposal; air conditioning, ventilation and heating (subject to the deduction hereinafter described); lobby maintenance and cleaning; elevators; protection and security (to the extent provided by Landlord without any obligation to do so); lobby decoration and interior and exterior landscape and garden maintenance and cleaning; snow removal, parking lot maintenance, boardwalk maintenance and cleaning, costs of maintaining easements areas granted to governmental bodies; all repairs, replacements and improvements which are appropriate for the continued operation of the Building in a first-class manner; maintenance and painting or other floor and wall covering of non-tenant areas; fire, all risk coverage, boiler and machinery, sprinkler, apparatus, public liability and property damages, rental and plate glass insurance and any insurance required by a mortgagee; supplies; wages, salaries, disability benefits, pensions, hospitalization, retirement plans, group insurance, and other employee benefits respecting employees of the Landlord and/or its management company up to and including the Building manager; uniforms and working clothes for such employees and the cleaning thereof; expenses imposed on the Landlord and/or its management company pursuant to law or to any collective bargaining agreement with respect to such employees; workmen's compensation insurance, payroll, social security, unemployment and other similar taxes with respect to such employees; the cost for a bookkeeper and for an accountant; the cost of office management space; professional and consulting fees; legal and auditing fees; association fees or dues; the expenses, including payments to attorneys and appraisers, incurred by Landlord in connection with any application or proceeding wherein Landlord obtains or seeks to obtain reduction or refund of the Real Estate Taxes payable or paid upon or against the Building; costs incurred by Landlord of compliance with any governmental law, rule or regulation enacted after the date of this Lease, management fees of the Building and any other expenses of any other kind whatsoever reasonably incurred in managing, operating, maintaining and repairing the Building and the Land. If the Building is less than ninety-five percent (95%) occupied at any time during any Lease Year, such expenses shall be adjusted to the extent necessary to reflect ninety-five percent (95%) occupancy throughout such twelve (12) month period. It is agreed, however, that the foregoing costs and expenses shall exclude or have deducted from them, as the case may be and as shall be appropriate: (i) leasing commissions; (ii) salaries for executives above the grade of Building manager; (iii) Building start-up or opening expenses; (iv) expenditures for capital improvements except those which under generally applied real estate practice are expensed or regarded as deferred expenses and except for capital expenditures required by law in any of which cases the cost thereof shall be included in Expenses for the calendar year in which the costs are incurred and subsequent calendar years, on a straight line basis amortized over an appropriate period not exceeding ten years, with an interest factor equal to the prime commercial lending rate publicly announced by First Union National Bank, Philadelphia, PA or its successor, as its "prime rate" (hereinafter referred to as the "Prime Rate") or such higher rate if Landlord borrows funds at such higher rate, at the time of Landlord's having actually incurred said expenditure; (v) amounts received by Landlord through proceeds of insurance to the extent the proceeds are compensation for expenses which were previously included in expenses hereunder; -4- (vi) cost of repairs or replacements incurred by reason of fire or other casualty, to the extent which Landlord is compensated therefor through proceeds of insurance, or caused by the exercise of the right of eminent domain; (vii) advertising, and promotional expenditures; (viii) legal fees for disputes with tenants and legal and auditing fees, other than legal and auditing fees reasonably incurred in connection with maintenance and operation of the Building or in connection with the preparation of statements required pursuant to additional rent or lease escalation provisions; If Landlord shall purchase any item of capital equipment or make any capital expenditure designed to result in savings or reductions in Expenses then the costs for same shall be included in Expenses. The costs of such capital equipment or capital expenditures are to be included in Expenses for the calendar year in which the costs are incurred and subsequent calendar years, on a straight line basis amortized over such period of time as reasonably can be estimated as the time in which such savings or reductions in Expenses are expected to equal Landlord's costs for such capital equipment or capital expenditure, with an interest factor equal to the Prime Rate, or such higher rate if Landlord borrows funds at such higher rate, at the time of Landlord's having actually incurred said costs. If Landlord shall lease any such item of capital equipment designed to result in savings or reductions in Expenses, then the rentals and other costs paid pursuant to leasing shall be included in Expenses for the calendar year in which they were incurred. If during all or part of any calendar year, Landlord shall not furnish any particular item(s) of work or service (which would constitute an expense hereunder) to portions of the Building, due to the fact that construction of the Building is not completed, or such portions are not occupied or leased or because such item of work or service is not required or desired by the tenant of such portion, or such tenant is itself obtaining and providing such item of work or service, or for other reasons, for the purposes of computing the Additional Rent payable hereunder, the amount of the Expenses for such item for such period shall be increased by an amount equal to the additional operating and maintenance expenses which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such item of work or service to such portion of the Building. In the event that any facilities, services or utilities used in connection with the Building are provided from another office building owned or operated by Landlord, or vice versa, the cost incurred by Landlord in connection with such facilities, services or utilities shall be allocated between the Buildings on an equitable basis reasonably determined by Landlord. (b) In the event (i) that the Commencement Date shall occur on a day other than the first day of a calendar year, (ii) that the date of the expiration or other termination of this Lease shall be a day other than the last day of a calendar year, or (iii) of any increase or decrease (as herein provided) in the Area of the Demised Premises or in the Gross Rentable Area of the Building, then in each such event in applying the provisions of this Article 3 with respect to any calendar year in which such event shall have occurred, appropriate adjustments shall be made to reflect the occurrence of such event on a basis consistent with the principles underlying the provisions of this Article 3, taking into consideration the portion of such calendar year which shall have elapsed prior to the Commencement Date, the date of such expiration or other termination or the date of such increase or decrease. (c) Tenant shall be responsible for Tenant's Proportionate Share of Excess Expenses during the Term as herein provided. (1) For each Lease Year, or part thereof, Landlord shall send to Tenant a statement of projected excess expenses, for the applicable Lease Year (or portion thereof) over the Base Year Expenses ("Projected Excess Expenses") and shall indicate what the estimated amount of Tenant's Proportionate Share of Excess Expenses shall be, said amounts to be paid in equal monthly installments (rounded to the nearest whole dollar) in advance on the -5- first day of each month by Tenant as Additional Rent, commencing on the first anniversary of the Commencement Date. (2) Following the end of each Lease Year, Landlord shall send to Tenant a statement of actual Expenses incurred for the prior Lease Year showing Tenant's Proportionate Share of Excess Expenses due from Tenant, and, in the case of the first Lease Year, a statement showing actual Base Year Expenses. In the event the amount prepaid by Tenant exceeds the amount that was actually due based upon actual year end cost, then Landlord shall credit an amount equal to the overcharge to the payment or payments of Additional Rent next coming due hereunder. In the event Landlord has undercharged Tenant then Landlord shall provide Tenant with an invoice stating the additional amount due, which amount shall be paid in full by Tenant within twenty (20) days of receipt. Provided that Tenant shall have paid Tenant's Proportionate Share of Excess Expenses, as billed by Landlord, in full for any Lease Year, Tenant shall have the right to audit the calculation of Tenant's Proportionate Share of Excess Expenses for such Lease Year within sixty (60) days after Tenant's receipt of the statement described in this Subparagraph (2) from Landlord with respect to such Lease Year. Such audit shall be conducted at Landlord's offices during regular business hours and upon at least five (5) business days' notice to Landlord. Tenant acknowledges and agrees that upon the termination or sooner expiration of this Lease Tenant shall remain liable for Tenant's Proportionate Share of Excess Expenses notwithstanding the fact that the statement described in this Subparagraph (2) from Landlord with respect to such Lease Year is delivered after the termination or sooner expiration of this Lease. (d) Each and every of the amounts payable by Tenant pursuant to Subparagraphs 3(c)(1) and 3(c)(2) above, whether requiring lump sum payment or constituting projected monthly amounts, shall for all purposes be treated and considered as Additional Rent and the failure of Tenant to pay the same as and when due in advance and without demand shall have the same effect as failure to pay any installment of the Fixed Rent and shall afford Landlord all the remedies provided in this Lease therefor, including, without limitation, the Late Charge as provided in Paragraph 2(c) of this Lease. (e) Tenant acknowledges and agrees that Landlord shall have the right to change the period of the Lease Year, either before or during the Term, to any other fiscal year or twelve month period. In the event Landlord makes such change, then the same shall be effective upon written notice to Tenant and, in such event, Tenant shall pay Tenant's Proportionate Share of Excess Expenses for the period from the end of the initially designated Lease Year, as last billed, to the beginning of the newly designated Lease Year, prorated for such period, within twenty (20) days of the rendering by Landlord of the bill for such interim period. 4. Completion of Improvements and Commencement of Rent. (a) Landlord agrees to construct the improvements and other work in and to the Demised Premises in accordance with Exhibit B attached hereto and made a part hereof (the "Landlord's Work"). If Tenant requests any changes to Exhibit B, Tenant shall bear any additional construction or other expense to Landlord caused directly or indirectly by any change requested by Tenant. Tenant shall pay Landlord for any such expense within fifteen (15) days after request for payment by Landlord. (b) The Demised Premises to be delivered on the Commencement Date shall be deemed ready for occupancy and the Commencement Date hereunder shall occur on such date that (a) the Demised Premises shall be delivered to Tenant in tenantable condition, free of violations of any health, safety, fire and other statutes and regulations governing the Demised Premises and its use, all of which shall be established by issuance of a certificate (temporary or final) by appropriate governmental authority, permitting occupancy of the Demised Premises for the purposes set forth herein; and (b) Landlord has substantially completed the Landlord's Work (and Landlord shall be deemed to have substantially completed the Landlord's Work notwithstanding that minor or insubstantial details of construction, mechanical adjustment or decoration remain to be performed in the Demised Premises or any part thereof, the non-completion of which does not materially interfere with Tenant's use of the Demised Premises). -6- If the occurrence of any of the conditions listed in the preceding sentence, and thereby the making of the Demised Premises ready for occupancy, shall be delayed due to: (i) any act by Tenant or any of its employees, agents or contractors, which materially interferes with the completion of Tenant's improvements, or (ii) any additional time required for the completion of the Landlord's Work because of the inclusion therein, at Tenant's request, of any item of work not included in Exhibit B; then the Commencement Date shall not be delayed by any day of such Tenant delay. In the event any such delay shall be asserted by Landlord, Landlord shall notify Tenant of the same, which notice shall include the number of delay days. (c) Tenant shall occupy the Demised Premises as soon as the same are ready for its occupancy and the Commencement Date shall have occurred (but not prior to said date except for purpose of installing of Tenant's personal property or otherwise with the express consent of Landlord as provided herein). If and when Tenant shall take actual possession of the Demised Premises, it shall be conclusively presumed that the same are in satisfactory condition, except any items of work set forth on a "Punch List" to be submitted to and acknowledged by Landlord in writing within thirty (30) days after the Commencement Date. 5. Tenant Covenants As To Condition of Premises, and Compliance with Laws. (a) In the event that the Building or any of the equipment affixed thereto or stored therein should be damaged as a result of any act of Tenant, its agents, servants, employees, invitees or contractors, Tenant shall, upon demand, pay to Landlord the cost of all required repairs, including structural repairs. Tenant shall commit no act of waste and shall take good care of the Demised Premises and the equipment affixed thereto and stored therein, shall maintain the Demised Premises in good condition and state of repair, and at the end or certain expiration of the Term hereof, shall deliver up the Demised Premises in good order and condition, wear and tear from a reasonable use thereof excepted, and, at Landlord's option, after the removal of those alterations, improvements or additions made by Tenant as Landlord shall designate in writing to Tenant and the restoration of the Demised Premises to its condition prior to the making of such removed alteration, improvement or addition. Landlord shall perform, or cause to be performed, all such maintenance and repairs and Tenant shall pay to Landlord the costs incurred therefor immediately upon demand as Additional Rent. (b) Tenant, at Tenant's expense, shall promptly comply with all laws, rules, regulations and ordinances, of all governmental authorities or agencies having jurisdiction over the Demised Premises, and of all insurance bodies (including, without limitation, the Board of Fire Underwriters), at any time duly issued or in force, applicable to the Demised Premises or any part thereof or to Tenant's use thereof ("Laws"). 6. Tenant Improvements, Alterations and Installations. (a) All fixtures, equipment, improvements, alterations, and installations which are attached to the Demised Premises, and any additions and appurtenances made by Tenant to the Demised Premises shall become the property of Landlord upon installation. Not later than the last day of the Term, Tenant shall, at its expense, remove from the Demised Premises all of its personal property and such improvements as Landlord elects to have removed. Tenant, at its sole cost and expense, shall repair injury done by or in connection with the installation or removal of such improvements. The foregoing undertaking shall survive the termination or sooner expiration of the Lease and surrender of the Demised Premises. Any equipment, fixtures, goods or other property of Tenant, not removed by Tenant upon the termination of this Lease, or upon any quitting, vacating or abandonment of the Demised Premises by Tenant, or upon Tenant's eviction, shall be considered as abandoned and Landlord shall have the right, without any notice to Tenant, to sell or otherwise dispose of the same, at the expense of Tenant, and shall not be accountable to Tenant for any part of the proceeds of such sale, if any. Landlord may have any such property stored at Tenant's risk and expense. (b) No structural alterations, installations, additions or improvements or nonstructural alterations that will adversely affect the plumbing, HVAC or electrical systems of the Demised Premises or the Building ("Building Systems") or that are visible to the Common -7- Area shall be made by Tenant without Landlord's express prior written approval, which Landlord shall grant or deny in its sole and absolute discretion. Tenant shall give Landlord prior written notice of any proposed alterations, additions or improvements (hereinafter collectively, with the initial construction of the Demised Premises, called "Alterations"). Tenant shall deliver to Landlord copies of proposed plans and as-built plans upon completion of Alterations. All Alterations shall be done at Tenant's sole expense and the making thereof shall not interfere with the use of the Building by other tenants or disturb harmonious labor relations with Landlord's employees, agents, contractors or subcontractors. In the event that Tenant, its employees, agents, contractors or subcontractors conflict or interfere with labor employed by Landlord, its employees, agents, contractors or subcontractors, or in the event that any work stoppage, jurisdictional labor dispute or other interference with Landlord, its employees, agents, contractors or subcontractors occurs, of which Landlord shall be the sole and absolute judge, Landlord shall have the right to require Tenant, upon written demand, to remove or cause the removal forthwith of all Tenant's employees, agents, contractors and subcontractors from the Demised Premises, and Tenant agrees to comply with such demand immediately. In the event Tenant fails to comply with such demand immediately, and thereby causes a delay in the general construction program of the Building or the Land or the Landlord's Work, Tenant shall be deemed to be in default of this Lease entitling Landlord to all of its rights hereunder and at law. Tenant agrees to indemnify, defend and hold harmless Landlord from any and all costs, expenses, claims, causes of action, damages and liabilities of any type or nature whatsoever (including, but not limited to attorneys' fees and costs of litigation) arising out of or relating to the making of the Alterations by Tenant. Nothing herein contained shall be construed as constituting the permission of Landlord for a mechanic or subcontractor to file a lien claim against the Demised Premises and Tenant agrees immediately to secure the removal of any such lien which a contractor purports to file against said premises by payment or otherwise pursuant to law. All such Alterations shall be effected in compliance with all applicable laws, ordinances, rules and regulations of governmental bodies having or asserting jurisdiction over the Demised Premises. 7. Various Negative Covenants by Tenant. Tenant agrees that it shall not, without Landlord's prior written consent: (a) Do anything in or near the Demised Premises which will increase the rate of fire insurance on the Building; (b) Permit the accumulation of waste or refuse matter in or near the Demised Premises except in containers provided therefor; (c) Mortgage, hypothecate, pledge or encumber this Lease in whole or in part; (d) Permit any signs, lettering or advertising matter to be erected or attached to the Demised Premises; or (e) Encumber or obstruct the Common Areas surrounding the Demised Premises nor cause same to be encumbered or obstructed, nor encumber or obstruct any access ways to the Demised Premises, nor cause same to be encumbered or obstructed. 8. Various Affirmative Covenants of Tenant. Tenant covenants and agrees that Tenant will: (a) At any time and from time to time, execute, acknowledge and deliver to Landlord, or to anyone Landlord shall designate, a tenant estoppel certificate in a form reasonably acceptable to Landlord or financial institutions requesting the same relating to matters customarily included in tenant estoppel certificates within fifteen (15) days of receipt of Landlord's request accompanied by such certificate. -8- (b) Faithfully observe and comply with the rules and regulations annexed hereto and made a part hereof as Exhibit C and such additional rules and regulations as Landlord hereafter at any time or from time to time may communicate in writing to Tenant, and which in the reasonable judgment of Landlord, shall be necessary or desirable for the reputation, safety, care or appearance of the Building, or the preservation of good order therein, or the operation or maintenance of the Building, or the equipment thereof, or the comfort of tenants or others in the Building; provided, however, that in the case of any conflict between the provisions of this Lease and any such rule or regulation, the provisions of this Lease shall control. Nothing contained in this Lease shall be construed to impose upon Landlord any duty or obligation to enforce the rules and regulations or the terms, covenants or conditions in any other lease as against any other tenant, and Landlord shall not be liable to Tenant for violation of any rule or regulation by any other tenant, its employees, agents, visitors, invitees, subtenants or licensees. 9. Building Directory and Signage. Tenant shall not affix any sign to the Building or place any sign so that it can be seen from outside of the Building or the Demised Premises, except that Tenant shall be entitled to place a sign on its entranceway if such sign complies with the sign criteria delivered by Landlord to Tenant or is approved by Landlord. Landlord will, at the request of Tenant, maintain listings on the directory located within the Building of the names of Tenant and any other firm, association or corporation in occupancy of the Demised Premises or any part thereof as permitted hereunder. Landlord shall not be required to list the names of any individuals on said Building directory. 10. Casualty and Insurance. (a) In the event of partial or total destruction of the Building or the Demised Premises by reason of fire or any other cause, Tenant shall immediately notify Landlord of same and Landlord shall promptly restore and rebuild the Building or the Demised Premises at Landlord's expense (but only to the extent of the insurance proceeds covering such damage) unless Landlord elects by notice to Tenant within ninety (90) days of said destruction not to restore and rebuild the Demised Premises, and, in such case, this Lease shall terminate. If Landlord elects to restore and rebuild the Demised Premises, then during the period of restoration of any such area, and, if any portion of Demised Premises are rendered untenantable by said damage, Tenant shall be relieved of the obligation to pay that portion of the rent herein reserved which relates to said untenantable area. (b) Tenant shall, at Tenant's sole cost and expense, but, except to the extent prohibited by law with respect to workmen's compensation insurance, for the mutual benefit of Landlord and Tenant and any Additional Insured (as hereinafter defined) or any other additional insured as Landlord may from time to time determine including the lessors under any ground leases or underlying leases and any mortgagees, maintain or cause to be maintained (a) commercial general liability insurance, including but not limited to, premises, bodily injury, personal injury and contractual liability, coverages for any and all injury resulting from any act or omission on the part of Tenant or Tenant's contractor's, licensees, agents, visitors or employees, on or about the Demised Premises including such claims arising out of the construction of improvements on the Demised Premises, such insurance to afford protection to the limit of not less than Five Million Dollars ($5,000,000.00) single limit; (b) workmen's compensation insurance covering all persons employed in connection with the construction of any improvements by Tenant and the operation of its business upon the Demised Premises and (c) "all risk" coverage on all of Tenant's personal property, including, but not limited to, standard fire and extended coverage insurance with vandalism and malicious mischief endorsements on all Tenant's improvements and alterations in or about the Demised Premises, to the extent of their full replacement value. In the event Landlord, at any time during the Term of the Lease, reasonably determines that Tenant's insurance coverage is inadequate, based upon the coverages being required by landlords of comparable buildings in the general geographic area of the Building, Landlord shall have the right to require Tenant to increase its insurance coverage. All such insurance shall, to the extent permitted by law, name Landlord, and BR Management Corporation, and their successors and assigns as additional insureds (the "Additional Insureds") -9- and shall be written by a good and solvent insurance carrier authorized to do business in the State of New Jersey. Any of the foregoing Additional Insureds may be changed at any time notice is given as provided in Paragraph 18 herein. Landlord makes no representation that the limits of liability specified to be carried by Tenant pursuant to this Paragraph 10 are adequate to protect Tenant. If Tenant believes that any of such insurance coverage is inadequate, Tenant will obtain such additional insurance coverage as Tenant deems adequate, at Tenant's sole expense. (c) Prior to the Commencement Date, and at least thirty (30) days prior to the expiration date of any policy, Tenant shall furnish evidence of such insurance and payment of premiums thereon to Landlord. Such insurance shall be in form satisfactory to Landlord and without limitation, shall provide that no cancellation or lapse thereof or change therein shall be effective until after thirty (30) days' written notice to Landlord at the address specified in Paragraph 18 of this Lease. Tenant waives all rights of recovery against Landlord and the Additional Insureds for any loss, damages, or injury of any nature whatsoever to property or persons for which the Tenant is insured. (d) During the Term of this Lease, Tenant shall maintain in effect in each insurance policy required under this Lease that relates to property damage a waiver of subrogation in favor of Landlord and the Additional Insureds from its then-current insurance carriers, and shall at all times furnish evidence of such currently effective waiver to Landlord. Such waiver shall be in a form reasonably satisfactory to the Landlord and without limitation, shall provide that no cancellation or lapse thereof or change therein shall be effective until after thirty (30) days' written notice to Landlord at the address, specified in Paragraph 18 of this Lease. (e) Each insurance policy required to be maintained under this Lease shall state that with respect to the interest of Landlord and the Additional Insureds the insurance maintained pursuant to each such policy shall not be invalidated by any action or inaction of Tenant and shall insure Landlord and the Additional Insureds regardless of any breach or violation of any warranties, declarations, conditions or exclusions by Tenant. (f) Each insurance policy required to be maintained under this Lease shall state that all provisions of each such insurance policy, except for the limits of liability, shall operate in the same manner as if a separate policy had been issued to each person or entity insured thereunder. (g) Each insurance policy required to be maintained under this Lease shall state that the insurance provided thereunder is primary insurance without any right of contribution from any other insurance which may be carried by or for the benefit of Landlord and the Additional Insureds. (h) Each insurance policy required to be maintained under this Lease shall recognize the indemnification set forth in Paragraph 11 of this Lease. (i) Failure of Tenant to maintain any of the insurance required under this Lease or to cause to be provided in any insurance policy the requirements set forth in this Paragraph 10, shall constitute a default under this Lease without any notice being required by Landlord. 11. Indemnification. Tenant shall indemnify, defend and hold harmless Landlord, the Additional Insureds, any mortgagee, and any lessor under any underlying leases or ground leases, from and against any expense (including, without limitation, legal and collection fees), loss, liability or consequential damages suffered or incurred as a result of or in connection with (i) any breach by Tenant of its obligations contained in this Lease or (ii) its acts or the acts of its agents, servants, invitees, contractors or employees. -10- 12. Non-Liability of Landlord. Except to the extent caused by Landlord's negligence or willful misconduct, Landlord shall not be liable for (and Tenant shall make no claim for) any property damage which may be sustained by Tenant or any other person (a) as a consequence of the failure, breakage, leakage, inadequacy, defect or obstruction of the water, plumbing, steam, sewer, waste or soil pipes, roof, drains, leaders, gutters, valleys, downspouts, or the like or of the electrical, gas, power, conveyor, refrigeration, sprinkler, air conditioning or heating systems, elevators or hoisting equipment; (b) by reason of the elements; (c) resulting from the carelessness, negligence or improper conduct on the part of any other tenant of Landlord or any other tenant's agents, employees, guests, licensees, invitees, subtenants, assignees or successors; or (d) attributable to any interference with, interruption of, or failure of, any services or utilities to be furnished or supplied by Landlord. Tenant shall give Landlord prompt written notice of the occurrence of any events set forth in this Paragraph 12. 13. Remedies and Termination Upon Tenant Default. (a) In the event that: (1) Tenant shall default in the payment of (i) any Fixed Rent or (ii) any Additional Rent or other charge payable monthly hereunder by Tenant to Landlord, on any date upon which the same becomes due, and such default shall continue for five (5) days after the same becomes due; or (2) Tenant shall default in the payment of any Additional Rent or any other charge payable hereunder which is not due and payable hereunder on a monthly basis, on any date upon which the same becomes due, and such default shall continue for five (5) days after Landlord shall have given to Tenant a written notice specifying such default; or (3) Tenant shall default in the due keeping, observing or performing of any covenant, agreement, term, provision or condition of Paragraph 1(b) of this Lease on the part of Tenant to be kept, observed or performed, and if such default shall continue and shall not be remedied by Tenant within 24 hours after Landlord shall have given to Tenant a written notice specifying the same; or (4) If during the Term hereof the Demised Premises or any part thereof shall be or become abandoned or deserted, vacated or vacant; or (5) Tenant shall default in the due keeping, observing or performing of any other covenant, agreement, term, provision or condition of this Lease on the part of Tenant to be kept, observed or performed, and if such default shall continue and shall not be remedied by Tenant within fifteen (15) days after Landlord shall have given to Tenant a written notice specifying the same; or (6) Should Tenant be evicted by summary proceedings or otherwise; then, Landlord may, in addition to any other remedies herein contained, as may be permitted by law, without being liable for prosecution therefor, or for damages, re-enter the Demised Premises and the same have and again possess and enjoy; and as agent for Tenant or otherwise, re-let the Demised Premises and receive the rents therefor and apply the same, first to the payment of such expenses, reasonable attorney fees and costs, as Landlord may have been put to in re-entering and repossessing the same and in making such repairs and alterations as may be necessary; and second to the payment of the rents due hereunder. Tenant shall remain liable for such rents as may be in arrears and also the rents as may accrue subsequent to the re-entry by Landlord, to the extent of the difference between the rents reserved hereunder and the rents, if any, received by Landlord during the remainder of the unexpired Term hereof, after deducting the aforementioned expenses, fees and costs; the same to be paid as such deficiencies arise and are ascertained each month. Landlord, at its option, may require Tenant to pay in a single lump sum payment at the -11- time of such expiration or re-entry as the case may be, a sum which represents the present value (using a discount rate of 4% per annum) of the excess of the aggregate of the Fixed Rent which would have been payable by Tenant for the period commencing with such expiration or re-entry, as the case may be, and ending on the originally fixed Expiration Date of the Term, over the aggregate rental value of the Demised Premises for the same period. (b) Upon the occurrence of any of the contingencies set forth in the preceding clause, or should Tenant be adjudicated a bankrupt, insolvent or placed in receivership, or should proceedings be instituted by or against Tenant for bankruptcy, insolvency, receivership, agreement of composition or assignment for the benefit of creditors, or if this Lease or the estate of Tenant hereunder shall pass to another by virtue of any court proceedings, writ of execution, levy, sale, or by operation of law, Landlord may, if Landlord so elects, at any time thereafter, terminate this Lease and the Term hereof, upon giving to Tenant or to any trustee, receiver, assignee or other person in charge of or acting as custodian of the assets or property of Tenant, five (5) days notice in writing, of Landlord's intention so to do. Upon the giving of such notice, this Lease and the Term hereof shall end on the date fixed in such notice as if the said date was the date originally fixed in this Lease for the expiration hereof; and Landlord shall have the right to remove all person, goods, fixture and chattels therefrom, by force or otherwise without liability for damages. 14. Remedies Cumulative; Non-Waiver By Landlord. The various rights, remedies, options and elections of Landlord, expressed herein, are cumulative, and the failure of Landlord to enforce strict performance by Tenant of the conditions and covenants of this Agreement to exercise any election or option or to resort or have recourse to any remedy herein conferred or the acceptance by Landlord of any installment of rent after any breach by Tenant, in any one or more instances, shall not be construed or deemed to be a waiver or a relinquishment for the future by Landlord of any such conditions and covenants, options, elections or remedies, but the same shall continue in full force and effect. Tenant waives trial by jury in any action or proceeding arising out of this Lease. 15. Services; Electric Enemy. (a) Landlord will: (i) supply heat for the warming of the Demised Premises and the public portions of the Building during Business Hours in the cold season; (ii) furnish to, and distribute in, the Demised Premises air conditioning during Business Hours when it may be required for the comfortable occupancy of the Demised Premises by Tenant; (iii) provide snow and ice removal or treatment for the parking area, sidewalks and driveways in a reasonably expeditious manner; and (iv) provide refuse removal from a dumpster to be provided on site to be used for normal paper waste attendant to an office building. "Business Hours" as used in this Lease, means 8:00 A.M. to 6:00 P.M. on weekdays, 8:00 A.M. to 2:00 P.M. on Saturdays, and not including Sundays and those legal holidays listed in Exhibit D annexed hereto and made a part hereof. Tenant agrees at all times to cooperate fully with Landlord and to abide by all the regulations and requirements which Landlord may prescribe for the proper functioning and protection of such air conditioning system. Landlord will clean the Demised Premises in accordance with the cleaning schedule annexed hereto as Exhibit E. The cost of the services and utilities provided pursuant to this Paragraph 15(a) is included in Expenses as defined in Paragraph 3(a). (b) Provided Tenant is not then in default of this Lease, Landlord will provide to Tenant overtime services and utilities when and to the extent reasonably requested by Tenant in accordance with such reasonable conditions as shall be determined by Landlord. If Tenant shall utilize Building HVAC after Business Hours, Tenant shall pay to Landlord, as Additional Rent, a charge that, at the time of the execution of this Lease is $75.00 per hour and which may be increased by Landlord from time to time upon written notice to Tenant for such additional service and utilities which charge shall cover all costs and expenses of Landlord in providing such overtime services, including, without limitation, the cost of the utility usage, the cost of maintenance, repairs and inspections of such building systems and employee and administrative -12- costs related to such services. Such charge shall constitute a direct charge to Tenant and not an Expense pursuant to Paragraph 3. (c) Landlord reserves the right, without liability to Tenant and without constituting any claim of constructive eviction, to stop or interrupt any heating, lighting, ventilating, air conditioning, gas, steam, power, electricity, water or other service and to stop or interrupt the use of any building or Building facilities at such times as may be necessary and for as long as may reasonably be required by reason of accidents, strikes, safety concerns or the making of repairs, alterations or improvements, or inability to secure a proper supply of fuel, gas, steam, water electricity, labor or supplies, or by reason of any other similar or dissimilar cause beyond the reasonable control of Landlord. No such stoppage or interruption shall entitle Tenant to any diminution or abatement of rent or other compensation nor shall this Lease or any of the obligations of Tenant be affected or reduced by reason of any such stoppage or interruption. (d) Landlord shall install transmission facilities in the Demised Premises, so that electric energy may be used by Tenant in the Demised Premises in such reasonable quantity as shall be sufficient to meet Tenant's ordinary business needs for lighting and the operation of its business machines, including photocopy equipment and computer and data processing equipment. Tenant covenants and agrees that its electrical usage shall not exceed four (4) watts per square foot of floor area at any time (including any supplemental HVAC serving the Premises, but not including Building HVAC). (e) In the event that Tenant shall require electric energy for use in the Demised Premises in excess of the quantity initially designed to be furnished as herein provided and if, in Landlord's judgment such excess requirements cannot be furnished unless additional risers, conduits, feeders, switchboards and/or appurtenances are installed in the Building, Landlord, upon written request of Tenant, will proceed with reasonable diligence to install such additional riser, conduits, feeders, switchboards and/or appurtenances provided the same and the use thereof shall be permitted by applicable laws and insurance regulations and shall not cause permanent damage or injury to the Building or the Demised Premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations or repairs or interfere with or disrupt other tenants or occupants of the Building, and Tenant agrees to pay all reasonable costs and expenses incurred by Landlord in connection with such installation. Landlord reserves the right to separately meter or monitor the utility services provided to the Demised Premises and bill the charges directly to Tenant. (f) In order that Landlord may at all times have all necessary information which it requires in order to maintain and protect its equipment, Tenant agrees that Tenant will not make any material alteration or material addition to the electrical equipment and/or appliances in the Demised Premises without the prior written consent of Landlord in each instance and will promptly advise Landlord of any other alteration or addition to such electrical equipment and/or appliances. Tenant agrees to advise Landlord in writing as to any material change in the periods of use of the lighting fixtures and Tenant's business machines and equipment. Tenant further acknowledges and agrees that Tenant shall not have the right to install additional connections to the Building electricity. Any such connections desired by Tenant shall be effected by Landlord at Tenant's sole cost and expense, and shall only be permitted to the extent such connections will not cause the Premises to exceed its permitted electrical capacity, or overload, damage or limit the electrical system of the Building. (g) Commencing with the Commencement Date, the cost of furnishing electricity to Tenant shall be as estimated, subject, however, to all of the other provisions of this Paragraph. Initially, an estimate of $235.94 (the "Electric Charge") ($1.25 psf per annum X 2,265 square feet l 12) shall be charged to Tenant beginning on the Commencement Date as the monthly charge for Landlord's service of furnishing electricity to the Premises (such amount, as the same may be increased or thereafter adjusted (but in no event decreased below $1.25 psf) pursuant to any of the provisions of this Paragraph, being hereinafter referred to as the "Electric Factor") for use during Business Hours. At any time after the Commencement Date, Landlord may cause a survey to be prepared by a reputable, independent electrical consultant to be selected by Landlord, the cost of which survey shall be borne by Landlord. The purpose of said -13- survey shall be to determine the appropriate charge to Tenant for electricity to be charged taking into account the full electric service including the estimated demand based upon the connected load necessary or useful for Tenant's operation of all equipment and lighting, including, without limitation, any additional hours in excess of Business Hours during which the Demised Premises are in use. Tenant acknowledges that any electrical usage relating to any supplemental air conditioning, heating and/or ventilation systems, regardless of when operated by Tenant, shall be payable as Additional Rent to Landlord, and as such shall be in addition to, and not be deemed part of, the original estimated Electric Charge. When the charge for the electricity has been so determined as a result of such survey, the Electric Charge shall be increased or thereafter adjusted (but in no event decreased below $1.25 psf) by the difference between the charge per annum determined by the survey and the estimated Electric Factor, effective as of the date of the survey. The Electric Factor shall, from time to time, be determined based on a rate equal to Landlord's cost (including any taxes included in or applicable to such rates) for supplying all electricity consumed at the Demised Premises, as determined by such surveys and/or readings, from time to time throughout the Term, of Tenant's check meter(s) (hereinafter "Checkmeter"). In the event a Checkmeter is installed (the necessity for which shall be determined by Landlord, at its sole discretion), the cost of same is to be borne by Tenant. In such event, Tenant shall, at its own cost and expense, be responsible for the maintenance, repair and replacement (if necessary) of said Checkmeter. (h) If the public utility rate schedule for the supply of electric current to the Building shall be increased at any time after the date hereof, or if there shall be a change in taxes or if additional taxes shall be imposed upon the sale or furnishing of such electric current, or if there shall be a change in the space constituting the Demised Premises, or if Tenant's failure to maintain its machinery and equipment in good order and repair causes a consumption of electrical current in excess of four (4) watts per rentable square foot for Tenant's lights and plugs in the Demised Premises, the Electric Charge herein reserved shall be equitably adjusted to reflect the resulting increase but at no less than Landlord's cost therefor. If Landlord and Tenant cannot agree thereon, the amounts of such adjustments shall be determined based on standard practices, by an independent electrical engineer, to be selected by Landlord and paid equally by Landlord and Tenant. When the amounts of such adjustment are so determined, the parties shall execute an agreement supplementary hereto to reflect such adjustments in the amount of the annual Electric Charge stated in this Lease effective from the date of the increase (but not decrease) of such usage as determined by such electrical engineer, or as the case may be, from the effective date of such increase (but not decrease) in the public utility rate schedule; but such adjustments shall be effective from the Commencement Date or the date of the survey, whichever is applicable whether or not such a supplementary agreement is executed. (i) Landlord reserves the right to discontinue furnishing electric energy for light and plugs to Tenant in the Demised Premises pursuant to Paragraph 15(d) of this Lease at any time upon ninety (90) days prior written notice to Tenant for Tenant to arrange to obtain electric service from a public utility company. If Landlord exercises such right of termination, this Lease shall continue in full force and effect and shall be unaffected thereby except only that, from and after the effective date of such termination, Landlord shall not be obligated to furnish electric energy to Tenant and the Electric Charge payable under this Paragraph shall be accordingly reduced by such amount then payable by Tenant under this Paragraph per annum. If Landlord so discontinues furnishing electric energy to Tenant, Tenant shall arrange to obtain electric energy directly from the public utility company furnishing electric service to the Building. Such electric energy may be furnished to Tenant by means of the then existing Building system feeders, risers and wiring to the extent that the same are available, suitable and safe for such purposes. All meters and additional panel boards, feeders, risers, wiring and other conductors and equipment which may be required to obtain electric energy directly from such public utility company shall be installed and maintained by Tenant, at its expense. At reasonable times during the Term, which times (except in the case of emergency) shall be arranged in advance with Landlord, Landlord shall provide Tenant with access to those portions of the Building as are necessary to make the installations necessary to provide electric energy to the Demised Premises. Landlord or its representatives may accompany Tenant whenever Tenant, its employees, agents or contractors enter the Building. Upon reasonable notice to Landlord and in -14- accordance with terms and conditions of this Lease, Tenant may install, in locations approved by Landlord, such additional panel boards, feeders, risers, wiring and other conductors and equipment necessary to provide electric energy to the Demised Premises. (j) Landlord shall have the right to procure periodic surveys made by an independent utility consultant selected by Landlord and if such utility consultant determines that there has been an increase in Tenant's use of electrical current in excess of four (4) watts per rentable square foot (in the aggregate, as provided for herein), then the provisions of Paragraph 15(h) shall be applicable in accordance with the terms thereof. In the event that either a survey by Landlord or a reading of the Checkmeter indicates that the Electric Charge then being paid by Tenant is not sufficient for Tenant's electrical usage, Landlord will forward to Tenant a statement showing that additional Electric Charges shall be due as a result of such comparison over the amount then payable, and thereafter, the monthly Electric Charge payable by Tenant shall be that charge indicated in the aforesaid Landlord's statement. (k) If Tenant shall require electricity beyond Business Hours for purposes other than as specified in this Paragraph, the Electric Factor shall be adjusted to reflect the resulting increases in Landlord's cost in providing electricity to the Demised Premises, and the Electric Charge shall also be adjusted accordingly. Landlord represents that electricity shall be supplied to the Premises twenty-four (24) hours per day, seven (7) days per week in accordance with the terms and provisions of this Lease. Tenant has reviewed the electrical capacity available to the Demised Premises and represents to and for the benefit of Landlord that it is satisfied therewith. (l) Landlord shall not in any way be liable or responsible to Tenant for any loss, damage or expense which Tenant may sustain or incur if: (i) the supply of electricity to the Demised Premises is interrupted; (ii) the quantity or character of electricity is changed or is no longer available or suitable for Tenant's requirements; or (iii) Tenant objects to, is inconvenienced by or otherwise affected by any requirement of the public utility company serving the Building. Tenant will comply with the general rules, regulations, terms, conditions and requirements of the public utility supplying electricity to the Building that may now or hereafter be applicable thereto. Tenant shall enter into such modifications of this Lease as Landlord may from time to time require in connection with any requirement of any public utility or any requirement of Law pertaining to electrical consumption or service, or charges therefor. If any equipment or machinery furnished by Landlord breaks down or for any cause ceases to function properly, Landlord shall use reasonable diligence to repair same promptly, but Tenant shall have no claim for abatement of Fixed Rent or Additional Rent or damages for any interruptions in service occasioned thereby or resulting therefrom. (m) All other electricity charges under this Lease shall be included as Expenses. 16. Subordination; Paramount Lease. (a) This Lease shall be subject and subordinate at all times to any first mortgage, first deed of trust or other first encumbrance heretofore or hereafter placed upon the Demised Premises or the property which includes the Demised Premises and of all renewals, modifications, consolidations, replacements and extensions thereof (all of which are hereinafter referred to as, collectively a "Mortgage") except to the extent that any Mortgage provides that this Lease is superior to that Mortgage. This provision shall operate automatically and without the necessity of any further act on the part of Tenant to effectuate such subordination. Tenant agrees, at the request of any person who may acquire Landlord's estate by foreclosure or transfer in lieu of foreclosure, to attorn to such person and to execute, acknowledge and deliver, upon demand by Landlord, any holder of a Mortgage or such person who may acquire Landlord's estate, but in no event later than ten (10) days after such demand, such further instruments evidencing and confirming such subordination of this Lease and such instruments evidencing such attornment obligation. Tenant hereby irrevocably appoints Landlord the attorney-in-fact of Tenant (such power of attorney being coupled with an interest), to execute, acknowledge and deliver any such instruments for and in the name of Tenant. Notwithstanding the foregoing, any -15- holder of any Mortgage may at any time subordinate its Mortgage to this Lease, without Tenant's consent, by notice in writing to Tenant, and thereupon this Lease shall be deemed prior to such Mortgage without regard to their respective dates of execution, delivery and recording and in that event such holder shall have the same rights with respect to this Lease as though this Lease had been executed, delivered and recorded prior to the execution, delivery and recording of such Mortgage. (b) If Landlord is or becomes lessee of the Building or the Land, then Tenant agrees that Tenant's possession shall be that of a subtenant and subordinate to the interest of Landlord's lessor, its heirs, personal representatives, successors and assigns (such lessor and other persons being hereinafter collectively referred to as the "Overlessor") without the necessity of any further action on the part of Tenant to effectuate such subordination, but notwithstanding the foregoing, if Landlord's tenancy shall terminate either by expiration, forfeiture or otherwise, then, if Overlessor shall so request, Tenant shall attorn to Overlessor and recognize Overlessor as Tenant's landlord upon the terms and conditions of this Lease for the balance of the Term. Tenant shall execute, acknowledge and deliver, upon demand by Landlord or any Overlessor, such further instruments evidencing such subordination of Tenant's right, title and interest under this Lease to the interests of Overlessor, and such further instruments of attornment, as shall be desired by such Overlessor. 17. Landlord's Cure of Tenant's Default. If Tenant shall fail or refuse to comply with and perform any conditions and covenants of this Lease, Landlord may, if Landlord so elects, carry out and perform such conditions and covenants, at the cost and expense of Tenant, and the said cost and expense shall be payable on demand, or at the option of Landlord shall be added to the installment of rent due immediately thereafter, but in no case later than one month after such demand, and shall be due and payable as such. This remedy shall be in addition to such other remedies as Landlord may have hereunder by reason of the breach of Tenant of any of the covenants and conditions in this Lease contained. 18. Notices. Any notice, demand, statement or other communication which under the terms of this Lease or under any statute or law must or may be given shall be given by hand delivery to the respective parties as follows or by registered or certified mail, return receipt requested, or by reputable private overnight delivery service addressed to the respective parties as follows: To Landlord: at the address set forth in the introductory paragraph to this Lease, with a copy to: Cherry Tree Investors, L.P. c/o Bergen of Cherry Hill, Inc. GSB Building, Suite 401 One Belmont Avenue Bala Cynwyd, PA 19004 Attn: Asset Manager To Tenant: At its address stated above until the Commencement Date; at the Demised Premises thereafter. Any such notice, demand, statement or other communication shall be deemed to have been given or made upon hand delivery or when deposited, postage paid, in the U.S. Mail, or delivered, charges prepaid or charged to sender by a reputable private overnight delivery service, as the case may be. Any of the above addresses may be changed at any time notice is given as above provided. -16- 19. Quiet Enjoyment. Landlord covenants that Tenant upon keeping and performing each and every covenant, agreement, term, provision and condition herein contained on the part and on behalf of Tenant to be kept and performed, shall quietly enjoy the Demised Premises without hindrance or molestation by Landlord or by any other person lawfully claiming by, through or under the same subject to the covenants, agreements, terms, provisions and conditions of this Lease and the effect of the application of same. 20. Intentionally Omitted. 21. Access to Premises. (a) Tenant agrees to permit Landlord and Landlord's agents, employees or other representatives to show the Demised Premises to any lessor under any underlying lease or ground lease or any mortgagee or any persons wishing to rent or purchase the same, and Tenant agrees that on and after the twelfth month next preceding the expiration of the Term hereof, Landlord or Landlord's agents, employees or other representatives shall have the right to show the Demised Premises to any prospective tenant or to place notices on the front of the Building or any part thereof, offering the Demised Premises for rent or for sale; and Tenant hereby agrees to permit the same to remain thereon without hindrance or molestation. (b) Tenant agrees that Landlord and Landlord's agents, employees or other representatives, shall have the right to enter into and upon the said premises or any part thereof, at all reasonable hours, for the purpose of examining the same or reading meters, or performing maintenance or making such repairs or alterations therein as may be necessary for the safety and preservation thereof. This clause shall not be deemed to be a covenant by Landlord nor be construed to create an obligation on the part of Landlord to make such inspection or repairs. 22. Brokerage. Tenant and Landlord warrant and represent to each other that neither has dealt with any broker or brokers regarding the negotiation of the within Lease other than the Designated Brokers. Landlord shall pay the Designated Brokers a commission pursuant to a separate agreement. Tenant and Landlord agree to be responsible for and to indemnify and save the other harmless from and against any claim for a commission or other compensation by any broker other than the Designated Brokers claiming to have negotiated with the indemnifying party with respect to the Demised Premises or to have called the said Demised Premises to Tenant's attention or to have called Tenant to Landlord's attention. 23. Parking. Tenant shall have the right under this Lease to the non-exclusive use of a proportionate share of parking spaces in the parking lot of the Building in compliance with such reasonable Rules and Regulations as Landlord may promulgate from time to time. Landlord shall have the right to assign the location of said parking spaces or may designate the location of same from time to time. 24. Landlord's Inability to Perform. This Lease and the obligation of Tenant to pay the rent hereunder and to comply with the covenants and conditions hereof, shall not be affected, curtailed, impaired or excused because of the Landlord's inability to supply any service or material called for herein, by reason of any rule, order, regulation or preemption by any governmental entity, authority, department, agency or subdivision or for any delay which may arise by reason of negotiations for the adjustment of any fire or other casualty loss or because of strikes or other labor trouble or for any cause beyond the control of the Landlord. -17- 25. Condemnation. If the Land, Building and Demised Premises leased herein, or of which the Demised Premises is a part, or any portion thereof, shall be taken under eminent domain or condemnation proceedings, or if suit or other action shall be instituted for the taking or condemnation thereof, or if in lieu of any formal condemnation proceedings or actions, Landlord shall grant an option to purchase and or shall sell and convey the Land, Building and the Demised Premises or any portion thereof, then this Lease, at the option of Landlord shall terminate, and the Term hereof shall end as of such date as Landlord shall fix by notice in writing; and Tenant shall have no claim or right to claim or be entitled to any portion of any amount which may be awarded as damages or paid as the result of such condemnation proceedings or paid as the purchase price for such option, sale or conveyance in lieu of formal condemnation proceedings; and all rights of Tenant to damages, if any, are hereby assigned to Landlord, provided that such Tenant shall have the right to make a separate claim for damages as provided below. Tenant agrees to execute and deliver any instruments, at the expense of Landlord, as may be deemed necessary or required to expedite any condemnation proceedings or to effectuate a proper transfer of title to such governmental or other public authority, agency, body or public utility seeking to take or acquire the Land, Building and Demised Premises or any portion thereof. Tenant covenants and agrees to vacate the Demised Premises, remove all Tenant's personal property therefrom and deliver up peaceable possession thereof to Landlord or to such other party designated by Landlord in the aforementioned notice. Failure by Tenant to comply with any provision in this clause shall subject Tenant to such costs, expenses, damages and losses as Landlord may incur by reason of Tenant's breach hereof. Tenant shall have no claim or right to claim or be entitled to any portion of any amount which may be awarded as damages or paid as the result of such condemnation proceedings or paid as the purchase price for any option, sale or conveyance in lieu of formal condemnation proceedings; and all rights of Tenant to damages, if any, are hereby assigned to Landlord. Notwithstanding the foregoing, Tenant shall have the right to make a separate claim against the condemning authority for such independent claim which it may have as may be allocated by law, for costs and damages due to any taking of Tenant's trade fixtures, relocation, moving and other similar costs and charges directly incurred by tenant and resulting from such condemnation, provided same does not diminish the Landlord's award. Tenant agrees to execute and deliver any instruments, at the expense of Landlord, as may be deemed necessary or required to expedite any condemnation proceedings or to effectuate a proper transfer of title to such governmental or other public authority, agency, body or public utility seeking to take or acquire the Land, Building and Demised Premises or any portion thereof. Tenant covenants and agrees to vacate the Demised Premises, remove all Tenant's personal property therefrom and deliver up peaceable possession thereof to Landlord or to such other party designated by Landlord in the aforementioned notice. Failure by Tenant to comply with any provision in this clause shall subject Tenant to such costs, expenses, damages and losses as Landlord may incur by reason of Tenant's breach hereof. 26. Assignment and Subletting. (a) Tenant shall not (i) assign or otherwise transfer, this Lease or any of its rights hereunder, or (ii) sublet the Demised Premises or any part thereof, or permit the use of the Demised Premises or any part hereunder by any persons other than Tenant or its employees, agents and invitees, without the prior written consent of Landlord in each instance. Landlord's consent to a proposed sublease or assignment shall not be unreasonably withheld provided the proposed assignee/subtenant is of a type and quality reasonably satisfactory to Landlord, and Landlord approves such entity's financial condition, and such proposed assignee/subtenant is not a current tenant of the Building or an entity with whom Landlord, during the six (6) month period prior to such request for consent, has been negotiating to lease any space in the Building. The consent by Landlord to any assignment, transfer, or subletting to any entity shall not be construed as a waiver or release of Tenant from any provision of this Lease, unless expressly so stated (it being understood that in all instances, Tenant shall remain primarily liable as a principal and not as a guarantor or surety) nor shall the collection or acceptance of rent from any such assignee, transferee, subtenant or occupant constitute a waiver or release of Tenant from -18- any such provision. No consent by Landlord to any such assignment, transfer, or subletting, in any one instance shall constitute a waiver of the necessity for such consent in a subsequent instance nor shall any consent by a Landlord be construed to permit reassignment or resubletting by a permitted assignee or sublessee. For purpose of the foregoing, a transfer, conveyance, grant or pledge, directly or indirectly, in one or more transactions, of interest in Tenant (whether stock, partnership interest or other form of ownership or control), or the issuance of new interests by which an aggregate of more than fifty percent (50%) of the interest in Tenant shall be vested in a party or parties who are not holders of such interest(s) as of the date hereof shall be deemed an assignment of this Lease; provided, however, that this limitation shall not apply to any corporation, all the outstanding voting stock of which is listed on a national securities exchange. Landlord's acceptance of any name for listing on the Building Directory will not be deemed, nor will it substitute for, Landlord's consent required under this Lease to any sublease, assignment or other occupancy of the Demised Premises. In the event of an assignment or subletting not in conformance with the terms of this Lease, such assignment and/or subletting shall be void ab initio, and Landlord shall have the right to terminate this Lease or to require that the Demised Premises be surrendered to Landlord for the balance of the Term (in the case of an assignment) or for the term of the proposed sublease (in the case of a sublease). Such termination shall in no event be construed to limit Landlord's right to damages or any other relief for the violation of the terms of this Lease. (b) If at any time or from time to time during the Term of this Lease Tenant desires to sublet or assign all or any part of the Demised Premises, Tenant shall give written notice to Landlord of such intent together with such financial information concerning the proposed assignee or sublessee as Landlord shall reasonably request. (c) If for any assignment or sublease consented to by Landlord hereunder Tenant receives rent or other consideration, either initially or over the term of the assignment or sublease, in excess of the rent called for hereunder, or in case of sublease or part, in excess of such rent fairly allocable to the part, after appropriate adjustments to assure that all other payments called for hereunder are appropriately taken into account, to pay to Landlord as additional rent equal to the excess of each such payment of rent or other consideration received by Tenant promptly after its receipt. (d) Regardless of Landlord's consent, no subletting or assignment shall release Tenant of Tenant's obligations or alter the primary liability of Tenant to pay the rental and to perform all other obligations to be performed by Tenant hereunder. The acceptance of rental by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by any assignee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee or successor. (e) In the event that (i) the Demised Premises or any part thereof are sublet and Tenant is in default under this Lease, or (ii) this Lease is assigned by Tenant, then, Landlord may collect rent from the assignee or subtenant and apply the net amount collected to the rent herein reserved; but no such collection shall be deemed a waiver of the provisions of this Article 26 with respect to assignment and subletting, or the acceptance of such assignee or subtenant as Tenant hereunder, or a release of Tenant from further performance of the covenants herein contained. (f) Tenant shall pay to Landlord all reasonable costs and expenses incurred by Landlord in connection with any assignment or sublease requested by Tenant, whether or not Landlord's consent is granted, including without limitation, fees paid to attorneys, accountants and space planners. 27. Environmental Laws. (a) Tenant, at its own cost and expense, agrees to comply with all applicable environmental laws, rules and regulations of the Federal, State, County and Municipal -19- governments and of all other governmental authorities having or claiming jurisdiction over the Demised Premises or appurtenances thereto, or any part thereof, which are applicable to the Demised Premises and/or the conduct of business thereon, including but not limited to the Industrial Site Recovery Act (N.J.S.A. 13:1K-6 et seq.) ("ISRA"). Further, Tenant agrees to make submissions to and provide any information required by all governmental authorities requesting same pursuant to Tenant's obligations under this Paragraph 27. Tenant represents to Landlord that Tenant's Standard Industrial Classification (SIC) Number as used on Tenant's Federal Tax Return is as set forth in the Preamble to this Lease. Tenant shall not conduct any operations that shall cause the Building or the Demised Premises to be deemed an "industrial establishment" as defined in ISRA. Notwithstanding the foregoing, in the event Tenant shall become an "industrial establishment", Landlord shall have, in addition to any other remedies available, the right to immediately terminate this Lease and Landlord shall also have the right to direct Tenant to comply with ISRA, at Tenant's sole cost and expense, or in Landlord's sole discretion, to comply with ISRA and to seek reimbursement of all costs and expenses (including but not limited to, attorneys fees, consulting fees, filing fees, and all remedial or investigative expenses) as a result of such termination and any amount expended by Landlord shall be Additional Rent hereunder. (b) Tenant hereby agrees to execute such documents Landlord reasonably deems necessary and to make such applications as Landlord reasonably requires to assure compliance with ISRA. Tenant shall bear all costs and expenses incurred by Landlord associated with any required ISRA compliance resulting from Tenant's use of the Demised Premises including but not limited to state agency fees, engineering fees, clean-up costs, filing fees and suretyship expenses. As used in this Lease, ISRA compliance shall include applications for determinations of nonapplicability by the appropriate governmental authority. The foregoing undertaking shall survive the termination or sooner expiration of the Lease and surrender of the Demised Premises and shall also survive sale, or lease or assignment of the Demised Premises by Landlord. Tenant shall immediately provide Landlord with copies of all correspondence, reports, notices, orders, findings, declarations and other materials pertinent to Tenant's compliance and the New Jersey Department of Environmental Protection's ("NJDEP") requirements under ISRA as they are issued or received by the Tenant. (c) Tenant shall not generate, store, manufacture, refine, transport, treat, dispose of, or otherwise permit to be present on or about the Demised Premises, any Hazardous Substances. As used herein, Hazardous Substances shall be defined as any "hazardous chemical," "hazardous substance," "hazardous waste" or similar term as defined in the Comprehensive Environmental Responsibility Compensation and Liability Act, as amended (42 U.S.C. 9601, et seq.), the Industrial Site Recovery Act (N.J.S.A. 13:1K-6 et seq.), the New Jersey Spill Compensation and Control Act, as amended, (N.J.S.A. 58:10-23.11b, et seq.), any rules or regulations promulgated thereunder, or in any other present or future applicable federal, state or local law, rule or regulation dealing with environmental protection. (d) In the event Tenant receives any notice that a spill or discharge of any Hazardous Substance has occurred on or about the Demised Premises, Building and/or Land or into the sewer and/or waste treatment system operated by Landlord from any person or entity, including NJDEP and the United States Environmental Protection Agency ("EPA"), then Tenant shall provide immediate written notice of same to Landlord, detailing all relevant facts and circumstances. (e) Tenant agrees to indemnify and hold harmless the Landlord, Additional Insureds and each mortgagee of the Demised Premises from and against any and all liabilities, damages, claims, losses, judgments, causes of action, costs and expenses (including the reasonable fees and expenses of counsel) which may be incurred by the Landlord or any such mortgagee or threatened against the Landlord or such mortgagee, relating to or arising out of any breach by Tenant of this paragraph, which indemnification shall survive the expiration or sooner termination of this Lease. -20- 28. Parties Bound. (a) The covenants, agreements, terms, provisions and conditions of this Lease shall bind and benefit the respective successors, assigns and legal representatives of the parties hereto with the same effect as if mentioned in each instance where a party hereto is named or referred to except that no violation of the provisions of Paragraph 7(c) hereof shall operate to vest any rights in any successor, assignee or legal representative of Tenant and that the provisions of this Paragraph 28 shall not be construed as modifying the conditions contained in Paragraph 13 hereof. (b) Tenant acknowledges and agrees that if Landlord shall be an individual, joint venture, corporation, limited liability company, tenancy in common, firm, or partnership, general or limited, there shall be no personal liability on such individual or on the members of such joint venture, corporation, limited liability company, tenancy in common, firm or partnership in respect of any of the covenants or conditions of this Lease; rather, Tenant agrees to look solely to Landlord's estate and property in the Building (or the proceeds thereof) for the satisfaction of Tenant's remedies arising out of or related to this Lease. (c) The term "Landlord" as used in this Lease means only the owner, or the mortgagee in possession, for the time being of the Demised Premises (or the owner of a lease of the Demised Premises) so that in the event of any sale or sales of the Land, Building, or the Demised Premises or of said lease, or in the event of a lease of the Land, Building or of the Demised Premises, the said Landlord shall be and hereby is entirely freed and relieved of all covenants, liabilities and obligations of Landlord hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the said lessee of the Land, Building or of the Demised Premises, that the purchaser or the lessee of the same has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder. 29. Miscellaneous. (a) This Lease contains the entire contract between the parties. No representative, agent or employee of Landlord has been authorized to make any representations or promises with reference to the leasing of the Demised Premises or to vary, alter or modify the terms hereof. No additions, changes or modifications, renewals, or extensions hereof, shall be binding unless reduced to writing and signed by Landlord and Tenant. (b) The terms, conditions, covenants and provisions of this Lease shall be deemed to be severable. If any clause or provision herein contained be adjudged to be invalid or unenforceable by a court of competent jurisdiction or by operation of any applicable law, it shall not affect the validity of any other clause or provision herein, but such other clauses or provisions shall remain in full force and effect. (c) Tenant shall not be entitled to exercise any option granted to it by this Lease at any time when Tenant is in default in the performance or observance of any of the covenants, agreement terms, provisions or conditions on its part to be performed or observed under this Lease. (d) The paragraph headings in this Lease are for convenience only and are not to be considered in construing the same. (e) If, in connection with obtaining financing for the Project, a banking, insurance or other recognized institutional lender shall request reasonable modifications in this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay or defer its consent thereto, provided that such modifications do not increase the obligations of Tenant hereunder or materially adversely affect the leasehold interest created or the conduct of Tenant's business operations at the Demised Premises. (f) All dates and time periods set forth in this Lease are Time of the Essence. -21- (g) In the event that Tenant or anyone claiming through or under Tenant shall not vacate and redeliver the Demised Premises on or before the Expiration Date as required by this Lease. Tenant shall be deemed a holdover tenant and Landlord shall have all rights and remedies provided at law relating to such holdover. During the period of holdover tenancy, the Tenant shall be liable for a holdover rental charge for the Demised Premises which charge shall be equal to Two and One Half (2-1/2) times the Fixed Rent and Additional Rent payable by Tenant hereunder during the Lease Year immediately preceding the Expiration Date. In addition, Tenant further agrees that if it fails to so surrender the Demised Premises, Tenant (i) shall be liable to Landlord for any and all damages which Landlord shall suffer by reason thereof, and (ii) shall indemnify Landlord against all claims and demands made by any succeeding tenants against Landlord founded upon delay by Landlord in delivering possession of the Demised Premises to such succeeding tenant. (h) This Lease shall not be recorded by either party. (i) Within fifteen (15) days after Landlord's request, Tenant will furnish Tenant's most recent audited financial statements (including any notes to them) to Landlord, or, if no such audited statements have been prepared, such other financial statements (and notes to them) as may have been prepared by an independent certified public accountant, or, failing those, Tenant's internally prepared financial statements, certified by Tenant. Tenant will discuss its financial statements with Landlord and will give Landlord access to Tenant's books and records in order to enable Landlord to verify the financial statements. Landlord will not disclose any aspect of Tenant's financial statements which Tenant designates to Landlord as confidential except: (i) to Landlord's lenders or prospective purchasers of the Project; (ii) in litigation between Landlord and tenant; and (iii) if required by court order. (j) Whenever Tenant requests Landlord to take any action or give any consent required or permitted under this Lease, Tenant will reimburse Landlord for all of Landlord's actual costs incurred in reviewing the proposed action or consent, including, without limitation, attorneys', engineers' or architects' fees, within ten (10) days after Landlord's delivery to Tenant of a statement of such costs. Tenant will be obligated to make such reimbursement without regard to whether Landlord consents to any such proposed action. (k) If Tenant fails or refuses to execute and deliver any instrument or certificate required to be delivered by Tenant hereunder (including, without limitation, any instrument or certificate required under Paragraph 8(a)) within the time periods required herein, then Tenant hereby appoints Landlord as its attorney-in-fact with full power and authority to execute and deliver such instrument or certificate for and in the name of Tenant. (1) Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to or in the vicinity of the Building and Project shall not affect this Lease, abate any payment owed by Tenant hereunder or otherwise impose any liability on Landlord. (m) Under no circumstances whatsoever shall Landlord ever be liable hereunder for consequential damages or special damages. (n) The obligation of Tenant to pay all Rent and other sums hereunder provided to be paid by Tenant and the obligation of Tenant to perform Tenant's other covenants and duties hereunder constitute independent, unconditional obligations to be performed at all times provided for hereunder, save and except only when an abatement thereof or reduction therein is hereinabove expressly provided for and not otherwise. Tenant waives and relinquishes all rights which Tenant might have to claim any nature of a prejudgment lien against or withhold, or deduct from, or offset against any rent and other sums provided hereunder to be paid Landlord by Tenant. (o) The furnishing of the form of this Lease shall not constitute an offer and this Lease shall become effective upon and only upon its execution by and delivery to each party hereto. -22- IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. LANDLORD: CHERRY TREE INVESTORS, L.P. By: Bergen of Cherry Hill, Inc., its general partner By: /s/ CHARLES J. DAVIDSON ----------------------------------- Name: CHARLES J. DAVIDSON Title: SENIOR VICE PRESIDENT TENANT: COMMONWEALTH ENERGY CORPORATION By: /s/ DICK PAULSEN -------------------------------------- Name: Dick Paulsen Title: C.O.O. -23- EXHIBIT "A" FLOOR PLAN OF DEMISED PREMISES [FLOOR PLAN] A - 1 EXHIBIT "A-1" METES AND BOUNDS DESCRIPTION ALL THAT CERTAIN tract or parcel of land and premises, situate in the Township of Cherry Hill, County of Camden and State of New Jersey, bounded and described as follows: BEGINNING at a concrete monument in the Southerly line of New Jersey State Highway Route #38 (100 feet wide), in the centerline of a concrete headwall at the end of a pipe beneath New Jersey State Highway Route #38, which pipe carries a small stream which is a branch of Cooper Creek, said point being a corner to lands now or formerly Shirl-Jim, Inc.; thence, extending along the Southerly line of New Jersey State Highway Route #38, South 85 degrees 58 minutes 06 seconds East, a distance of 347.51 feet to a point; thence, extending along a line perpendicular to the centerline of New Jersey State Highway Route #38, South 04 degrees 01 minute 54 seconds West, a distance of 1.00 feet to a point; thence, extending Southeastwardly along the curved Southerly line of New Jersey State Highway Route #38 and along the curved Southwesterly line of Olive Street, on the arc of a circle curving to the right, having a radius of 260.00 feet, an arc distance of 238.26 feet to a point of tangency in the Southwesterly line of Olive Street; thence, extending along the Southwesterly line of Olive Street, South 33 degrees 27 minutes 48 seconds East, a distance of 166.48 feet to a point; thence, leaving the Southwesterly line of Olive Street, extending along lands now or formerly of Frank Cerminaro, South 56 degrees 32 minutes 12 seconds West a distance of 79.34 feet to a point; thence, extending along lands now or formerly of John Swyter, North 33 degrees 27 minutes 48 seconds West, a distance of 55.19 feet to a point; thence, extending along lands of the same, South 59 degrees 13 minutes 43 seconds West, a distance of 104.47 feet to a point, said line being the rear line in the plan of Kenilworth Estates; thence, extending along lands of the same, South 33 degrees 27 minutes 48 seconds East, a distance of 256.48 feet to a point on the Northwesterly line of Longwood Avenue; thence, extending along the Northwesterly line of Longwood Avenue, South 56 degrees 32 minutes 12 seconds West, a distance of 208.71 feet to a point; thence, leaving the Northwesterly line of Longwood Avenue, extending along lands now or formerly of Pasquale Ludovico, North 33 degrees 27 minutes 48 seconds West, a distance of 266.29 feet to a point on the aforementioned rear line of Kenilworth Estates; thence, extending along the said rear line of Kenilworth Estates, South 59 degrees 13 minutes 43 seconds West, a distance of 891.00 feet to a point; thence, extending along lands now or formerly of 3 Executive Campus Realty Inc., North 41 degrees 41 minutes 45 seconds West, a distance of 117.74 feet to a point; thence, extending partly along lands now or formerly of Delaware Valley Propane Company and partly along lands of the aforementioned Shirl-Jim, Inc. North 35 degrees 51 minutes 13 seconds East, a distance of 374.49 feet to a point; thence, extending along said lands of Shirl-Jim, Inc., the three (3) following courses and distances; (1) North 32 degrees 44 minutes 55 seconds East, a distance of 338.00 feet to a point; thence (2) North 41 degrees 06 minutes 14 seconds East, a distance of 180.22 feet to a point; thence (3) North 32 degrees 13 minutes 25 seconds East, a distance of 97.75 feet to a point, said point being the place of beginning. CONTAINING 11.289 Acres of land. BEING shown and designated as Lot 1 G Block 595 Plate 10 on the Tax Map of the Township of Cherry Hill. TOGETHER WITH THE BENEFICIAL Rights and Interest in and to a certain Declaration of Easement and Right-of-Way for Ingress, Egress and Regress, to and from New Jersey State Highway Route 70 and Cuthbert Boulevard, as contained in Deed Book 3604 page 586 and modified by First Modification of Declaration of Easement and Right-of-Way as contained in Deed Book 3640 page 493. ALSO TOGETHER WITH THE BENEFICIAL Rights and Interest in and to a certain Access Easement on lands now or formerly 3 Executive Campus Realty Inc., as contained in Modification of Declaration as contained in Deed Book 4009 page 591. A - 2 EXHIBIT "B" LANDLORD'S WORK 1. Enclose receptionist area into an office as shown on Exhibit "B-l." 2. Install building standard carpet throughout the Demised Premises. 3. Either wall paper or paint the walls of the office described in Paragraph 1 above with a wall paper or paint which is reasonably complimentary to the existing wall paper in the remainder of the Demised Premises. B - 1 EXHIBIT B-1 [FLOOR PLAN] EXHIBIT "C" RULES AND REGULATIONS 1. No sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the exterior or interior Common Areas of the Building without the prior written consent of Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person chosen by Landlord. 2. No awning shall be permitted on any part of the Demised Premises. Tenant shall not place anything against, near or on any glass partitions, doors, windows or window sills which may appear unsightly from outside the Demised Premises and Tenant is specifically prohibited from sitting or placing anything on the window sills of the Demised Premises. Tenant shall not obstruct any windows, doors, partitions or lights within the Demised Premises which admit or reflect light into the hallways or other Common Areas of the Building. Tenant shall not attach or hang any curtains, blinds, shades or screens used in connection with any window or door of the Demised Premises without first obtaining the written consent of Landlord. Said curtains, blinds or shades must be of a quality, type, design and color and attached in a manner approved by Landlord. 3. Landlord shall retain the right to control and prevent access to the Building of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interests of the Building and its tenants; provided that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. No tenant and no employee or invitee of any tenant shall go upon the roof of the Building. 4. All cleaning and janitorial services for the Building and the Demised Premises shall be provided exclusively through Landlord, and except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Demised Premises. Landlord shall not in any way be responsible to any Tenant for any loss of property on the Demised Premises, however occurring, or for any damage to any Tenant's property by the janitor or any other employee or any other person. 5. Landlord will furnish Tenant, free of charge, two (2) keys (plus two (2) additional keys upon request) to each door lock in the Demised Premises. Landlord may charge an additional amount $2.00 per key for any additional keys requested by Tenant. Tenant shall not alter any lock or install a new additional lock or bolt on the entrance door of its Demised Premises without written consent of Landlord. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys of all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefor. 6. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation. 7. Any freight elevator shall be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord in its discretion shall deem appropriate. No equipment, materials, furniture, packages, supplies, merchandise or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Landlord. 8. Tenant shall not place a load upon any floor of the Demised Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on such platforms as determined by Landlord to be necessary to properly distribute the weight. Business machines and mechanical equipment C - 1 belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Building must be acceptable to Landlord. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant. 9. Tenant shall not use or keep in the Demised Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Demised Premises any foul or noxious gas or substance, or permit or allow the Demised Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, nor shall Tenant bring into or keep in or about the Demised Premises any birds or animals. 10. Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord. 11. Tenant shall cooperate fully with Landlord to assure the most effective operation of the Building's heating and air-conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice, and shall refrain from attempting to adjust controls other than room thermostats installed for Tenant's use. Tenant shall keep corridor doors closed, and shall close window coverings at the end of each business day. 12. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. 13. Landlord reserves the right to exclude from the Building between the hours of 6 p.m. and 8 a.m. the following day, or such other hours as may be established from time to time by Landlord, and on Sundays and legal holidays, any person unless that person is known to the person or employee in charge of the Building and has a pass or is properly identified. Tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such persons. Landlord shall not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. 14. Tenant shall close and lock the doors of the Demised Premises and entirely shut off all water faucets or other water apparatus, and electricity, gas or air outlets before tenant and its employees leave the Demised Premises. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 15. Tenant shall not obtain for use on the Demised Premises ice, drinking water, food, beverage, towel or other similar services or accept barbering or bootblacking services upon the Demised Premises, except from such contractors as are reasonably approved by Landlord and at such hours and under such regulations as may be fixed by Landlord. 16. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown thereto. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees shall have caused it. 17. Tenant shall not sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Demised Premises. Tenant shall not make any room-to-room solicitation of business from other tenants in the Building. C - 2 18. Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 19. Tenant shall not mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Demised Premises or any part thereof. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduced to the Demised Premises. Tenant shall not cut or bore holes for wires. Tenant shall not affix any floor covering to the floor of the Demised Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule. 20. Tenant shall not install, maintain or operate upon the Demised Premises any vending machine without the written consent of Landlord. 21. Canvassing, soliciting and distribution of handbills or any other written material, and peddling in the Building are prohibited, and each tenant shall cooperate to prevent same. 22. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Building. 23. Tenant shall store all its trash and garbage within the Demised Premises. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. 24. The Demised Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind, nor shall the Demised Premises be used for any improper, immoral or objectionable purpose. No cooking shall be done or permitted by any tenant on the Demised Premises, except that use by Tenant of Underwriters' Laboratory-approved equipment for brewing coffee, tea, hot chocolate and similar beverages or use of a microwave oven shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 25. Tenant shall not use in any space or in the public halls of the Building any hand trucks except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. 26. Without the written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 27. Tenant shall comply with all safety fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 28. Tenant assumes any and all responsibility for protecting the Demised Premises from theft, robbery and pilferage. 29. The requirements of Tenant will be attended to only upon written application to the office of the Building Manager by an authorized individual. 30. Tenant shall not park its vehicles in any parking areas designated by Landlord as areas for parking by visitors to the Building. Tenant shall not leave vehicles in the Building parking areas overnight. 31. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other tenant, nor prevent C - 3 Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. 32. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of premises in the Building. In the event of conflict between the provisions contained in this Lease and these Rules and Regulations the provisions of this Lease shall prevail. 33. Landlord reserves the right to make such other and reasonable Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Building and the Complex and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are adopted. 34. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. C - 4 EXHIBIT "D" BUILDING HOLIDAYS New Years Day President's Day Memorial Day Fourth of July Labor Day Thanksgiving Day Christmas D - 1 EXHIBIT "E" JANITORIAL MAINTENANCE SPECIFICATIONS PROVIDED BY LANDLORD LOBBY AND ENTRANCE AREAS Daily Cleaning Services: 1. Dust and damp mop all lobby and entrance foyers to insure dust free floors with specific attention to hard-to-reach areas. 2. All waste and trash cans will be emptied. All waste and trash cans will be washed as needed. 3. Vacuum all carpeted areas. 4. Dust and wipe clean all desks and chairs. 5. Wipe and clean and polish all stainless steel and other metal work. 6. Clean all entrance doors. 7. All floors to be swept with chemically treated cloths, spot mopped and spray buffed. 8. Dust and/or wash clean all directory boards and display glass. 9. All lights will be turned off, and specified doors locked at the completion of cleaning. Weekly Cleaning Services: 1. Dust and clean all paneling, door trim and other architectural louvers, ornamental work, grills, picture frames, thermostats, baseboards, entire doors and woodwork. 2. Complete high dusting of pictures, frames, etc. 3. Spot clean all carpeted areas. 4. Spot clean all wall surfaces. 5. Wipe clean metal surfaces, kickplates, switch plates, signs and door saddles. 6. Dust and wipe clean all furniture, fixtures, shelving, desk equipment, window sills and door frames. Monthly Cleaning Services: 1. All telephones will be sanitized. 2. Vacuum all upholstered furniture. Yearly Cleaning Services: 1. Strip and refinish all floor areas. GENERAL OFFICE AREAS Daily Cleaning Services: E - 1 1. All waste and trash cans will be emptied. All waste and trash cans will be washed as needed. 2. All water fountains to be sanitized and polished. 3. Dust desk tops. 4. Spot clean all wall surfaces and columns. 5. Vacuum all carpeted areas; moving light furniture other than desks, file cabinets, etc. 6. Dust and spot mop all resilient tile floor areas. All floor edges will be damp mopped. 7. All glass partitions will be spot cleaned. Weekly Cleaning Services: 1. Dust and clean all paneling, door trim, ornamental work, grills, picture frames, ventilating louvers, baseboards and entire doors. 2. Dust and wipe clean all furniture, fixtures, shelving, cabinets, window sills, picture frames, bases of all chairs, and desk tops with clean cloths. 3. Wipe clean metal door knobs, light switch plates, mirrors, kick plates, door saddles and directional signs. Monthly Cleaning Services: 1. Complete all high dusting. 2. All telephones will be cleaned and sanitized. Quarterly Cleaning Services: 1. Dust and wipe clean all diffusers and ventilators. 2. Damp mop and spray buff all resilient tile floor areas. Yearly Cleaning Services: 1. Strip and refinish all resilient tile floor areas. 2. Dust blinds. RESTROOMS Daily Cleaning Services: 1. All toilets and urinals will be sanitized and wiped clean. 2. All sinks and fixtures will be cleaned with a non-abrasive cleaner, sanitized and polished. 3. All paper towel and toilet tissue dispensers will be wiped clean. 4. All waste baskets and sanitary disposal units will be emptied. 5. Clean all mirrors with glass cleaner and chrome with chrome cleaner. 6. All dispensers will be refilled. E - 2 7. All restroom floors will be damp mopped nightly using disinfectants. Monthly Cleaning Services: 1. All walls, vertical and horizontal surfaces will be wiped clean and sanitized. 2. All partitions, tiled walls and vertical surfaces will be wiped clean. Quarterly Cleaning Services: 1. All restroom floors will be machine scrubbed. CORRIDORS AND COMMON AREAS Daily Cleaning Services: 1. All drinking fountains will be sanitized and polished. 2. All waste trash cans will be emptied. 3. Wipe clean all metal door knobs, light switch plates, kick plates, mirrors, door saddles and directional signs. 4. Sweep with chemically treated mops; damp mop to remove spill off. Weekly Cleaning Services: 1. Spray buff all resilient tile floor areas. 2. All fire extinguishers will be dusted. 3. Spot clean all wall surfaces and columns; including stainless steel work. 4. Dust and wipe clean all furniture, fixtures, shelving, cabinets, window sills and picture frames with clean cloths. Monthly Cleaning Services: 1. Complete all high dusting. 2. Dust and wipe clean all paneling, door trim, ornamental work, grills, picture frames, ventilating louvers, baseboards and entire doors. Quarterly Cleaning Services: 1. Dust and wipe clean all air diffusers and ventilators. Yearly Cleaning Services: 1. Strip and refinish all resilient tile floor areas. ELEVATORS Daily Cleaning Services: 1. All elevators will be cleaned maintaining all metal work throughout. 2. All resilient tile floor areas will be swept with a chemically treated dust mop and spot mopped. Carpeted surfaces will be vacuumed. Weekly Cleaning Services: 1. All resilient tile floors will be mopped and spray buffed. E - 3 2. All walls will be wiped clean. Monthly Cleaning Services: 1. Vacuum elevator door tracks and saddles. STAIRWELLS AND MISCELLANEOUS Weekly Cleaning Services: 1. All stairs will be swept and mopped. 2. All metal and framework will be dusted and wiped clean. 3. All janitorial closets will be kept clean and orderly. E - 4 EX-99.1 9 a84640exv99w1.txt EXHIBIT 99.1 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Commonwealth Energy Corporation (the "Company") on Form 10-K for the year ending July 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Ian B. Carter, Chairman of the Board and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: October 29, 2002 By: /s/ Ian B. Carter ------------------------------- Ian B. Carter Chairman of the Board and Chief Executive Officer EX-99.2 10 a84640exv99w2.txt EXHIBIT 99.2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Commonwealth Energy Corporation (the "Company") on Form 10-K for the year ending July 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), James L. Oliver, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: October 29, 2002 By: /s/ James L. Oliver ------------------------------- James L. Oliver Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----


x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 31, 2002

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to


California		33-0769555
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


PART I
	Item 1.Business
	Item 2.Properties
	Item 3.Legal Proceedings
	Item 4.Submission of Matters to a Vote of Security Holders
PART II
	Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters
	Item 6.Selected Financial Data
	Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A.Quantitative and Qualitative Disclosures About Market Risk
	Item 8.Financial Statements and Supplementary Data
	Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10.Directors and Executive Officers of the Registrant
	Item 11.Executive Compensation
	Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13.Certain Relationships and Related Transactions
	Item 14.Controls and Procedures
PART IV
SIGNATURES
EXHIBIT 3.4
EXHIBIT 10.7
EXHIBIT 10.22
EXHIBIT 10.23
EXHIBIT 10.24
EXHIBIT 10.25
EXHIBIT 99.1
EXHIBIT 99.2


		Page

PART I
Item 1.	Business		1
Item 2.	Properties		8
Item 3.	Legal Proceedings		8
Item 4.	Submission of Matters to a Vote of Security Holders		10
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		10
Item 6.	Selected Financial Data		12
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 8.	Financial Statements and Supplementary Data		25
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosures		25
PART III
Item 10.	Directors and Executive Officers of the Registrant		25
Item 11.	Executive Compensation		28
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		34
Item 13.	Certain Relationships and Related Transactions		36
Item 14.	Controls and Procedures		36
PART IV
Item 15.	Exhibits, Financial Statements and Reports on Form 8-K		37



	Percentage of Total Revenue
	Years Ended July 31,

	2000			2001		2002

Retail Energy Sales		87.6	%		54.6%		82.3%
Wholesale Energy Sales		—			43.3%		15.9%


Item 5.	*Market for Registrant’s Common Equity and Related Stockholder Matters*


		Period from
		August 15,			Year Ended July 31,
		1997 through
		July 31, 1998			1999			2000			2001		2002


		(Amounts in thousands except per share information)
Consolidated Statement of Operations Data:
Net revenue		$	1,387		$	39,124		$	99,624		$	183,264	$	117,768
Direct energy costs			3,735			38,729			86,732			76,615		86,198

Gross (negative) margin			(2,348	)		395			12,892			106,649		31,570
Other costs and expenses(1)			5,928			18,940			22,037			25,861		23,060

Income (loss) from operations			(8,276	)		(18,545	)		(9,145	)		80,788		8,510
Loss on equity investments			—			—			—			—		(160	)
Interest income, net			19			123			499			1,593		939

Income (loss) before income taxes			(8,257	)		(18,422	)		(8,646	)		82,381		9,289
Provision for income taxes			—			—			—			21,852		4,125

Net income (loss)(2)		$	(8,257	)	$	(18,422	)	$	(8,646	)	$	60,529	$	5,164

Net income (loss) per common share(3):
	Basic	$	(.96	)	$	(.84	)	$	(.30	)	$	2.06	$	.19

	Diluted	$	(.96	)	$	(.84	)	$	(.30	)	$	1.77	$	.16

Weighted-average shares outstanding(3):
	Basic		8,567			21,905			28,795			29,385		27,482

	Diluted		8,567			21,905			28,795			34,152		31,536



	July 31,

	1998		1999		2000		2001		2002

Consolidated Balance Sheet Data:
Working capital	$	1,896	$	12,428	$	12,803	$	50,184	$	58,842
Total assets		7,205		27,858		35,444		107,016		101,229
Long-term debt		—		—		—		—		—
Shareholders’ equity		3,131		19,900		24,236		86,037		87,952


	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
Year ended July 31, 2001		1,080
Year ended July 31, 2002		(743	)


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*



			For the Years Ending July 31,

	Total		2003		2004		2005

Electricity purchase contracts	$	89,889,636	$	56,525,014	$	33,364,622	$	—
Operating leases		1,289,596		745,789		452,135		100,672

	$	91,188,232	$	57,270,803	$	33,816,757	$	100,672


			Director
Name	Age		Since		Principal Occupation and Other Information

Ian B. Carter		64		1999	Mr. Carter has been our Chairman and Chief Executive Officer since January 2000. During the preceding four month period prior to that, he acted as Interim President. From October 1988 to August 1999, Mr. Carter operated his owned businesses, including a mortgage banking firm and a merchant banking firm. Prior to that, Mr. Carter served as an investment specialist for Coldwell Banker Commercial Brokerage and worked as a Systems Engineer and Salesman with IBM. Mr. Carter also served in the United States Army serving in Vietnam, Europe and the Pentagon. Mr. Carter received his Bachelor of Science degree in Engineering from the United States Military Academy at West Point, New York and his Master in Business Administration in finance from the University of Southern California.


Name and Position	Age		Principal Occupation and Other Information

Ian B. Carter Chairman and Chief Executive Officer		64	Mr. Carter is also a director, and his biography is referenced above.
Richard L. Paulsen Chief Operating Officer		54	Mr. Paulsen has been our Chief Operating Officer since May 2000. From January 1991 to June 1999, Mr. Paulsen served as the Chief Executive Officer 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 and at Basic Computer Systems, Inc., a national supplier of application software and systems that he founded. Mr. Paulsen graduated from Loyola University with a Bachelor of Science degree in mathematics.
James L. Oliver Chief Financial Officer		54	Mr. Oliver has been the Chief Financial Officer of the Company since November 1999. From January 1997 to November 1999, was self employed as a management consultant. Prior to that, Mr. Oliver served in various capacities at a number of companies, including serving as Chief Financial Officer for two operating units of Emerson Electric Co., as Chief Financial Officer for a business unit of Smithkline Beckman, and as head of strategic and financial planning for an operating unit of Dresser Industries. Mr. Oliver received his Bachelor of Science degree in accounting and finance from the University of Southern California.
John A. Barthrop General Counsel and Secretary		58	Mr. Barthrop has been our General Counsel since May 1999. From August 1998 to May 1999, Mr. Barthrop practiced law with the firm of Eadington, Merhab & Eadington. From July 1996 to August 1998, he was a principal member of the business and litigation law firm of Smith, Sinek & Barthrop. Prior to that, Mr. Barthrop owned and operated his own law firm, served as General Counsel and Assistant to the President for Newman Properties, a national real estate development company, and served as Associate General Counsel for the Beneficial Standard, a conglomerate involved in insurance, finance and real estate. Mr. Barthrop obtained a Bachelor of Science degree from the University of Washington and a Juris Doctorate degree from University of California, Hastings College of Law, and is licensed to practice before the State Courts and the U.S. District Courts.
Scott A. Petterson Vice President and Corporate Controller		44	Mr. Petterson has served as our Corporate Controller since July 2000. From June 1998 to July 2000, he served as Manager of Internal Audit for the Pittston Company, a diversified holding company in the freight, security and cash management industries. Prior to that, Mr. Petterson served as the Director of Internal Audit for Regency Health Services, a healthcare provider. Mr. Petterson graduated from the University of California at Santa Barbara with a Bachelor of Arts degree in Business Economics with a special emphasis in Accounting. He is a Certified Public Accountant in California and a member of the American Institute of Public Accountants.
Roy Reeves Vice President of Marketing		41	Mr. Reeves has served as our Vice President of Marketing since December 2000. From September 1997 to December 2000, Mr. Reeves served as Vice President of Sales & Marketing at CSA, Inc., now called PrepStar, an athletic trade magazine publisher. Prior to that, Mr. Reeves served as General Manager for the Interactive Media Division of High Technology Solutions, Inc. (“HTS”), and as President and Chief Executive Officer of TouchMedia, Inc., a multimedia company he founded and sold to HTS. Mr. Reeves obtained a Bachelor of Science degree in Business Administration with an emphasis in Marketing from the University of Southern California.



											Long Term Compensation


		Annual Compensation									Awards		Payouts

								(e)					(g)
								Other			(f)		Securities				(i)
		(b)						Annual			Restricted		Underlying		(h)		All Other
(a)		Fiscal		(c)		(d)		Compen-			Stock		Options/		LTIP		Compen-
Name and Principal Position		Year		Salary		Bonus(1)		sation			Award(s)		SARs		Payouts		sation

Ian Carter			2002	$	314,988	$	495,000	$	62,553	(2)		—		300,000		—		—
	Chief Executive Officer		2001		297,975		100,000		36,241	(2)		—		300,000		—		—
			2000		214,844		—		10,167	(2)		—		3,300,000		—		—
Richard Paulsen			2002		310,000		140,000		22,046	(3)		—		—		—		—
	Chief Operating Officer		2001		245,534		50,000		5,647	(3)		—		900,000		—		—
			2000		36,250		—		—			—		—		—		—
John Barthrop			2002		182,016		55,500		16,203	(4)		—		—		—		—
	General Counsel		2001		145,366		40,000		10,406	(4)		—		500,000		—		—
			2000		100,674		—		877	(4)		—		—		—		—
James L. Oliver			2002		171,000		89,813		19,996	(5)		—		—		—		—
	Chief Financial Officer		2001		138,208		40,000		12,166	(5)		—		500,000		—		—
			2000		76,058		—		2,800	(5)		—		—		—		—
Scott A. Petterson			2002		119,577		45,000		9,619	(6)		—		—		—		—
	Vice President and Corporate Controller		2001		98,798		15,000		5,730	(6)		—		150,000		—		—
			2000		—		—		—			—		—		—		—



											Potential
											Realizable Value
	Number of			Percentage							At Assumed Annual
	Securities			of Total							Rates of Stock
	Underlying			Options/SARs			Exercise or				Price Appreciation
	Options/SARs			Granted to			Base				for Option Term(1)
	Granted			Employees in			Price		Expiration
Name	(#)			Fiscal Year			($/sh)		Date		5%($)		10%($)

Ian Carter		300,000(2	)		100.0	%	$	2.50		01/01/10	$	358,092	$	857,692
James L. Oliver		—			—			—		—		—		—
John A. Barthrop		—			—			—		—		—		—
Richard Paulsen		—			—			—		—		—		—
Scott A. Petterson		—			—			—		—		—		—



					Number of Securities				Value of Unexercised
					Underlying Unexercised				In-the-Money
					Options/SARs at				Options/SARs at
			Value		Fiscal Year-End(#)				Fiscal Year-End($)(1)
	Shares Acquired		Realized
Name	on Exercise(#)		($)		Exercisable		Unexercisable		Exercisable		Unexercisable

Ian B. Carter		—		—		2,350,000		1,550,000	$	297,000		—
Richard Paulsen		—		—		450,000		450,000		—		—
John A. Barthrop		—		—		298,000		250,000	$	86,880		—
James L. Oliver		—		—		250,000		250,000		—		—
Scott A. Petterson		—		—		100,000		100,000		—		—


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*



		Common Stock								Series A Convertible Preferred Stock


		Amount and Nature of								Amount and Nature of
		Beneficial Ownership(1)								Beneficial Ownership(1)

		Number of								Number of
		Shares		Right to			Percent of			Shares					Percent of
Name		Owned(2)		Acquire(3)			Class			Owned(2)			Right to Acquire		Class(4)

Principal Stockholders:
	Ian B. Carter		50,000		2,350,000			8.1	%		—			—		—
	Joseph P. Saline, Jr.		—		704,000	(5)		2.6	%		352,000	(6)		—		35.2	%
Directors and Named Executive Officers:
	Ian B. Carter		50,000		2,350,000			8.1	%		—			—		—
	Craig G. Goodman		—		—			—			—			—		—
	Junona A. Jonas		—		50,000			*			—			—		—
	Robert C. Perkins		177,000		75,000	(7)		1.3	%		25,000			—		2.5	%
	William J. Popejoy
	Joseph P. Saline, Jr.		—		704,000	(5)		2.6	%		352,000	(6)		—		35.2	%
	Eugene Sullivan		—		—			—			—			—		—
	Richard Paulsen		—		450,000			1.7	%		—			—		—
	John A. Barthrop		2,000		298,000			1.1	%		—			—		—
	James L. Oliver		—		250,000			*			—			—		—
	Scott A. Petterson		—		125,000			*			—			—		—
All Directors and Executive Officers as a group (12 persons)			229,000		4,402,000	(8)		14.3	%		377,000	(9)		—		37.7	%


*	Indicates beneficial ownership of less than 1% of the issued and outstanding class of securities.


Item 15.	*Exhibits, Financial Statements and Reports on Form 8-K*


Report of Ernst & Young LLP, independent auditors		F-1
Consolidated balance sheets at July 31, 2001 and 2002		F-2
Consolidated statements of operations for the three years in the period ended July 31, 2002		F-3
Consolidated statements of shareholders’ equity for the three years in the period ended July 31, 2002		F-4
Consolidated statements of cash flows for the three years in the period ended July 31, 2002		F-5
Notes to consolidated financial statements		F-6


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(1)
	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(1)
	3.3	Certificate of Determination of Commonwealth Energy Corporation dated September 22, 1997 and filed with the Secretary of State of California on March 13, 1998(2)
	3.4	Bylaws of Commonwealth Energy Corporation, as amended
Material Contracts Relating to Management Compensation Plans or Arrangements
	10.1	Severance Agreement dated June 1, 2000, among Commonwealth Energy Corporation, electricAmerica, Inc. and Frederick M. Bloom(1)
	10.2	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(1)
	10.3	Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and Richard Paulsen(2)
	10.4	Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and James Oliver(2)
	10.5	Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and John Barthrop(2)
	10.6	Commonwealth Energy Corporation 1999 Equity Incentive Plan for Employees(1)
	10.7	Change of Control Agreement dated November 1, 2000 between Commonwealth Energy Corporation and Scott A. Petterson



Dated: October 28, 2002	COMMONWEALTH ENERGY CORPORATION
	By: /s/ IAN B. CARTER
	O	-------------------------------------------- Ian B. Carter Chairman of the Board and Chief Executive fficer



Signature	Title	Date



/s/ IAN B. CARTER Ian B. Carter	Chairman of the Board, Chief Executive Officer and a Director (Principal Executive Officer)	October 28, 2002


/s/ JAMES L. OLIVER James L. Oliver	Chief Financial Officer (Principal Financial Officer)	October 28, 2002


/s/ SCOTT A. PETTERSON Scott A. Petterson	Vice President — Finance and Controller (Principal Accounting Officer)	October 28, 2002

/s/ CRAIG G. GOODMAN Craig G. Goodman	Director	October 28, 2002

/s/ JUNONA A. JONES Junona A. Jones	Director	October 28, 2002

/s/ ROBERT C. PERKINS Robert C. Perkins	Director	October 28, 2002

William J. Popejoy	Director

/s/ JOSEPH P. SALINE, JR. Joseph P. Saline, Jr.	Director	October 28, 2002

/s/ EUGENE R. SULLIVAN Eugene R. Sullivan	Director	October 28, 2002


		By: /s/ IAN B. CARTER Ian B. Carter Chairman of the Board and Chief Executive Officer (Principal Executive Officer)


		By: /s/ JAMES L. OLIVER James L. Oliver Chief Financial Officer (Principal Financial Officer)



							Convertible						Retained
	Common Stock						Preferred Stock						Earnings
													(Accumulated
	Shares			Amount			Shares			Amount			Deficit)			Total

Balance at July 31, 1999		26,755,221	(A)	$	45,758,101			939,000		$	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 and comprehensive loss		—			—			—			—			(8,646,089	)		(8,646,089	)

Balance at July 31, 2000		29,333,164	(A)		58,740,149			939,000			1,053,972			(35,558,119	)		24,236,002
Exercise of stock options		103,699			5,678			—			—			—			5,678
Compensation charge related to settlement of employee stock option disputes		—			139,725			—			—			—			139,725
Compensation charge related to performance-based stock options		—			1,080,000			—			—			—			1,080,000
Income tax benefits arising from exercise of stock options		—			339,295			—			—			—			339,295
Cumulative unpaid dividends on convertible preferred stock		—			—			—			81,188			(81,188	)		—
Payment of dividends on preferred stock		—			—			—			(216,548	)		—			(216,548	)
Repurchase of preferred stock		(76,500	)		—			(76,500	)		(76,500	)		—			(76,500	)
Net income and comprehensive income		—			—			—			—			60,529,417			60,529,417

Balance at July 31, 2001		29,360,363			60,304,847			862,500			842,112			24,890,110			86,037,069
Exercise of stock options		64,829			26,630			—			—			—			26,630
Compensation charge related to settlement of employee stock option disputes		—			2,500			—			—			—			2,500
Compensation charge related to performance-based stock options		—			(742,500	)		—			—			—			(742,500	)
Repurchase of founder’s shares		(1,175,160	)		(2,400,000	)		—			—			—			(2,400,000	)
Cancellation and return of founder’s accommodation shares		(828,500	)		—			—			—			—			—
Income tax benefits arising from exercise of stock options		—			(43,205	)		—			—			—			(43,205	)
Cumulative unpaid dividends on convertible preferred stock		—			—			—			70,554			(70,554	)		—
Payment of dividends on preferred stock		—			—			—			(30,195	)		—			(30,195	)
Repurchase of preferred stock		(87,500	)		—			(87,500	)		(62,500	)		—			(62,500	)
Net income and comprehensive income		—			—			—			—			5,164,414			5,164,414

Balance at July 31, 2002		27,334,032		$	57,148,272			775,000		$	819,971		$	29,983,970		$	87,952,213


	Investment
Investee	Amount		% Ownership

Envenergy, Inc.	$	2,029,669		8.73%
Turbocor, LLC		2,997,257		21.16%
Power Efficiency Corporation		2,425,471		28.00%

	$	7,452,397


Reserved for conversion of convertible preferred stock			775,000
Reserved for exercise of warrants			100,000
Reserved for exercise of outstanding stock options			10,490,231

			11,365,231



			Options Outstanding

										Weighted-
										Average
						Exercise		Weighted-		Fair Value
			Number of			Price		Average		of Common
			Shares			Per Share		Exercise Price		Stock(A)

Balance at July 31, 1999				5,226,575			$ .01 - $3.75	$	0.478
Options granted:
	Exercise less than fair value of common stock(A):
		— Employee commissions for stock sales		21,000			$1.00	$	1.000	$	2.50
		— Other employees		12,000			$1.00	$	1.000	$	2.50
	Exercise price equal to fair value of common stock(A):
		— Employee performance-based		2,600,000			$2.50	$	2.500	$	2.50
		— Other employee		750,000			$2.50	$	2.500	$	2.50
		— Outside directors		250,000			$2.50	$	2.500	$	2.50
		— Non-employee		52,500			$2.50	$	2.50	$	2.50
		— Settlement and severance of former president		1,000,000			$2.50	$	2.50	$	2.50
Options exercised				(392,406	)		$ .01 - $1.00	$	0.179
Options cancelled				(269,777	)		$ .05 - $3.75	$	1.902

Balance at July 31, 2000				9,249,892			$ .01 - $3.75	$	1.469
Options granted:
	Exercise price less than fair value of common stock(A):
		— Employee performance-based		300,000			$2.50	$	2.500	$	2.75
	Exercise price equal to fair value of common stock(A):
		— Other employees		2,500,000			$2.75	$	2.750	$	2.75
		— Outside directors		150,000			$2.75	$	2.750	$	2.75
Options exercised				(67,200	)		$ .01 - $1.00	$	0.072
Options cancelled				(1,849,500	)		$ .01 - $3.75	$	1.723

Balance at July 31, 2001				10,283,192			$ .01 - $3.75	$	1.792
Options granted:
	Exercise price less than fair value of common stock(A):
		— Other employees		4,500			$1.00 - $3.75	$	2.222	$	3.13
	Exercise price equal to fair value of common stock(A):
		— Employee performance-based		300,000			$2.50	$	2.500	$	2.38
Options exercised				(51,961	)		$ .01 - $1.00	$	0.503
Options cancelled				(45,500	)		$ .05 - $3.75	$	1.042

Balance at July 31, 2002				10,490,231			$ .01 - $3.75	$	1.822


			Average
Range of	Number of		Remaining				Weighted
Exercise	Shares		Contractual		Shares		Average
Prices	Outstanding		Life (Years)		Exercisable		Exercise Price

$ .01 - $ .		50 3,083,056		.63		3,083,056	$	0.11
$1.00		464,675		.45		464,675	$	1.00
$2.50 - $3.7		5 6,942,500		6.00		4,442,501	$	2.64

Total		10,490,231		4.17		7,990,232	$	1.56


					Stock-based
	Number of Options				Compensation
					Recognized in
	Vested		Not Earned		Fiscal 2001

Completion of the audit of the Company’s July 31, 2000 consolidated financial statements(A)		500,000		—	$	125,000
Settlement of the California Department of Corporations investigation(A)		250,000		—		62,500
Settlement of the California Public Utilities Commission investigation(A)		500,000		—		125,000
Exceeding the Company’s business plans for the calendar year ended December 31, 2000 by 10% or more		100,000		200,000		25,000

		1,350,000		200,000	$	337,500


	Current			Deferred		Total

Federal	$	(1,768,000	)	$	4,610,000	$	2,842,000
State		583,000			700,000		1,283,000

	$	(1,185,000	)	$	5,310,000	$	4,125,000


Year ending July 31,

2003	$	745,789
2004		452,135
2005		100,672

	$	1,298,596


Year ending July 31,

2003	$	1,172,917
2004		1,346,250
2005		627,083