1

 
5. Term of Agreement. This Agreement shall commence to be effective on August 1, 2006(the “Commencement Date”), and shall continue until July 31, 2011, unless terminated as provided inSection 14 hereof.6. Compensation. During the term of this Agreement, the Company shall pay thefollowing compensation to Employee:6.1 Annual Compensation. Employee shall be paid a fixed salary of $400,000 per year,payable in two installments per month of $16,700 each on the 1st and 16th day of each month,corresponding to the second half of the previous month and the first 15 days of the current month,respectively, commencing on August 16, 2006 for the period from August 1, 2006 until August 15,2006. Employee shall receive an annual 7% increase in said fixed salary effective each January1st during the term of this Agreement. Employee has the right is his sole discretion todefer any portion of his salary in excess of $13,000 per month and have it paid at a later date bynotifying the Company on or before the scheduled date for a salary payment.6.2 Additional Compensation. In addition to the compensation set forth in Section 6.1of this Agreement, Employee may be paid a bonus or bonuses during each year, as determined at thesole discretion of the Company’s Board of Directors based on the Board’s evaluation of theEmployee’s definable efforts, accomplishments and similar contributions.7. Fringe Benefits. Employee shall be entitled to all fringe benefits which theCompany or its subsidiaries may make available from time-to-time for persons with comparablepositions and responsibilities. Without limitation, such benefits shall include participation inany life and disability insurance programs, profit incentive plans, pension or retirement plans,and bonus plans as are maintained or adopted from time-to-time by the Company. The Company shallalso provide Employee with medical and dental group insurance coverage or equivalent coverage forEmployee and his dependents. The medical and dental insurance coverage shall begin on theCommencement Date and shall continue throughout the term of this Agreement. The Company will alsoprovide and pay for a health club membership for Employee, reasonably selected by the Employee.8. Office and Staff. In order to enable Employee to discharge his obligations andduties pursuant to this Agreement, the Company agrees that it shall provide suitable office spacefor Employee in El Segundo, California, together with all necessary and appropriate supportingstaff and secretarial assistance, equipment, stationery, books and supplies. Employee agrees thatthe office space and supporting staff presently in place is suitable for the purposes of thisAgreement. The Company agrees to provide at its expense parking for one vehicle by the Employee atthe Company’s executive offices.9. Reimbursement of Expenses. The Company shall reimburse Employee for all reasonabletravel, mobile telephone, promotional and entertainment expenses incurred in connection with theperformance of Employee’s duties hereunder, subject to Section 10 of this Agreement with respect toautomobile expenses. Employee’s reimbursable expenses shall be paid promptly by the Company uponpresentment by Employee of an itemized list of invoicesdescribing such expenses. All compensation provided in Sections 6, 7, and 9 of this Agreementshall be subject to customary withholding tax and other employment taxes, to the extent required bylaw.10. Automobile. Notwithstanding anything else herein to the contrary, the Companyshall pay to the Employee a fixed amount equal to $500 per month on the last day of each monthduring the term of this Agreement as reimbursement to the Employee on a non-accountable basis ofall expenses incurred by the Employee for the use of his automobile for Company business purposes,including but not limited to depreciation, repairs, maintenance, gasoline and insurance. After theexpiration of the first year of the term of this Agreement, the Company’s Board of Directors willreview and may in its discretion determine to increase the Employee’s automobile allowance, orauthorize the Company to lease an automobile for the Employee. Employee shall not be entitled toany other reimbursement for the use of his automobile for business purposes.
 
2

 
11. Vacation. Employee shall be entitled to three weeks of paid vacation per year orpro rata portion of each year of service by Employee under this Agreement. The Employee shall beentitled to the holidays provided in the Company’s established corporate policy for employees withcomparable duties and responsibilities.12. Rights In And To Inventions And Patents.12.1 Description of Parties’ Rights. The Employee agrees that with respect to anyinventions made by him or the Company during the term of this Agreement, solely or jointly withothers, (i) which are made with the Company’s equipment, supplies, facilities, trade secrets ortime, or (ii) which relate to the business of the Company or the Company’s actual or demonstrablyanticipated research or development, or (iii) which result from any work performed by the Employeefor the Company, such inventions shall belong to the Company. The Employee also agrees that theCompany shall have the right to keep such inventions as trade secrets, if the Company chooses.12.2 Disclosure Requirements. For purposes of this Agreement, an invention is deemedto have been made during the term of this Agreement if, during such period, the invention wasconceived or first actually reduced to practice. In order to permit the Company to claim rights towhich it may be entitled, the Employee agrees to disclose to the Company in confidence the natureof all patent applications filed by the Employee during the term of this Agreement.13. Termination. This Agreement may be terminated in the following manner and nototherwise:13.1 Mutual Agreement. This Agreement may be terminated by the mutual writtenagreement of the Company and Employee to terminate.13.2 Termination by Employee for Breach. Employee may at his option and in his solediscretion terminate this Agreement for the material breach by the Company of the terms of thisAgreement. In the event of such termination, Employee shall give the Company 30 days prior writtennotice.13.3 Termination by the Company for Breach. The Company may at its option terminatethis Agreement in the event that the Employee intentionally performs his duties in bad faith underthis Agreement, or breaches his fiduciary duty to the Company, to the Board ofDirectors or to the Company’s shareholders; provided, however, that the Company shall give theEmployee written notice of specific instances for the basis of any termination of this Agreement bythe Company pursuant to Section 13.3 of this Agreement. Employee shall have a period of 30 daysafter said notice in which to cease the alleged violations before the Company may terminate thisAgreement. If Employee ceases to commit the alleged violations within said 30 day period, theCompany may not terminate this Agreement pursuant to this Section. If Employee continues to committhe alleged violations after said 30 day period, the Company may terminate this Agreementimmediately upon written notification to Employee. Notwithstanding anything else herein to thecontrary, if the Employee is removed pursuant to Section 13.3 of this Agreement, the Employee shallreceive all of the benefits provided in Section 14(iii) of this Agreement, regardless of the termsand conditions of the Company’s Stock Option Plan or any existing stock option agreements or anyamendments thereto governing the options described in Section 14(iii) of this Agreement.13.4 Termination Upon Death. This Agreement shall terminate upon the death of theEmployee.
 
3

 
13.5 Termination Upon the Disability of the Employee. This Agreement shall terminateupon the disability of the Employee. As used in the previous sentence, the term “disability” shallmean the complete disability to discharge Employee’s duties and responsibilities for a continuousperiod of not less than six months during any calendar year. Any physical or mental disabilitywhich does not prevent Employee from discharging his duties and responsibilities in accordance withusual standards of conduct as determined by the Company in its reasonable opinion shall notconstitute a disability under this Agreement.13.6 Termination from or Changes in Position. Removal of the Employee from hisposition as the Chief Executive Officer or President of the Company shall be deemed to be atermination subject to the severance payment positions set forth in Section 14 of this Agreement.The Company shall not be entitled to place the Employee in any other employment position withoutthe Employee’s consent. The Employee’s failure to consent shall not be a breach of any provisionof this Agreement.13.7 Termination As A Result of A Change in Control of the Company. “Change ofControl” is defined as a sale of all or substantially all of the Company’s assets or more thanfifty percent (50%) of the Company’s outstanding stock, to a purchaser which is unaffiliated withthe Company, in a single transaction or a series of related transactions, or a merger pursuant towhich the Company is not the surviving corporation, with any entity which is unaffiliated with theCompany. In the event of a Change in Control of the Company, if the Employee, negotiating in goodfaith, is unable to come to an agreement with the surviving company regarding an employmentagreement, then the Employee may terminate this Agreement pursuant to Section 13.2 of thisAgreement.13.8 Other Termination by Employee. If this Agreement is terminated by Employee inwriting for a reason other than the Company’s breach of this Agreement (i.e. voluntary resignation)then (a) Employer shall not be entitled to assert any claim against the Employee for consequentialor indirect damages or for lost profits as a result of the termination; and (b) Employee shall notbe entitled to any rights set forth in Section 14 of this Agreement except that Employee shall beentitled to the right to exercise vested options, if any, for a period of 90 days after the date ofthe written notification of termination by the Employee.14. Improper Termination. If this Agreement is terminated by Employee for any reasonpursuant to Section 13.2, 13.6 or 13.7 of this Agreement or by the Company in any manner exceptspecifically in accordance with Section 13.1 or 13.3, 13.4 or 13.5 of this Agreement, then (i) theCompany shall immediately pay to the Employee a lump sum payment equal to the sum of the Employee’sentire annual compensation and accrued but unpaid bonus (if any, with respect to bonus) payablethrough the end of the term of this Agreement pursuant to Sections 6.1 and 6.2 herein,respectively, plus an additional lump sum equal to 36 months of his last monthly payment on record(ii) Employee shall be entitled to all of the benefits under Section 7 of this Agreement, asamended, through the end of the term of this Agreement, and (iii) if applicable, all unvested stockoptions owned by Employee will immediately vest, Employee shall be entitled to exercise all vestedstock options which he owns for the entire remaining exercise period of the stock options, no suchstock options shall terminate prior to said expiration dates, and no “severance” shall be deemed tohave occurred under the Company’s Stock Option Plan or under existing Stock Option Agreementscovering said stock options. It is specifically agreed that in such event Employee shall have noduty to mitigate his damages by seeking comparable, inferior or different employment.15. Indemnification of Employee. Pursuant to the provisions and subject to thelimitations of the California Corporations Code, and in particular Sections 204 and 317 therein,the Company shall indemnify and hold Employee harmless as provided in Sections 15.1, 15.2 and 15.3of this Agreement. The Company shall, upon the request of Employee, assume the defense anddirectly bear all of the expense of any action or proceedings which may arise for which Employee isentitled to indemnification pursuant to this Section.
 
4

 
15.1 Indemnification of Employee for Actions by Third Parties. The Company herebyagrees to indemnify and hold Employee harmless from any liability, claims, fines, damages, losses,expenses, judgments or settlements actually incurred by him, including but not limited toreasonable attorneys’ fees and costs actually incurred by him as they are incurred, as a result ofEmployee being made at any time a party to, or being threatened to be made a party to, anyproceeding (other than an action by or in the right of the Company, which is addressed in Section15.2 of this Agreement), relating to actions Employee takes within the scope of his employment asthe Chief Executive Officer of the Company or in any other employment capacity, or in his role as adirector of the Company, provided that Employee acted in good faith and in a manner he reasonablybelieved to be in the best interest of the Company and, in the case of a criminal proceeding, hadno reasonable cause to believe his conduct was unlawful.15.2 Indemnification of Employee for Actions in the Right of the Company. The Companyhereby agrees to indemnify and hold Employee harmless from any liability, claims, damages, losses,expenses, judgments or settlements actually incurred by him, including but not limited toreasonable attorneys’ fees and costs actually incurred by him as they are incurred, as a result ofEmployee being made a party to, or being threatened to be made a party to, any proceeding by or inthe right of the Company to procure a judgment in its favor by reason of any action taken byEmployee as an officer, director or agent of the Company, provided that Employee acted in goodfaith in a manner he reasonably believed to be in the best interests of the Company and itsshareholders, and provided further, that no indemnification by the Company shall be requiredpursuant to this Section 15.2 (i) for acts or omissions that involve intentional misconduct or aknowing and culpable violation of law, (ii) for acts or omissions that Employee believed to becontrary to the best interests of the Company or its shareholders or that involve the absence ofgood faith on the part of Employee, (iii) for any transaction from which Employee derived animproper personal benefit, (iv) for acts or omissions that show a reckless disregard by Employee ofhis duties to the Company or its shareholders in circumstances in which Employeewas aware, or should have been aware, in the ordinary course of performing his duties, of arisk of serious injury to the Company or its shareholders, (v) for acts or omissions thatconstitute an unexcused pattern of inattention that amounts to an abdication of Employee’s dutiesto the Company or its shareholders, or (vi) for any other act by Employee for which Employee is notpermitted to be indemnified under the California Corporations Code. Furthermore, the Company hasno obligation to indemnify Employee pursuant to this Section 15.2 in any of the followingcircumstances:A. In respect of any claim, issue, or matter as to which Employee is adjudged to be liable tothe Company in the performance of his duties to the Company and its shareholders, unless and onlyto the extent that the court in which such action was brought determines upon application that, inview of all the circumstances of the case, he is fairly and reasonably entitled to indemnity forthe expenses and then only in the amount that the court shall determine.B. In the event of the application of Section 15.2(A), then for amounts paid in settling orotherwise disposing of a threatened or pending action without court approval.C. In the event of the application of Section 15.2(A), then for expenses incurred in defendinga threatened or pending action which is settled or otherwise disposed of without court approval.15.3 Reimbursement. In the event that it is determined by a trier of fact thatEmployee is not entitled to indemnification by the Company pursuant to Sections 15.1 or 15.2 ofthis Agreement, then Employee is obligated to reimburse the Company for all amounts paid by theCompany on behalf of Employee pursuant to the indemnification provisions of this Agreement. In theevent that Employee is successful on the merits in the defense of any proceeding referred to inSections 15.1 or 15.2 of this Agreement, or any related claim, issue or matter, then the Companywill indemnify and hold Employee harmless from all fees, costs and expenses actually incurred byhim in connection with the defense of any such proceeding, claim, issue or matter.
 
5

 
16. Assignability of Benefits. Except to the extent that this provision may becontrary to law, no assignment, pledge, collateralization or attachment of any of the benefitsunder this Agreement shall be valid or recognized by the Company. Except as provided by law,payment provided for by this Agreement shall not be subject to seizure for payment of any debts orjudgments against the Employee, nor shall the Employee have any right to transfer, modify,anticipate or encumber any rights or benefits hereunder; provided that any stock issued by theCompany to the Employee pursuant to this Agreement shall not be subject to Section 16 of thisAgreement.17. Directors’ and Officers’ Liability Insurance. The Company will utilize its bestefforts in good faith to purchase directors’ and officers’ liability insurance for the officers anddirectors of the Company, which would include the same coverage for Employee. The Companycovenants to maintain in effect a directors’ and officers’ liability insurance policy on the sameterms and conditions as applicable to all other officers and directors of the Company.18. Notice. All notices and other communications required or permitted hereundershall be in writing or in the form of a telex or telecopy (confirmed in writing) to be given onlyduring the recipient’s normal business hours unless arrangements have otherwise been made toreceive such notice by telex or telecopy outside of normal business hours, and shall be mailed byregistered or certified mail, postage prepaid, or otherwise delivered by hand, messenger, or telexor telecopy (as provided above) addressed (a) if to the Employee, at the address for suchEmployee set forth on the signature page hereto or at such other address as such Employee shallhave furnished to the Company in writing or (b) if to the Company, to its principal executiveoffices and addressed to the attention of the Chairman of the Board, or at such other address asthe Company shall have furnished in writing to the Employee.In case of the Company:Cereplast, Inc.