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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10 A
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GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMONWEALTH ENERGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 33-0769555
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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15901 RED HILL AVENUE, SUITE 100, TUSTIN, CALIFORNIA 92780
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 258-0470
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS TO BE REGISTERED
NONE NONE
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(TITLE OF CLASS)
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TABLE OF CONTENTS
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PAGE
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Item 1. Business.................................................... 1
Item 2. Financial Information....................................... 8
Item 3. Properties.................................................. 14
Item 4. Security Ownership of Certain Beneficial Owners and
Management................................................ 14
Item 5. Directors and Executive Officers............................ 15
Item 6. Executive Compensation...................................... 17
Item 7. Certain Relationships and Related Transactions.............. 21
Item 8. Legal Proceedings........................................... 21
Item 9. Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters.................... 22
Item 10. Recent Sales of Unregistered Securities..................... 22
Item 11. Description of Registrant's Securities to be Registered..... 24
Item 12. Indemnification of Officers and Directors................... 24
Item 13. Financial Statements and Supplementary Data................. 24
Item 14. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................. 24
Item 15. Financial Statements and Exhibits........................... 24
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i
ITEM 1. BUSINESS
A. Background and Overview.
We were incorporated on August 15, 1997. Since then our primary business
has been the sale of retail electric power to residential and small commercial
customers in the newly deregulated California electricity market. We began
providing electric service as one of more than 300 licensed Electric Service
Providers ("ESPs") in the state and aggregated customers via an internal call
center. As our customer base grew, we began developing software to better manage
our back office customer service functions associated with servicing electricity
accounts. We also began to provide service to larger commercial, industrial and
governmental customers. Once we had established a foothold in California, we
expanded our retail electricity services to end users in Pennsylvania,
specifically into the Pennsylvania Electric Company territory ("PECO"). We
established a new tradename, "electricAmerica," in Pennsylvania and began
aggregating residential, commercial, industrial and governmental customers via
our call center. Currently, we sell electric power to approximately 56,000
retail end-use customers in California and approximately 32,000 retail end-use
customers in Pennsylvania.
A portion of the electric power we sell is delivered to our retail and
commercial end-use customers by the incumbent utility distribution companies
("UDCs") and electric distribution companies ("EDCs"). All of these companies
serve as the incumbent utility in their jurisdiction and measure electric power
usage and bill customers on our behalf but have different names dependent upon
their respective jurisdiction. Three UDCs in California and one EDC in
Pennsylvania conduct these activities on our behalf. The remaining portion of
our electric power is sold to large wholesale customers by our own energy
trading department.
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 price of electricity on the wholesale level increases
and allows us to resell the electricity that we purchased, in excess of that
needed to supply retail and commercial end-user customers, at higher prices to
wholesale customers, as occurred in the California marketplace 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 this 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.
Most electricity markets function in a similar manner in that the incumbent
utility is the entity that owns the physical wires that transport electricity to
each user's location. The utility company is paid a fee for use of its wires. 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, taking requests for service changes or problems,
etc., while in other jurisdictions the utility is not allowed to, or chooses not
to, perform these services. In California and Pennsylvania, the utility
companies currently assist us with 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 associated with those services as well as
the right to use the distribution network.
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 contracts, or advance purchases and to clear those transactions
through the market oversight body called the California Independent System
Operator ("CAISO"). The CAISO is responsible for ensuring system reliability and
that all electricity put into the grid has a corresponding exit from the grid.
This matching of power transactions is done in a constant sequence of 15 minute
increments. The Pennsylvania marketplace is governed by a similar structure
called the PJM
1
interconnection ("PJM"). The PJM is responsible for matching all power
transactions among market participants and ensuring system reliability.
California has recently passed legislation that requires the California
State Public Utilities Commission to suspend direct access. The suspension of
direct access means that retail electric suppliers, such as our company, will
not be allowed to actively seek new customers to enroll for our services. The
ruling came in connection with legislation entitled ABX-1, which amended the
California Water Code section 801110, to allow for this suspension. This ruling
allows us to keep our current customer base intact and only impacts our ESP
business in California, not other states. The ruling does, however, prohibit us
from signing up new customers for an, as yet, undetermined amount of time. This
may affect our ability to continue to increase revenues in the State of
California relating to our ESP business operations in this jurisdiction. We are
actively seeking relief from this ruling from the California Public Utilities
Commission and the California State Legislature. If our California business
operations are continuously impaired in this manner, it may become necessary for
us to seek relief from the courts.
Prior to the inception of electricity deregulation in 1998, the retail
electric service industry was controlled almost exclusively by utilities.
Presently, eight states and Washington, D.C. offer deregulated retail electric
service, while fourteen states are transitioning to deregulated status. Our
opportunities for expansion may increase as more states and territories
deregulate.
As in other industries that have deregulated, competition in the electric
service industry is intended to provide consumers with a choice of multiple
suppliers that is expected to promote product differentiation, lowered costs and
enhanced services. To obtain these features, customers may switch electric
service from their utility to an alternative supplier.
The majority of our operating margins have come from the resale of
electricity purchased under a contract with Calpine Power Services Company that
expires in June 2002. This contract may not be renewed on terms as favorable to
us as those contained in the current contract. During fiscal 2001, this contract
accounted for 60% of the total energy supplied by us and from which 83% of our
revenue was derived. To mitigate the risk of relying solely on our ESP business,
we have expended a great deal of effort to diversify our business activities
during the past twelve months. In this report we have attempted to describe the
changes we are making to be able to have a diversified energy company that
allows us to take advantage of other opportunities afforded by the energy
marketplace in all of North America.
As an electric service provider we are dependent on serving and expanding
into deregulated electric service markets. We also have been pursuing other
business opportunities in regulated and deregulated electric service markets.
Our experience in the energy markets has led us to increase our breadth of
service offerings, leverage our existing energy expertise and pursue a
diversification strategy that includes:
- Establishment of a trading desk to better manage and schedule our energy
load, and our wholesale power purchases and sales;
- Sale of energy-efficient products and services to retail customers
through our own call center and direct sales force;
- Management and fulfillment of utility back office functions for energy
retailers, generators, utilities, municipalities and cooperatives;
- Energy management programs, including energy curtailment, distributed
generation and alternative power generation for commercial, industrial
and governmental electric service customers;
- Procurement of government sponsored energy-related grants to augment our
research and development efforts;
- Creation of separate, energy-focused profit centers, such as our call
center; and
- Investments in energy-related ventures synergetic with our plans.
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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 yet, none of them
is operational.
B. Products and Services.
To date our business activities are comprised primarily of providing retail
electricity services and wholesale power procurement and sales. We are
broadening the scope of the energy related services we provide to include energy
efficient products, managed back office services, energy management programs,
energy research and development and load aggregation. However, none of these
services have yet begun to contribute materially to our income or losses or
developed to the point of being a separate business segment.
1. Retail Electricity
We offer electric "product" and service to customers on month-to-month or
longer-term service contracts. The difference between the customers' list price
for energy and the sum of our wholesale electricity purchase cost and ancillary
costs provide us a gross profit/loss margin. We provide a value proposition to
customers by pricing electric products below, or delivering a more
environmentally friendly (not derived from fossil-fuel sources) product than,
our competitors.
We are licensed in California by the California Public Utilities Commission
as an Electric Service Provider (License #1092); in Pennsylvania by the
Pennsylvania Public Utility Commission as an Electric Generation Supplier
(License #A-110117); in New Jersey by the New Jersey Board of Public Utilities
as an Electric Generation Supplier (License #ESL-0046); in Ohio by the Public
Utilities Commission of Ohio as a Certified Electric Supplier (License #01-074);
in Texas as a Retail Energy Provider (RE Certificate #10029) and we are in the
license approval process in Michigan as an Alternative Electric Supplier. We are
also licensed as a Power Marketer by the Federal Energy Regulatory Commission
("FERC"). These licenses permit us to sell electrical power to commercial,
industrial, governmental and residential customers.
To procure commodity supply for our retail electric service sales, we
purchase electricity under a mix of long-term and short-term wholesale contracts
and, prior to fiscal 2001, by spot purchases in regional power exchanges. Our
spot purchases are now minimal in markets in which we participate. In
California, we currently provide customers with environmentally friendly power
purchased under our contract with Calpine Power Services Company. In
Pennsylvania, we provide customers with a 50% environmentally friendly power
product derived from multiple sources, purchased via two long-term bilateral
contracts and a variety of short-term contracts with wholesale power providers.
Electricity sales to retail and commercial end-users in fiscal 2001 contributed
$103.5 million in revenues, or 56.5% of total sales.
The electricity distribution infrastructure utilized by utility companies
prior to deregulation of the energy industry remains the only current method of
distribution to the end-use customer. We use this established electricity
network for the delivery of energy to our customers. We do not own or operate
these lines, but we and our customers pay the utility companies that own the
lines ancillary fees for use of this distribution network. These fees are
collected by the respective independent system operator ("ISO") or regional
transmission organization ("RTO") for a specific region or state, and typically
run 5% to 10% of prevailing retail electricity market prices. The ISO or RTO
insure that proper electricity reserve margins are in place at all times, as
electricity must have supply and demand in near perfect balance to insure
reliable service.
2. Wholesale Power Procurement and Sales
Due to the variable electricity usage patterns of our customers, frequently
we are left with excess electricity, which we are committed to purchase, and
which must be resold, since it cannot be stored. We use our best efforts to sell
this excess electricity in the wholesale electricity market. Conversely,
increased usage by our customers may require us to purchase additional
electricity to cover increased demand.
We have established a trading desk that buys and sells our electricity in
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. These purchases and sales are regulated by FERC and
reports are made on a regular basis to the U.S. Department of Energy. Typically,
electricity is more expensive during peak hours -- that is, when demand and
usage are highest. Weather, generation capacity, transmission, distribution
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and other market issues 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. Wholesale power sales in fiscal 2001 contributed $79.3 million in
revenues, or 43.3% of total sales.
3. Energy Efficient and Emergency Preparedness Products
We developed and utilize our own inside sales force to sell energy
efficient and emergency preparedness products to customers by telephone. Energy
conservation and home safety are important issues to customers and selling them
energy management controllers, compact fluorescent lamps, natural gas shut-off
valves and other such devices has been a natural extension of our business,
although sales of these products account for less than one percent of our total
revenues. 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. All deliveries of products are made only after
payment by check or credit card from our customers. Energy Efficient and
Emergency Preparedness Products sales in fiscal 2001 contributed $.5 million in
revenues, or 0.2% of total sales in fiscal 2001.
The following segments have not yet materially contributed to our revenue:
4. Managed Back Office Services
We established a wholly-owned subsidiary, UtiliHost, Inc., which was
organized to manage the customer-related back office processes for commodity
trading partners. The core technology which will support UtiliHost is software
that originally was developed by us to better manage electric service customers
internally. TACT(TM) (Trans-Action Control Technology) and TRIUMPH(TM) (Total
Resource Internet Utility Management Power Host) are proprietary software
products which are available for use by UtiliHost to provide services and manage
back office processes for clients. TACT acts as a data translator between
trading partner transactions, while TRIUMPH is a comprehensive, modular software
package that calculates and manages back office processes such as customer
enrollment, forecasting, metering, ancillary products, billing, accounts
receivable, customer service and settlement. We have commenced our marketing
efforts for UtiliHost(TM) through a mix of direct mail, print media and Internet
advertising, primarily in deregulated energy markets.
5. Energy Management Programs
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
financial benefit as an incentive to our customers to lower electrical usage,
while we benefit by avoiding the purchase of expensive power from other
suppliers. The resulting savings, is ultimately shared between the customer and
us. Our sales department markets these programs to commercial, industrial and
governmental entities seeking to save energy costs by decreasing their energy
usage during peak periods.
Distributed generation programs provide customers with on site electrical
power generation, which improves reliability while also equipping them with a
cost-effective source for seasonal or peak demand power. When certain industrial
manufacturing processes are interrupted by a power outage, the results can be
disastrous. Millions of dollars in materials, labor and time may be lost. Our
sales department, along with outside consultants and associated vendors,
formulate a custom energy solution for clients that have uninterruptable power
requirements.
6. Energy Research and Development
We were recently selected by the California Energy Commission to manage
more than $11 million in research and development funds for development of
renewable energy technologies. Launched in 1998, PIER (Public Interest Energy
Research) funds various electricity-related research, development and
demonstration projects. Our proposal, entitled "Biogas/PV Micro-Grid Renewable
Resource Program," was the only private company proposal selected for the award.
This project commences December 1, 2001, and runs for four years.
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Phase One of this project will include assessing regional electricity needs,
renewable resources and power grid capabilities in at least two areas in
California. Our focus will be on developing a method of blending biogas and
solar resources to meet California's energy needs. Phase Two of this project
will include a waste collection and generation option addressing ground water
contamination developed for the California Dairy Industry and various
Photovoltaic (solar) systems. If phase two is implemented, we have the
opportunity for capital investment in the development project. Our capital
investment is limited to $3.5 million. We have not incurred any significant
costs related to this program.
7. Load Aggregation
We are currently discussing with several generators and utilities a
comprehensive solution for cities and major commercial and industrial customers
to meet their energy demand. We will assist cities to become municipal utilities
by providing them all required energy procurement, energy management, customer
service and back-room services. We will do the same for major commercial and
industrial customers to meet their electricity demand requirements. This program
allows us a diversified approach to aggregating customers. To date, we have not
entered into any contracts to provide load aggregation services.
8. ACT
As we diversify our business and revenue streams, we have decided to
establish separate divisions within our company that have profit and loss
responsibility. Our call center, now called Advanced Client Technologies
("ACT"), outsources services to third party energy-related firms, and provides
us with inbound, outbound and customer service functions for electricAmerica. A
new division of our company, ACT specializes in aggregating electric service
residential and small commercial customers, selling energy efficient and
emergency preparedness products and handling inbound customer service inquiries.
Call monitoring, third party verification and call reporting are also provided.
In addition to maintaining our own customer aggregation and service needs, ACT's
market focus has been on clients seeking to aggregate energy customers in
deregulated markets.
9. Summit Energy Ventures, L.L.C.
In July 2001 Commonwealth made the initial capital contribution of $15
million into Summit Energy Ventures, LLC ("Summit"). To date this represents our
entire capital contribution to Summit. When the Board approved this investment
it did so to be able to have our funds work on our behalf and to gain access to
the merger and acquisition and financial skills of Mr. Strasser. This decision
was made to bring value to Commonwealth and to our shareholders while insuring
Commonwealth had total control of the funds and the decisions to invest.
Strasser came highly recommended and considerable legal and business due
diligence was conducted prior to the Board making this decision. It should be
noted that such major energy companies as Ontario Power Generators, Quebec Hydro
and ABB have similar relationships to invest capital.
Commonwealth owns 100% of the Preferred Membership Interest of Summit and
50% of the Common Membership Interest. Steven Strasser owns the other 50% of the
Common Membership Interest. Summit was established at the request of
Commonwealth solely to act on behalf of Commonwealth to gain ownership in and
develop significant business relationships with companies in the Energy
Efficient Products and Services market. Commonwealth was introduced to Mr.
Strasser by the senior partners at a major energy law firm. This introduction
was made as part of our search to locate an entity who could assist the company
in its efforts to diversify.
Commonwealth receives all of its initial invested capital and an annual 10%
preferred return before Summit participates in any of the profits. Commonwealth
through the Investment Committee, sets all of the investment criteria, and we
make all of the investment decisions based on the work done by Summit. No
investment may be considered and no capital may be invested without the explicit
written consent of Commonwealth Investment Committee.
Northwest Power Management (NPM) has the responsibility of identifying
suitable companies. They then present individual companies that they have
selected to the Commonwealth Investment Committee that provides their
approval/disapproval. If approval is received, NPM then begins the due diligence
process that
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includes, but is not limited to, complete business plan and financial analysis,
management analysis to include personal interviews, product and technology
analysis, site inspections, personal interviews with the company's customers and
validation of their future sales projections. Once the preliminary due diligence
is completed the findings are again presented to the Investment Committee. This
presentation usually includes management from the specific company being a part
of that presentation. At that time, the Investment Committee provides its
approval/disapproval to enter into formal negotiations with the company on the
specific terms established by the Investment Committee. If these terms are met,
the Investment Committee will provide their final approval to fund the
investment. Once the investment is complete, it is the responsibility of NPM to
manage the investment until such time as a disposition decision is made. At that
time if we choose to do so, we may buy out Summit's interest in a specific
investment. This relationship was specifically established for the benefit of
Commonwealth.
This relationship provides us several benefits. We gain access to numerous
synergistic companies that are in the specific energy sector of energy
efficiency. This will assist us to achieve our diversification goals. These
companies have proven technology and/or services that compliment our goal of
providing and managing energy efficient products and services. We anticipate
being able to market these products to our Commercial and Industrial (C & I)
customers and to others that desire to reduce their electricity costs without
impairing their productivity. In addition, we look forward to significant asset
appreciation through these relationships. An additional benefit is the
relationship we establish with institutional investors in the energy sector.
These institutional investors will be our financial partners in these companies.
We also have the right to purchase from Summit their interest in any investment.
C. Marketing.
Our business prospects depend upon our ability to identify and enter
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.electric.com and through our inbound toll-free number,
1-800-ELECTRIC.
- Taking advantage of the increasing consumer acceptance of online
commerce, both directly through our web sites (www.electricamerica.com
and www.electric.com) and through traditional channels.
- Developing strategic marketing alliances with established power suppliers
to offer competitive electric products and services to, and management
of, aggregations of customers.
- Cross-selling additional products and services to our customers, such as
energy efficiency and emergency-preparedness products.
- Positioning UtiliHost as a means for clients to outsource their
electricity customer service management.
D. Competition.
We face competition in the electricity service business from a small number
of energy retailers vying for residential and commercial customers, and from the
incumbent utilities. According to the California Public Utilities Commission
("CPUC"), over 300 companies were licensed to market electricity on a retail
basis at the beginning of the deregulated California electricity market.
According to the CPUC, we are one of approximately sixteen companies that
remains in the business in California. We face similar competition in
Pennsylvania.
We face competition in selling energy efficient and emergency preparedness
products from many sources, including traditional hardware retailers and online
energy product retailers.
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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.
E. Employees.
We currently employ approximately 160 people; 156 at the Tustin, California
offices, and four at our Cherry Hill, New Jersey office. We are not a party to
any collective bargaining agreement or labor union contract, nor have we been
subjected to any strikes or employment disruptions in our brief history.
Management believes that we enjoy a good relationship with our employees.
F. Governmental Regulation.
To market electric power in a given area, we are required to register with
the appropriate state public utilities commission, maintain a Power Marketer
certificate from FERC, and comply with lawful and regulatory requirements. The
lawful and regulatory requirements with which we must comply relate to the
complex inter-relationship of the regulatory framework of deregulation of the
electric industry in each of the jurisdictions we conduct business in. This
inter-relationship is between the state statutes and regulations which implement
the structure of deregulation in any given state with the regulatory oversight
body, typically the State Public Utility Commission, which carries out the state
statutes and regulations. Both of these regulatory agencies have the ability in
their separate capacity to make orders, rulings or initiate proceedings which
alter or change the regulatory structure which impacts the applicable rule
structure for any given jurisdiction. States will require that we be registered
with, and comply with, the protocols of an ISO or RTO for scheduling and moving
electricity on the transmission system. Some states require that power marketers
must also meet a renewable energy portfolio standard where a portion of the
electricity they sell must be generated by renewable energy resources. In some
states, registration as a retail electric provider simply requires that we
obtain and maintain a certificate or license to do business in the state. We
have been granted the necessary FERC permit, and have applied for all relevant
state license and certificates required in our initial target markets.
G. Forward-Looking Statements.
This report statement includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements other than statements of
historical facts contained in this documents are forward-looking statements.
Forward-looking statements include, but are not limited to, statements relating
to expansion opportunities for the subsidiary companies, extension of
Commonwealth's business model to new markets and industries, demand in the
market for UtiliHost services, completion of acquisitions of certain assets, and
growth or retail energy operations and demand for retail energy outsourcing and
back office solutions. When used in this document, the words "anticipate,"
"believe," "estimate," "expects," "intend," "may," "project," "plan," "should,"
and similar expressions are intended to be among the statements that identify
forward-looking statements. Although Commonwealth believes that its expectations
reflected in these forward-looking statements are based on reasonable
assumptions, such statements involve risks and uncertainties and no assurances
can be given that actual results will be consistent with these forward looking
statements. In particular, the following items may affect our future:
- The California State Legislature, the Governor's Office and the
California Public Utilities Commission may enact and enforce legislation
that could adversely affect our operations in California.
- We are required to obtain and maintain licenses from the states in which
we sell electricity.
- In certain states, competitive restructuring of retail marketing may
prevent us from selling electricity.
- We are completely dependant upon a limited number of third parties that
we do not control to generate and supply to us electricity and their
failure or delay in entering into or performing their contracts with us
will have a material adverse effect on our operations and financial
condition.
- We are completely dependent upon a limited number of utilities that we do
not control for the transmission and distribution of the electricity we
sell to our customers and their failure or delay in
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entering into or performing their contracts with us will have a material adverse
effect on our operations and financial condition.
ITEM 2. FINANCIAL INFORMATION
A. Selected Financial Data.
The following table summarizes certain selected financial data for
Commonwealth Energy Corporation. Our statement of operations data for the period
August 15, 1997 (date of incorporation) through July 31, 1998 and each of the
three years in the period ended July 31, 2001 and our balance sheet data at July
31, 1998, 1999, 2000 and 2001 set forth below are derived from audited
consolidated financial statements of the Company. The consolidated financial
statements as of July 31, 2000 and 2001 and for each of the three years in the
period ended July 31, 2001 and the independent auditor's report thereon, are
included elsewhere herein.
<Table>
<Caption>
PERIOD FROM
AUGUST 15, YEARS ENDED JULY 31,
1997 THROUGH -----------------------------------
JULY 31, 1998 1999 2000 2001
-------------- --------- --------- ---------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
STATEMENT OF OPERATIONS DATA:
Net revenue................................... $ 1,387 $ 39,124 $ 99,624 $183,264
Direct energy costs........................... 3,735 38,729 86,732 76,615
------- -------- -------- --------
Gross (negative) margin....................... (2,348) 395 12,892 106,649
Other costs and expenses(1)................... 5,928 18,940 22,037 25,861
------- -------- -------- --------
Income (loss) from operations................. (8,276) (18,545) (9,145) 80,788
Interest income, net.......................... 19 123 499 1,593
------- -------- -------- --------
Income (loss) before income taxes............. (8,257) (18,422) (8,646) 82,381
Provision for income taxes.................... -- -- -- 21,852
------- -------- -------- --------
Net income (loss)(2)(3)....................... $(8,257) $(18,422) $ (8,646) $ 60,529
======= ======== ======== ========
Net income (loss) per common share(4):
Basic....................................... $ (.96) $ (.84) $ (.30) $ 2.06
======= ======== ======== ========
Diluted..................................... $ (.96) $ (.84) $ (.30) $ 1.77
======= ======== ======== ========
Weighted-average shares outstanding(4):
Basic....................................... 12,561 26,625 33,519 29,385
======= ======== ======== ========
Diluted..................................... 12,561 26,625 33,519 34,152
======= ======== ======== ========
</Table>
<Table>
<Caption>
AT JULY 31,
----------------------------------------
1998 1999 2000 2001
------ ------- ------- --------
BALANCE SHEET DATA:
Working capital..................................... $1,896 $12,428 $12,803 $ 50,184
Total assets........................................ 7,205 27,858 41,590 107,016
Long-term debt...................................... -- -- -- --
Shareholders' equity................................ 3,131 19,900 24,236 86,037
</Table>
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(1) Includes stock-based compensation costs as follows:
<Table>
<Caption>
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
</Table>
(2) No cash dividends have been paid on our common stock.
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(3) Our convertible preferred stock provides for cumulative dividends, which
accrue at an annual rate of 10% and are payable at the discretion of our
Board of Directors. Such dividends have been accrued as follows:
<Table>
<Caption>
AMOUNT
--------------
(IN THOUSANDS)
Period from August 15, 1997 through July 31, 1998........... $64
Year ended July 31, 1999.................................... 84
Year ended July 31, 2000.................................... 84
Year ended July 31, 2001.................................... 81
</Table>
(4)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 has been restated to reflect the resolution of the status of
our common stock issued to our founder as more fully described in Notes 1 and
11 of the Notes to Consolidated Financial Statements included elsewhere
herein.
B. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Our primary business to date has been the sale of electric power to retail
and commercial end-users in California and, beginning January 2000, in
Pennsylvania and the sale of electric power to wholesale customers in California
and Pennsylvania. We are licensed by the FERC as a power marketer and by the
California, Pennsylvania, New Jersey, Texas and Ohio Public Utilities
Commissions as an electric services or electric generation supplier. We plan to
enter new deregulated electric power markets in the future. We are in the
licensing process in Michigan.
As of July 31, 2001, we delivered electricity to approximately 88,000
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 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, substantially all
of our electricity was purchased under long-term contracts.
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 2001 COMPARED TO YEAR ENDED JULY 31, 2000
Net revenue
Net revenue increased by $83.6 million, or 84.0%, from $99.6 million for
fiscal 2000 to $183.3 million for fiscal 2001. California electricity sales
represented $58.2 million of the increase, while Pennsylvania electricity sales
accounted for $25.4 million of the increase. Our California wholesale
electricity sales, which commenced during fiscal 2001, contributed $70.7 million
to the increase in California which was offset in part by a decrease of $4.2
million in sales to retail and commercial end-users and a decrease of $8.3
million in green credits received. 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. During fiscal 2001, electricity sales prices were
significantly higher than in the prior year, with our average California retail
and wholesale prices being $.141 and $.175 per kWh, respectively. Our overall
average price in California was $.157 per kWh, versus $.05 per kWh in 2000.
Total kilowatt hours of electricity billed in California during 2001 was 984.7
million compared with 1.7 billion billed in the prior year. The year-to-year
reduction in kilowatt hours billed resulted from the termination of commercial
and industrial customers that were returned to incumbent utilities during June
and July 2000 because these customers were requiring us to purchase large
quantities of electricity on the spot market which, in turn, gave us severe
credit issues. The green power credits decreased due to a rate reduction from
$.015 to $.01 per kWh in June 2000 and reduced sales of electricity subject to
the credit caused by the reduction of customers during June and July 2000. The
increased Pennsylvania 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 and to
9
wholesale electricity sales that contributed $8.6 million of the increase. At
July 31, 2001, we had approximately 88,000 customers compared to approximately
81,000 customers at July 31, 2000. The California supply and demand conditions
that drove up wholesale electricity prices during fiscal 2001 began moving
toward equilibrium in the fourth quarter as wholesale prices began to abate. We
expect to see lower prices during fiscal 2002 than existed in fiscal 2001.
Direct energy costs
Direct energy costs declined to $76.6 million for fiscal 2001, a decrease
of $10.1 million, or 11.7%, from $86.7 million for fiscal 2000. This decrease is
a result of $40.8 million lower costs in California partially offset by
increased costs in Pennsylvania. Increased costs in Pennsylvania are due to
having only seven months of costs totaling $3.4 million for fiscal 2000 compared
to a full year of costs totaling $34 million 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. Decreased costs in
California during fiscal 2001, as compared to the prior year, are due to reduced
requirements for the purchase of electricity due to the customers we terminated
in June and July 2000. Many of the customers that we terminated 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. These customer
terminations brought our electricity supply requirements in California to supply
our customers 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 in fiscal 2001 as compared to fiscal
2000. 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
Selling and marketing expenses decreased $2.6 million, or 42.1%, from $6.2
million for fiscal 2000 to $3.6 million for fiscal 2001. This decrease is
primarily a result of a decrease in promotional activities as the Company
reduced its activities for the solicitation of new customers. Advertising costs
decreased $1.9 million and telemarketing payroll decreased $.4 million due the
reduction of personnel in that department.
General and administrative expenses
General and administrative expenses increased $5.8 million, or 37.7%, from
$15.4 million for fiscal 2000 to $21.2 million for fiscal 2001. 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 the Company providing for amounts due
from PG&E and PX, which have declared bankruptcy. These increases were partially
offset by a decrease in customer termination cost of $.7 million incurred in
fiscal 2000, where no further expenses were required in fiscal 2001.
Stock-based compensation charges
Stock-based compensation charges increased from $.4 million for fiscal 2000
to $1.1 million for fiscal 2001. The stock-based compensation charges for fiscal
2001 all resulted from performance-based stock options granted to our Chairman
and CEO.
Interest income, net
Interest income grew to $1.6 million for fiscal 2001, an increase of $1.1
million or 220%, from $.5 million for fiscal 2000. The increase is attributable
to the increase in cash flow available for investments provided from operations,
offset in part by a $.6 million increase in interest expense due to borrowings
which were outstanding on our line of credit during fiscal 2001.
10
Provision for income taxes
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 period
we reported a loss before income taxes. The income tax rate for fiscal 2001 was
26.6% which is 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
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 is primarily attributable to a $93.8 million increase in gross
margin, offset in part by the provision for income taxes of $21.9 million. The
key driver of 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 extends through June 2002, the higher prices at which we were
able to recall the electricity significantly increased our gross margin. During
the fourth quarter of fiscal 2001, electricity prices and our gross margin
significantly declined in California as compared to the first three quarters of
fiscal 2001. We expect to see in fiscal 2002 electricity prices and gross
margins closer to historical levels than the prior year.
YEAR ENDED JULY 31, 2000 COMPARED TO YEAR ENDED JULY 31, 1999
Net revenue
Net revenues increased by $60.5 million, or 154.6%, from $39.1 million in
fiscal 1999 to $99.6 million in fiscal 2000. California energy sales represented
$57.7 million of the increase, while Pennsylvania sales, which commenced in
January 2000, accounted for $2.8 million of the increase. California electricity
price increases that began in May 2000 contributed to an estimated $15.0 million
of the increase in California energy sales. The green power credits received
increased $8.8 million to $12.3 million for fiscal 2000 compared to $3.5 million
in fiscal 1999 due to increased electricity sales subject to the credit. The
remainder of the sales increase resulted from new customers. At July 31, 2000,
the Company had approximately 81,000 customers compared to approximately 52,000
customers at July 31, 1999.
Direct energy costs
Direct energy costs grew to $86.7 million in fiscal 2000, an increase of
$48.0 million, or 124.0%, from $38.7 million in fiscal 1999. This increase was
due to a higher level of energy purchases in fiscal 2000 as compared to fiscal
1999 due to our increased customer base. Direct energy costs, as a percent of
net revenues, decreased from 99.0% in fiscal 1999 to 87.1% in fiscal 2000. This
decrease in the energy cost percentage was driven by the higher California
retail prices during the latter part of fiscal 2000, an increase of higher
margin residential customers and improved energy procurement methods. These
favorable components were partially offset by higher costs of electricity
purchases in the wholesale market for quantities in excess of our fixed price
contract.
Selling and marketing expenses
Selling and marketing expenses increased $4.2 million, or 205%, from $2.0
million for fiscal 1999 to $6.2 million for fiscal 2000. This increase is due to
higher costs associated with increased promotional and telemarketing activities
as we changed our customer base from industrial to residential customers.
General and administrative expenses
General and administrative expenses increased $4.2 million, or 37.5%, from
$11.2 million for fiscal 1999 to $15.4 million for fiscal 2000. Approximately
$1.9 million of the increase is due to development and maintenance of our
internal information technology systems. The remaining increase is due primarily
to
11
$.7 million of commercial and industrial customer termination costs and $1.2
million in increased costs related to severance arrangements with former
officers.
Stock-based compensation charges
Stock-based compensation charges decreased by $5.3 million, or 92.2%, from
$5.7 million for fiscal 1999 to $.4 million for fiscal 2000. The decrease was
due to fewer fully vested options being granted in fiscal 2000, which also had a
lower average difference between the fair value of the our common stock at date
of grant and the option exercise prices.
Interest income, net
Interest income, net, grew to $.5 million in fiscal 2000, an increase of
$.4 million, from fiscal 1999. The increase is attributable to having a full
year's impact on investment income of capital raised in fiscal 1999.
Net loss
Net loss declined to $8.6 million in fiscal 2000, a decrease of $9.8
million, or 53.1%, from $18.4 million in fiscal 1999. This decrease in net loss
is primarily attributable to a $12.5 million increase in gross margin offset in
part by a $3.1 million increase in other costs and expenses.
LIQUIDITY AND CAPITAL RESOURCES
Through July 31, 2000, most of our capital was raised through a series of
private placements for the sale of common stock which provided an aggregate of
$51.1 million of net proceeds, of which $41.3 million was used to support our
operating activities which were unprofitable through July 31, 2000. We began
profitable operations during fiscal 2001.
Cash flow from operations for fiscal 2001 was $61.8 million an increase of
$76.9 million compared with cash used from operations in fiscal 2000 of $15.0
million. Net profit for fiscal 2001 of $60.5 million, compared to a net loss of
$8.6 million for fiscal 2000, was the primary reason for this increase.
California's higher retail and wholesale prices were the key influences on our
profitability. Investing activities for fiscal 2001 include only purchases of
property and equipment of $1.1 million, a decrease of $.6 million compared to
fiscal 2000.
Cash used in financing activities for fiscal 2001 was $23.8 million,
compared to cash provided of $14.7 million for fiscal 2000. The change of $38.4
million is attributable to the following: $15.0 million investment in Summit
Energy Ventures which is classified as restricted cash; absence of sales of
common stock during fiscal 2001, which provided $12.1 million during fiscal
2000; an increase in restricted cash of $4.8 million for letters of credit
required by energy suppliers to support increased purchases of electricity in
fiscal 2001 and $5.3 million provided in fiscal 2000 from borrowings under our
credit facility.
Cash flow used in operations for fiscal 2000 was $15.0 million, a decrease
in cash used of $5.2 million compared to fiscal 1999. The major components of
cash used in operations in fiscal 2000 were the net loss of $8.6 million and an
increase in billed and unbilled accounts receivable of $13.2 million. The higher
California electricity prices in the fourth quarter of fiscal 2000 drove sales
higher resulting in higher accounts receivables. During fiscal 2000, we used
cash of $1.8 million for investing activities, a decrease of $.7 million
compared with the prior year. Investing activities during fiscal 2000 consisted
only of purchases of property and equipment.
Financing activities in fiscal 2000 were comprised of three components. Net
cash proceeds from the sale of common stock were $12.1 million. This compares
with $28.3 million in net capital raised in fiscal 1999 from the sale of common
stock. We also borrowed $5.3 million under a $15 million credit facility that
was entered into with Coast Business Credit in June 2000. The credit facility
with Coast Business Credit carried a loan origination fee of $300,000 and
required the issuance to Coast Business Credit of a warrant to purchase 100,000
shares of our common stock at an exercise price of $5.50 per share. The loan has
a maturity date of June 30, 2002, subject to automatic renewal and early
termination, and bears interest at the prime rate plus 1.75% per annum,
calculated on the basis of a 360-day year. The borrowings from the credit
facility were used
12
primarily to pay for California electricity purchases, the price of which had
increased significantly during the fourth quarter of fiscal 2000. There was also
an increase of $2.7 million in restricted cash during fiscal 2000 required for
additional collateral to support additional energy purchases both in California
and Pennsylvania.
The most significant trend that has contributed to the increase in our
liquidity and capital resources during fiscal 2001 was the significant increase
in energy prices to consumers and in the wholesale energy markets in California.
We believe that consumer energy prices have leveled off and will remain at their
current level for the foreseeable future. The wholesale energy market has also
stabilized after significant fluctuations during fiscal 2000 and fiscal 2001.
Based upon current market conditions, we believe we should be able to enter into
new contracts to purchase electricity at approximately the currently contracted
rate upon the expiration of our current contract in June 2002. Therefore, based
on these factors, we believe that our liquidity and capital resources will not
be adversely affected in the coming year.
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. The resulting impact on the
Company has been a holdback of $2,226,630 in amounts due to us from the
Automated Power Exchange (APX) relating to November 2000 and January 2001
activity. The APX has informed us that the holdbacks were made, in part, because
PG&E and PX, which have declared bankruptcy, did not make their scheduled
payments to the APX. We have established an allowance of $1,471,142 for doubtful
accounts related to the APX holdbacks based upon our estimates of the amounts
that will ultimately be collected from the APX. In addition, PG&E has withheld
payments of approximately $1,100,000 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.
As of July 31, 2001, $15 million in cash was invested in Summit Energy
Ventures. Under certain circumstances, another $10 million in cash could be
invested in Summit. If this additional amount of cash were invested with Summit,
it would reduce the amount of cash that would otherwise be used for other growth
initiatives within the Company.
The initial $15 million credit facility that the Company obtained on June
29, 2000 was restructured on August 10, 2001. This restructuring provided the
Company with more flexibility than the original agreement. The new line
shortened the maturity date to June 30, 2002, compared to June 30, 2003. Because
the agreement calls for a deduction in minimum interest charges, the limit of
the credit line was reduced from $15 million to $10 million. The interest rate
charged remains the same at prime plus 1.75%. The cost to amend the original
agreement was $20,000.
We expect that our existing funds, our existing line of credit and our cash
flow from operations will be sufficient to fund our operations and meet our
capital requirements for the next 12 months.
C. Inflation.
Inflation has not been a material factor in either revenue or operating
expenses during our existence.
D. Quantitative and Qualitative Disclosures About Market Risk.
We do not have or use any derivative instruments as of July 31, 2001 nor do
we have any plans to enter into such derivative. We generally invest cash
equivalents in high-quality credit instruments consisting primarily of high
yielding money market funds, bankers acceptance notes and government agency
securities with maturities of 90 days or less. We do not expect any material
loss from our cash equivalents and therefore believe that our potential interest
rate exposure is not material. We do not currently invoice customers in any
currency other than the United States dollar. In addition, we do not currently
incur significant expenses denominated in foreign currencies. Therefore, we
believe that we are not currently subject to significant risk as a result of
currency fluctuations.
An electricity price change of per $.01 kWh, has an estimated annual impact
on our net revenue of:
<Table>
California............................................. $10.9 million
Pennsylvania........................................... $11.0 million
</Table>
13
ITEM 3. PROPERTIES
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 1,210 square feet pursuant to a
three-year lease executed on August 25, 1999.
We believe that our leased property is in good condition, is well
maintained and is adequate for our current and immediately foreseeable operating
needs.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial
ownership of our Series A Convertible Preferred Stock and Common Stock as of
September 30, 2001 for:
- each person known by us to beneficially own more than 5% of our Series A
Convertible Preferred Stock or 5% of our common stock;
- each executive officer named in the Summary Compensation Table set forth
in Item 6 -- "Executive Compensation";
- each of our directors; and
- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Unless otherwise indicated, the address for those
listed below is c/o Commonwealth Energy Corporation, 15901 Red Hill Avenue,
Suite 100, Tustin, California 92780. Except as indicated by footnote, and
subject to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them. In preparing the table below, we have
relied upon information supplied by such persons and our stock records. The
number of shares of common stock outstanding used in calculating the percentage
for each listed person includes the shares of common stock underlying options
held by such persons that are exercisable within 60 days of September 30, 2001,
but excludes shares of common stock underlying options held by any other person.
Percentage of beneficial ownership is based on 27,311,703 shares of common stock
and 812,500 shares of Series A Convertible Preferred Stock outstanding as of
September 30, 2001.
<Table>
<Caption>
PERCENT
TITLE OF CLASS NAME AMOUNT OF CLASS
-------------- ------------------------ --------- --------
Series A Convertible Preferred Stock..... Robert Perkins 25,000 2.99%
Common Stock............................. Ian B. Carter 2,000,000(1) 6.82%
Robert Perkins 252,000(2) *
Richard Paulsen 225,000(3) *
John Barthrop 175,000(4) *
James Oliver 125,000(5) *
Brad Gates 50,000(6) *
Series A Convertible Preferred Stock..... Directors and Executive
Officers as a Group 25,000 2.99%
Common Stock............................. Directors and Executive
Officers as a Group 2,827,000(7) 9.38%(8)
</Table>
- ---------------
* Represents less than one percent.
(1) Includes 1,950,000 options that may be exercised as shares within 60 days of
September 30, 2001.
(2) Includes 120,000 options that may be exercised as shares within 60 days of
September 30, 2001.
(3) Includes 225,000 options that may be exercised as shares within 60 days of
September 30, 2001.
14
(4) Includes 173,000 options that may be exercised as shares within 60 days of
September 30, 2001.
(5) Includes 125,000 options that may be exercised as shares within 60 days of
September 30, 2001.
(6) Includes 50,000 options that may be exercised as shares within 60 days of
September 30, 2001.
(7) This figure is based on the current number of shares of Common Stock that
each director and executive officer of the Company owns plus the number of
shares of Common Stock that each director and executive officer has the
right to obtain within 60 days from September 30, 2001.
(8) This percentage was derived by dividing the figure obtained in footnote (7)
above by the total number of shares of Common Stock outstanding as of
September 30, 2001 plus the number of shares of Common Stock that each
director and executive officer has the right to obtain within 60 days from
September 30, 2001.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
A. Identification of Directors.
Our directors and their ages as of September 30, 2001 are as follows:
<Table>
<Caption>
NAME AGE POSITION
---- --- --------
Ian B. Carter.................................. 63 Chairman of the Board
Bradley L. Gates............................... 61 Director
Robert C. Perkins.............................. 62 Director
Junona A. Jonas................................ 57 Director
Joseph P. Saline, Jr........................... 59 Director
</Table>
The directors of the Company serve as such until the next annual meeting of the
shareholders of the Company or until their successors are elected and qualified.
IAN B. CARTER -- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Mr. Carter has been a member of the Board since January 1999 and Chief
Executive Officer since January 2000. For four months prior to that, he acted as
Interim President. From June 1986 through September 1999, Mr. Carter spent 14
years with Coldwell Banker Commercial Brokerage, as an investment specialist.
Prior to that, he spent four years as a Systems Engineer and Salesman with IBM.
Mr. Carter spent almost seven years in the United States Army serving in
Vietnam, Europe and the Pentagon. Mr. Carter received his Bachelor of Science
(BS) degree in Engineering from the United States Military Academy at West
Point, New York and his Master in Business Administration (MBA) in finance from
the University of Southern California.
BRADLEY L. GATES -- DIRECTOR
Mr. Gates has been a member of the Board since January 1999, and has nearly
40 years of distinguished professional business and law enforcement experience.
He served as the elected Sheriff of Orange County, California from 1974 until
his retirement in 1998. Mr. Gates received an MS degree and Bachelor of Science
degree in criminology from California State University, Long Beach.
ROBERT C. PERKINS -- DIRECTOR
Mr. Perkins has been a member of the Board since January 1999. For the past
30 years, Mr. Perkins has served as Chairman and CEO of Hospital Management
Services providing financial and management consulting to hospitals and similar
institutions. Mr. Perkins received his Bachelor of Science degree in accounting
from Bob Jones University.
JUNONA A. JONAS -- DIRECTOR
Ms. Jonas has been a member of the Board since January 2001. She brings
experience from a career with PG&E that spanned from 1978 through 1999 during
which time she served as the first President and COO of
15
PG&E's retail energy services subsidiary, Vantus Energy Corporation. After her
success with Vantus Corporation, Ms. Jonas became the Vice President, Gas and
Electricity Supply at PG&E. Ms. Jonas also served as past President and COO of
utility.com. She currently serves as the General Manager of Alameda Power and
Telecom. Ms. Jonas has a Bachelors degree from Santa Clara University and a
Masters degree from Stanford and Cal State University Hayward.
JOSEPH P. SALINE, JR. -- DIRECTOR
Mr. Saline has been a member of the Board since January 2001. Mr. Saline is
currently an Operations Manager at Litton Industries in their Integrated Systems
Division, and also serves on the board of directors of InterBill Inc. in Rohnert
Park, California. Mr. Saline retired as a Colonel in the United States Air Force
Reserve. He received a Bachelors degree from the University of Detroit and a
Masters degree from Purdue University.
B. Identification of Executive Officers.
Our executive officers and their ages as of September 30, 2001 are as
follows:
<Table>
<Caption>
NAME AGE POSITION
---- --- --------
Ian B. Carter............................ 63 Chief Executive Officer
Richard L. Paulsen....................... 53 Chief Operating Officer
James L. Oliver.......................... 53 Chief Financial Officer
John A. Barthrop......................... 58 General Counsel and Secretary
</Table>
RICHARD L. PAULSEN -- CHIEF OPERATING OFFICER
Mr. Paulsen has been the Chief Operating Officer since May 2000. Mr.
Paulsen previously served as the CEO and President of Olicon Imaging Systems,
Inc., a national supplier of diagnostic imaging products and services. Prior to
that, Mr. Paulsen worked at Wieden and Kennedy, Inc. an advertising agency, as
Executive Vice President and Chief Operating Officer. From 1978 to 1986, he
started and financed the firm of Basic Computer Systems, Inc., a national
supplier of application software and systems. Mr. Paulsen graduated from Loyola
University with a Bachelor of Science degree in mathematics.
JAMES L. OLIVER -- CHIEF FINANCIAL OFFICER
Mr. Oliver has been the Chief Financial Officer of the Company since
November 1999. Mr. Oliver spent seven years with Emerson Electric Co. as Chief
Financial Officer for two operating units. Prior to that, Mr. Oliver served as
CFO for a business unit of Smithkline Beckman, as head of strategic and
financial planning for an operating unit of Dresser Industries. He has consulted
for a variety of companies including Snapple, the Stanley garage door opener
business and the private equity firm of former U.S. Secretary of the Treasury,
William E. Simon. Mr. Oliver received his Bachelor of Science degree in
accounting and finance from the University of Southern California.
JOHN A. BARTHROP -- GENERAL COUNSEL
Mr. Barthrop has been our General Counsel since May 1999, and has over 30
years of experience practicing law and counseling businesses. Prior to accepting
a position with us, he was a principal member of the business and litigation law
firm of Smith, Sinek & Barthrop. He owned and operated his own law firm in
Orange, California for over 15 years. He was General Counsel and Assistant to
the President for a national real estate development company, responsible for
negotiating phased retail development projects in the Western states. He was
also Associate General Counsel for the Beneficial Standard. Mr. Barthrop
obtained a Bachelor of Science degree from the University of Washington and a
Juris Doctorate from University of California, Hastings College of Law, and is
licensed to practice before the State Courts and the U.S. District Courts.
16
C. Family Relationships.
There are no family relationships among directors, executive officers or
persons nominated or chosen by the Company to become directors or executive
officers.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth for each of the past three fiscal years, all
compensation received for services rendered in all capacities by all persons
serving as chief executive officer and each of the other current most highly
compensated executive officers of our company.
<Table>
<Caption>
LONG TERM COMPENSATION
----------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------- ---------- ---------------------------------
(A) (B) (C) (D) (E) (G) (H)
OTHER (F) SECURITIES (I)
ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL FISCAL COMPEN- STOCK OPTIONS/ LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION(2) AWARD(S) SARS(4) PAYOUTS SATION
------------------ ------ -------- -------- --------- ---------- ---------- ------- ---------
Ian Carter,............ 2001 $313,336 $100,000 $15,600 -- 300,000 $ -- $ --
Chief Executive
Officer 2000 211,932 -- 7,800 -- 3,300,000(3) -- --
1999 -- -- -- -- 200,000 -- --
Frederick Bloom,....... 2001 -- -- -- -- -- -- 92,138(1)
Former Chief 2000 184,899 50,000 -- -- -- -- 40,373(1)
Executive Officer 1999 168,250 25,000 -- -- -- -- --
Richard Paulsen,....... 2001 248,326 50,000 4,155 -- 900,000 -- --
Chief Operating
Officer 2000 36,250 -- -- -- -- -- --
John Barthrop,......... 2001 150,971 40,000 4,800 -- 500,000 -- --
General Counsel 2000 101,552 -- -- -- -- -- --
1999 21,154 -- -- -- 50,000 -- --
James L. Oliver,....... 2001 140,526 40,000 4,800 -- 500,000 -- --
Chief Financial
Officer 2000 76,058 -- 2,800 -- -- -- --
</Table>
- ---------------
(1) Represents severance payments made in conjunction with the employee's
resignation and severance agreement effective June 1, 2000.
(2) Represents auto allowances paid.
(3) Includes an option to purchase 2,600,000 shares pursuant to performance
criteria in his employment contract.
(4)This column represents options and are not to be confused with shares. Once
earned there options may be exercised as stock at the designated option
price.
We currently have in place our 1999 Equity Incentive Plan, pursuant to
which 7,000,000 shares of common stock are reserved for issuance, to provide
incentive compensation to our employees. Directors are eligible for the
Company's 1999 Equity Incentive Plan if they are both Directors and employees.
At this time, Ian Carter is the Company's only employee Director and is
therefore the only Director that qualifies to participate under this plan.
The following table sets forth information concerning nonqualified stock
options granted our 1999 Equity Incentive Plan to the executive officers during
the fiscal year ended July 31, 2001.
<Table>
<Caption>
POTENTIAL REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES OF STOCK
# OF SECURITIES OPTIONS PRICE APPRECIATION FOR OPTION
UNDERLYING GRANTED TERM
OPTIONS TO EMPLOYEE IN EXERCISE EXPIRATION ------------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
---- --------------- -------------- -------- ---------- ------------- -------------
Ian Carter........... 300,000 10.2% $2.50 01/01/10 $ 471,671 $1,195,307
Richard Paulsen...... 900,000 30.5% 2.75 11/01/07 1,007,574 2,348,075
John Barthrop........ 500,000 16.9% 2.75 11/01/07 559,763 1,304,486
James L. Oliver...... 500,000 16.9% 2.75 11/01/07 559,763 1,304,486
</Table>
17
(A) EMPLOYMENT AGREEMENTS
Executive compensation is determined by a Compensation Committee elected by
our Board of Directors. The Compensation Committee is currently comprised of:
Robert Perkins, Brad Gates and Ian Carter. 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. Except for Mr. Carter, none of the Compensation
Committee members are or has been an officer or employee of Commonwealth Energy
Corporation. Mr. Carter recuses 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 a 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 Compensation Committee was formed by the
Board in September 1999, and both Mr. Perkins and Mr. Carter were appointed to
the Compensation Committee in December 1999. Mr. Gates was appointed in January
2001 and replaced Ms. Anderson (a former board member) on the Compensation
Committee.
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 received a base salary of $275,000 for the first twelve months
of his employment and will receive a salary according to the following schedule,
subject to possible increases which the Board of Directors may grant from time
to time: $325,000 for the second twelve months, $375,000 for the third twelve
months, $425,000 for the fourth twelve months and $500,000 for the fifth twelve
months. 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. Under his employment agreement, Mr. Carter could earn options to
purchase up to 4,500,000 of shares of the Company's Common Stock. The options
have an exercise price of $2.50 per share and will expire on January 1, 2010. As
of January 1, 2000, 300,000 shares were vested and 100,000 shares vest annually
of each year from 2001 through 2004. The remaining shares subject to option
include 2,900,000 shares that are performance-based and vest upon the occurrence
of certain events, which performance has been achieved for 1,350,000 shares, and
900,000 shares not yet earned related to the Company exceeding its financial
performance as set out in its business plans for calendar years ending December
31, 2002, 2003 and 2004 by 10% or more. In addition, Mr. Carter received options
to purchase 200,000 shares in fiscal 1999. As of July 31, 2001, 1,950,000 shares
subject to options have vested.
If during the term of the agreement, Mr. Carter is terminated, leaves, or
is replaced as a result of: (i) all or substantially all of the assets of the
Company or more than fifty percent (50%) of the issued and outstanding voting
shares of the Company being acquired by any one person or entity not then
affiliated with the Company; (ii) control of the Company being taken over by a
group of shareholders when no significant change of ownership has taken place;
or (iii) 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 under I.R.S. Code sec. 280G.
The Company may terminate Mr. Carter's employment upon the occurrence of
any of the following: Mr. Carter's death, total disability, or for cause. "Total
disability" is deemed to have occurred if Mr. Carter is incapacitated for 120
consecutive calendar days or for 150 calendar days (whether or not consecutive)
in any 180 calendar day period. 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
18
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 only terminate his employment "for cause," which is limited
to either (i) 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 (ii) the Company's material breach of the
agreement. In the case of a termination described in (i) above, Mr. Carter is
entitled to receive a payment equal to eight times his then current base salary.
In the case of termination under (ii) above, 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 CEO 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 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 taxes payable by him under I.R.S.
Code sec. 280G. A "Change in Control" is generally defined as any of the
following: (i) any person acquires 50% or more of (A) the outstanding shares of
Common Stock of the Company or (B) the combined voting power of the Company's
then-outstanding securities entitled to vote generally in the election of
Directors; (ii) during any period of not more than two consecutive years, the
incumbent Directors cease for any reason to constitute at least a majority of
the Board of Directors; or (iii) a merger or consolidation resulting in the
holders of voting securities of the Company outstanding immediately prior
thereto failing to continue to represent at least 50% of the combined voting
power of the voting securities of the Company, or the Company's sale or
disposition of all or substantially all of the Company's assets or any
transaction; (iv) the Company is subject to a hostile takeover in the form of a
proxy fight; or (v) any other means that allows the Company to be controlled by
a material change in the Board of Directors.
The agreement will terminate upon the occurrence of any of the following:
Mr. Paulsen's death, "total disability" (as defined above), 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 manners 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 (i) his base salary and benefits earned through the date of
termination and (ii) 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 CEO 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.
19
If during the term of the agreement there is a Change in Control (as
defined above), 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 taxes payable by Mr. Oliver under I.R.S. Code sec. 280G.
The agreement will terminate upon the occurrence of any of the following:
Mr. Oliver's death, "total disability" (as defined above), 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 (i) his base salary and benefits earned through the date of termination
and (ii) an amount equal to one and one-half times his then current annual base
salary.
John A. Barthrop. Mr. Barthrop serves as Chief Legal Counsel of the Company
pursuant to an employment agreement entered into 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 CEO 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 above), 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 taxes payable by Mr. Barthrop under I.R.S. Code sec. 280G.
The agreement will terminate upon the occurrence of any of the following:
Mr. Barthrop's death, "total disability" (as defined above), 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 (i) the base salary and benefits earned through the date of
termination and (ii) an amount equal to one and one-half times his then current
annual base salary.
Pursuant to the employment agreements entered into on November 1, 2000 with
Messrs. Paulsen, Barthrop and Oliver, has been granted options to purchase an
aggregate of 900,000, 500,000 and 500,000 shares, respectively, 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.
Pursuant to the previous employment agreement entered into on May 6, 1999
with John Barthrop, he received an option to purchase 50,000 shares of our
Common Stock.
(B) DIRECTORS' FEES
Only non-employee (outside) directors are compensated for Board service. We
do not have any standard arrangements for director compensation, rather each
director is offered a retainer amount and meeting attendance fees based on such
factors as length of service and industry experience. Directors are paid $300
for each committee meeting attended, the amount is increased to $500 for the
Committee Chairperson. In connection with their election to our Board, Messrs.
Perkins and Gates and Mrs. Jonas each received options to purchase 50,000 shares
of our common stock.
(C) CHANGE IN CONTROL AGREEMENTS
We have entered into employment agreements with certain of our executive
officers, which, among other things, provide for severance and other benefits
if, during the term of the such agreements (i) all or substantially all of the
assets of Commonwealth Energy Corporation or more than fifty percent (50%) of
the
20
issued and outstanding voting shares of the Commonwealth Energy Corporation are,
in any transaction or series of transactions, acquired by any one person or
entity not then affiliated with the company, or (ii) control of Commonwealth
Energy Corporation is taken over by a group of shareholders when no significant
change of ownership has taken plan, or (iii) a liquidity event such as a merger,
acquisition, strategic alliance or any other event that could bring substantial
capital into the company and any of these events listed require that such
officer be terminated, leave the company, be replaced or any other event that no
longer allows or requires such officer to remain with the company.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 8. LEGAL PROCEEDINGS
On August 10, 2001, we settled the claims and related counterclaims filed
in the litigation entitled Commonwealth Energy Corp., et al. v. Frederick M.
Bloom, Orange County Superior Court case number 00CC15507 in which the company
claimed Mr. Bloom had not paid the amount disclosed for his shares. The material
terms of the settlement provided that we pay Mr. Bloom $4,790,000 in damages,
and an additional $2,400,000 to purchase 1,175,160 shares of our common stock
claimed to be held by Mr. Bloom and his affiliates. The settlement agreement
also provided that the remaining 4,720,000 shares of our common stock claimed to
be held by Mr. Bloom and his affiliates were void. As a material part of the
settlement, Mr. Bloom agreed to release his previous claims to 1,200,000 shares
he had previously provided to us under an Accommodation Agreement and agreed to
that he would have no future ownership in Commonwealth Energy Corporation.
Finally, Mr. Bloom agreed not to compete with our business for two years in
certain energy-related areas.
On August 16, 2001 Joseph P. Saline, a member of our Board elected by the
cumulative ballot vote of our former founder and Chief Executive Officer
Frederick Bloom (see disclosure above), filed a civil suit against us seeking
the production of certain corporate records. We have provided Mr. Saline with
documents he requested under the protection of a court order which the Judge
prohibits him from disclosing those documents to other persons outside our Board
of Directors members. The company has cooperated with Mr. Saline in his request
for documents. This litigation is ongoing.
We settled a contested matter with the CPUC relating to Mr. Bloom's failure
to disclose in the CPUC's updated Energy Service Provider application signed by
Mr. Bloom in 1998, of the seven regulatory actions and the cease and desist
sanctions filed against Mr. Bloom. For Mr. Bloom's failure to disclose these
sanctions, the CPUC required the imposition of a fine of $140,000. The CPUC also
alleged that we, under the direction of Mr. Bloom, illegally supplemental billed
approximately 20,200 customers in early 1999. While we contested this claim, we
agreed, as part of the settlement, to return funds received from those customers
who were billed, to pay an audit fee and to pay fines for 159 violations related
to supplemental billing complaints that were documented by the Consumer Services
Division ("CSD") of the CPUC. The total settlement amount of $256,500 was
recorded as expense of $100,000 in fiscal 2000 and $156,500 in fiscal 2001, in
our consolidated financial statements. We have agreed to cooperate fully with
any state or federal regulatory or law enforcement agency, in any investigation
of the activities of Mr. Bloom during the period he served as an officer of our
company. The settlement terms require that if Mr. Bloom returns in any capacity
whatsoever as a director, officer, or employee, of Commonwealth or any of its
subsidiaries at any time, we must immediately will file a formal application for
re-registration under Code #394.1(a), disclosing the resumed relationship. The
Administrative Law Judge recommended approval of the CSD's settlement and it was
adopted by the CPUC on July 15, 2001.
We settled a complaint filed by the Department of Corporations ("DOC") in
an action entitled The People of the State of California v. Commonwealth Energy
Corporation, Los Angeles Superior Court, case No. BC245014. The agreed judgment
is in the form of an injunction and ancillary relief and was filed on February
13, 2001. The DOC's complaint was based upon activities that took place from
September 1997 to October 1999, a period during which Mr. Bloom and other
members of our former management were in
21
charge of operations. The investigation that led to the complaint centered
around the sale of our restricted securities. As part of the settlement, we
agreed to cooperate with the Commissioner of Corporations and the DOC in
connection with any further investigation arising out of the events described in
the complaint, including any investigation of former officers, directors, or
employees. We paid $150,000 in civil penalties as part of the DOC settlement in
February, 2001. The Company has agreed to cooperate with the DOC in any future
investigation it may conduct against Mr. Bloom or any other former members of
management.
Thirteen former stock sales employees led by Mr. David James commenced a
lawsuit against us on February 23, 2001 alleging that former management had
agreed to issue deeply discounted stock options to them as additional
compensation for stock sales but that we had not issued all of the stock options
allegedly earned. We have reflected on our books the issuance of stock options
covering 1,221,000 shares of Common Stock to these plaintiffs to which we
believe they are entitled. The plaintiffs have not identified the basis for the
number of respective shares under option they believe are owed to them and we,
therefore, cannot estimate the impact on our capital structure should they
succeed in their lawsuit. In our cross-complaint against these individuals, we
have alleged that they committed breach of conduct, unfair business practices,
misappropriation of trade secrets, intentional interference with prospective
economic advantage, unjust enrichment, slander and fraud.
ITEM 9.MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is currently no established public trading market for any class of
our equity securities. As of September 30, 2001, 10,283,192 shares of our Common
Stock are reserved for the exercise of outstanding stock options, 100,000 shares
of our Common Stock are reserved for the exercise of outstanding warrants, and
812,500 shares of our Common Stock are reserved for issuance upon conversion of
currently outstanding shares of our Series A Convertible Preferred Stock and
other than pursuant to an employee benefit plan or dividend reinvestment plan,
we are not currently offering or proposing to offer any shares of our Common
Stock for sale to the public.
As of September 30, 2001, there were approximately 2,572 holders of our
Common Stock and 61 holders of our Series A Convertible Preferred Stock.
We have declared and paid cash dividends on our Series A Convertible
Preferred Stock. We currently intend to retain future earnings for use in our
business and do not anticipate declaring or paying any dividends on shares of
our Common Stock in the foreseeable future.
As of January 7, 2002, all outstanding shares may be sold pursuant to Rule
144 under the Securities Act of 1933, as amended. We currently have no
outstanding obligations to register shares for sale by security holders.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
We have sold or issued the following securities during the last three years
in reliance upon the exemption from registration provided by Section 3(a)(11) of
the Securities Act of 1933, as amended. While the company did not seek to rely
on the safe harbor provided by Rule 147 promulgated under the Securities Act, we
believe that the transactions summarized below complied with the requirements of
Section 3(a)(11) for the following reasons: At the time of each such sale, and
for the most recent fiscal year immediately preceding such sale, the company was
a California corporation, maintained its principal office in California, derived
at least 80 percent of its gross revenues from operations within California, had
at least 80 percent of its assets located within California, intended to use,
and did use, at least 80 percent of the net proceeds of the sales of the
securities in the operation of its business in California and had a reasonable
basis for believing that each purchaser resided in, and was doing business in,
California. In addition, within a period of nine months after such sales, none
of the purchasers had given the company notice of any resales of the securities
to persons residing outside of California.
On or about September 15, 1998, we sold an aggregate of 3,773,256 shares of
our common stock to 484 investors at a price per share of $2.63, receiving gross
proceeds in the amount of $9,905,216 in cash.
22
On or about November 1, 1998, we sold an aggregate of 1,962,443 shares of
our common stock to 284 investors at a price per share of $3.75, receiving gross
proceeds in the amount of $7,359,510 in cash.
On or about January 1, 1999, we sold an aggregate of 2,538,897 shares of
our common stock to 499 investors at a price per share of $3.75, receiving gross
proceeds in the amount of $9,520,837 in cash.
On or about May 15, 1999, we sold an aggregate of 2,678,084 shares of our
common stock to 718 investors at a price per share of $5.50, receiving gross
proceeds in the amount of $14,729,571 in cash.
On June 28, 2000, we issued a warrant to purchase up to 100,000 shares of
our common stock, at $5.50 per share, to Coast Business Credit, as partial
consideration for a credit facility made available to us by Coast Business
Credit.
In December of 1998, January of 1999 and April of 1999, we issued stock
options exercisable for an aggregate of 1,936,250 shares of our common stock to
46 individuals in return for consulting and other services having an aggregate
value of $3,869,606, 1,483,500 of which are exercisable at $0.05 per share,
27,750 of which are exercisable at $1.00 per share and 425,000 of which are
exercisable at $3.75 per share.
In June and July of 2000, we issued stock options exercisable for an
aggregate of 21,000 shares of our common stock, at an exercise price of $1.00,
to 3 individuals in return for consulting and other services having an aggregate
value of $31,500.
In August, September, October, November and December of 1998, we issued
stock options exercisable for an aggregate of 1,782,090 shares of our common
stock to 76 employees and directors, 957,840 of which are exercisable at $0.01
per share, 57,500 of which are exercisable at $0.05 per share, 450,000 of which
are exercisable at $0.50 per share and 316,750 of which are exercisable at $1.00
per share.
In January, February, March, May, July and August of 1999, we issued stock
options exercisable for an aggregate of 374,000 shares of our common stock to 14
employees and directors, 50,000 of which are exercisable at $0.05 per share,
100,000 of which are exercisable at $0.25 per share, 100,000 of which are
exercisable at $0.50 per share and 124,000 of which are exercisable at $1.00 per
share.
In January, April, July, August, November and December of 2000, we issued
stock options exercisable for an aggregate of 6,100,000 shares of our common
stock to 12 employees and directors, 3,600,000 of which are exercisable at $2.50
per share and 2,500,000 of which are exercisable at $2.75 per share.
In January of 2001, we issued stock options exercisable for an aggregate of
450,000 shares of our common stock to 3 employees and directors, 300,000 of
which are exercisable at $2.50 per share and 150,000 of which are exercisable at
$2.75 per share.
In September, October and December of 1998, we issued stock options
exercisable for an aggregate of 220,550 shares of our common stock to 7
consultants and vendors in return for consulting and other services having an
aggregate value of $573,797, 110,000 of which are exercisable at $0.01 per
share, 100,500 of which are exercisable at $0.05 per share, and 10,050 of which
are exercisable at $1.00 per share.
In January and March of 1999, we issued stock options exercisable for an
aggregate of 34,125 shares of our common stock, at an exercise price of $1.00
per share, to 4 consultants and vendors in return for consulting and other
services having an aggregate value of $95,550.
In January and April of 2000, we issued stock options exercisable for an
aggregate of 1,052,500 shares of our common stock, at an exercise price of $2.50
per share, to 4 non-employee members of our advisory board in return for
consulting and other services and one ex-employee in connection with a severance
agreement having an aggregate value of $436,577.
The proceeds of $27,437,232 from the sales of common stock, net of issuance
costs, for the year ended July 31, 1999 was used primarily to fund operating
activities of $19,448,666, which included an increase in accounts receivables. A
total of $3,406,000 was pledged as collateral for letters of credit in
connection with the agreements for the purchase of electric power. Additionally,
proceeds were used to purchase property and equipment of $1,988,000 and
intangible asset of $500,000.
23
The proceeds of $12,868,856 from the sale of common stock, net of issuance
costs, for the year of July 31, 2000 was used primarily to fund operating
activities of $15,842,885, which included an increase in accounts receivables.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
Common Stock
All Shares of Common Stock entitle the holder thereof to: (i) one vote for
each share held of record on all matters submitted to a vote of shareholders,
(ii) to participate equally and to receive any and all such dividends as may be
declared by the Board of Directors out of funds legally available therefor; and
(iii) to participate pro rata in any distribution of assets upon liquidation of
our Company. Our shareholders have no preemptive rights to acquire additional
shares of Common Stock or any other securities. The Common Stock is not subject
to redemption and carries no subscription or conversion rights. All outstanding
shares of Common Stock are fully paid and nonassessable. There are no provisions
in our Articles of Incorporation or Bylaws that would delay, defer or prevent a
change in control of the Company.
The convertible preferred stock provides for cumulative dividends which
accrue at an annual rate of 10% and are payable at the discretion of the
Company. Each convertible preferred share is convertible into one share of the
Company's common stock at the shareholder's discretion and have full voting
rights. Preferred shareholders are entitled to preferred liquidation rights over
common stock in the amount of $1.00 per share plus an amount equal to all
declared but unpaid dividends.
ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article Five of our Articles of Incorporation contains a provision that
eliminates the personal liability of a director for monetary damages to the
fullest extent permissible under California law.
We maintain policies of directors and officers insurance with National
Union Fire Insurance Company in the aggregate amount of $20 million with a
deductible of $75,000.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included at "Item 15, Financial Statements and Exhibits".
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a)(1) Index to Consolidated Financial Statements:
<Table>
Report of Ernst & Young LLP, independent auditors........... F-1
Consolidated balance sheets at July 31, 2000 and 2001....... F-2
Consolidated statements of operations for the three years in
the period ended July 31, 2001............................ F-3
Consolidated statements of shareholders' equity for the
three years in the period ended July 31, 2001............. F-4
Consolidated statements of cash flows for the three years in
the period ended July 31, 2001............................ F-5
Notes to consolidated financial statements.................. F-6
</Table>
(a)(2) Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
24
(b) Reports on Form 8-K. None
(c) The following exhibits are attached hereto, as required by Item 601 of
Regulation S-K:
<Table>
<Caption>
EXHIBIT
NUMBER TITLE OF EXHIBIT
- ------- ----------------
3.1 Articles of Incorporation of Commonwealth Energy Corporation
dated August 14, 1997 and filed with the Secretary of State
of the State of California on August 15, 1997*
3.2 Certificate of Amendment of Articles of Incorporation of
Commonwealth Energy Corporation dated December 31, 1998 and
filed with the Secretary of State of the State of California
on February 19, 1999*
3.3 Bylaws of Commonwealth Energy Corporation, as amended*
10.1 Power Purchase Agreement dated April 27, 1999, between
Commonwealth Energy Corporation and Calpine Power Services
Company*
10.2 First Amendment to Power Purchase Agreement dated as of
April 29, 1999*
10.3 Second Amendment to Power Purchase Agreement dated as of May
28, 1999, between Commonwealth Energy Corporation and
Calpine Power Services Company*
10.4 Loan and Security Agreement dated June 28, 2000 between
Commonwealth Energy Corporation, electricAmerica, Inc. and
electric.com, Inc. and Coast Business Credit*
10.5 Warrant dated June 28, 2000, issued by Commonwealth Energy
Corporation in favor of Coast Business Credit.*
10.6 Limited Liability Company Agreement of Summit Energy
Ventures, LLC, as amended by the First Amendment to the
Limited Liability Company Agreement of Summit Energy
Ventures, LLC, dated August 2001
10.7 PECO Energy Company Confirmation Agreement dated January 30,
2001.*
10.8 Exelon Generation Company, LLC Confirmation Agreement dated
May 13, 2001*
10.9 Standard Office Lease -- Gross dated April 1, 1997, for
property located at 15941 Redhill Avenue, Suite 200, Tustin,
California, together with Rules and Regulations and Work
Letter attached thereto*
10.10 Standard Sublease dated November 12, 1998, between Kurt
Busch and Commonwealth Energy Corporation, for property
located at 15991 Redhill Avenue, Suite 200, Tustin,
California.*
10.11 Severance Agreement dated June 1, 2000, among Commonwealth
Energy Corporation, electricAmerica, Inc. and Frederick M.
Bloom*
10.12 Employment Agreement dated January 1, 2000, between
Commonwealth Energy Corporation and Ian Carter, as modified
by an Addendum to Employment Agreement dated as of November
1, 2000*
10.13 Employment Agreement dated November 1, 2000, between
Commonwealth Energy Corporation and Richard Paulsen
10.14 Employment Agreement dated November 1, 2000, between
Commonwealth Energy Corporation and James Oliver
10.15 Employment Agreement dated November 1, 2000, between
Commonwealth Energy Corporation and John Barthrop
10.16 Commonwealth Energy Corporation 1999 Equity Incentive Plan
for Employees*
10.17 Amendment Number 6 to lease by and between Warner/Redhill
Associates and Frederick Michael Bloom
21.1 Subsidiaries of the Registrant*
</Table>
- ---------------
*Each of these exhibits is incorporated herein by reference to Commonwealth
Energy's Form 10 filed with the Securities and Exchange Commission on August 9,
2001 (File No. 000-33069).
25
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Commonwealth Energy Corporation
We have audited the accompanying consolidated balance sheets of
Commonwealth Energy Corporation as of July 31, 2000 and 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended July 31, 2001. 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, 2000 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended July 31, 2001, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Orange County, California
October 12, 2001
F-1
COMMONWEALTH ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<Table>
<Caption>
JULY 31,
----------------------------
2000 2001
------------ ------------
Current assets:
Cash and cash equivalents................................. $ 4,213,168 $ 41,114,046
Accounts receivable:
Billed................................................. 17,468,027 16,818,659
Unbilled............................................... 6,333,096 3,338,172
Green power credits.................................... 2,806,508 1,176,611
------------ ------------
26,607,631 21,333,442
Less allowance for doubtful accounts................... (1,458,984) (3,946,388)
------------ ------------
Net accounts receivable................................... 25,148,647 17,387,054
Prepaid income taxes...................................... -- 2,109,997
Deferred tax asset........................................ -- 6,607,711
Prepaid expenses and other current assets................. 795,539 3,943,625
------------ ------------
Total current assets.............................. 30,157,354 71,162,433
Property and equipment, net................................. 3,316,877 3,606,078
Restricted cash............................................. 6,146,339 28,242,911
Other assets:
Intangible assets......................................... 997,500 945,000
Deposits and notes receivable............................. 972,135 388,466
Deferred tax asset........................................ -- 2,671,058
------------ ------------
Total other assets................................ 1,969,635 4,004,524
------------ ------------
Total assets...................................... $ 41,590,205 $107,015,946
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,148,848 $ 9,404,851
Notes payable under line of credit........................ 5,281,272 3,888,072
Other current liabilities................................. 3,924,083 7,685,954
------------ ------------
Total current liabilities......................... 17,354,203 20,978,877
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock -- 10,000,000 shares
authorized with no par value; 939,000 and 862,500
shares issued and outstanding in 2000 and 2001,
respectively........................................... 1,053,972 842,112
Common stock -- 50,000,000 shares authorized with no par
value; 29,333,164 and 29,360,363 shares issued and
outstanding in 2000 and 2001, respectively............. 58,740,149 60,304,847
Retained earnings (accumulated deficit)................... (35,558,119) 24,890,110
------------ ------------
Total shareholders' equity........................ 24,236,002 86,037,069
------------ ------------
Total liabilities and shareholders' equity........ $ 41,590,205 $107,015,946
============ ============
</Table>
See accompanying notes.
F-2
COMMONWEALTH ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED JULY 31,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
Net energy sales............................... $ 35,583,644 $ 87,320,533 $179,284,773
Green power credits............................ 3,540,405 12,303,794 3,978,989
------------ ------------ ------------
Net revenue.................................... 39,124,049 99,624,327 183,263,762
Direct energy costs............................ 38,728,563 86,731,876 76,615,138
------------ ------------ ------------
Gross margin................................... 395,486 12,892,451 106,648,624
Selling and marketing expenses................. 2,038,139 6,211,360 3,597,001
General and administrative expenses............ 11,184,025 15,380,674 21,183,396
Stock-based compensation charges............... 5,718,410 445,277 1,080,000
------------ ------------ ------------
Income (loss) from operations.................. (18,545,088) (9,144,860) 80,788,227
Interest income................................ 128,946 586,479 2,319,628
Interest expense............................... (5,585) (87,708) (726,446)
------------ ------------ ------------
Income (loss) before provision for income
taxes........................................ (18,421,727) (8,646,089) 82,381,409
Provision for income taxes..................... -- -- 21,851,992
------------ ------------ ------------
Net income (loss).............................. $(18,421,727) $ (8,646,089) $ 60,529,417
============ ============ ============
Net income (loss) per common share
(1999 and 2000 restated -- Note 1):
Basic........................................ $ (.84) $ (.30) $ 2.06
============ ============ ============
Diluted...................................... $ (.84) $ (.30) $ 1.77
============ ============ ============
Stock-based compensation charges relate to the
following:
Selling and marketing expenses............... $ 1,454,427 $ 423,500 $ --
General and administrative expenses.......... 4,263,983 21,777 1,080,000
------------ ------------ ------------
$ 5,718,410 $ 445,277 $ 1,080,000
============ ============ ============
</Table>
See accompanying notes.
F-3
COMMONWEALTH ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JULY 31, 1999, 2000 AND 2001
<Table>
<Caption>
CONVERTIBLE RETAINED
COMMON STOCK PREFERRED STOCK EARNINGS
------------------------- ---------------------- (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT) TOTAL
---------- ----------- ------- ----------- ------------ ------------
Balance at July 31, 1998........... 16,928,526(A) $10,567,314 939,000 $ 885,232 $ (8,321,563) $ 3,130,983
Proceeds from sales of common
stock, net of issuance costs of
$7,399,016....................... 9,686,945 24,382,626 -- -- -- 24,382,626
Stock options granted included in
issuance costs................... -- 3,869,606 -- -- -- 3,869,606
Stock options granted for services
received......................... -- 669,347 -- -- -- 669,347
Compensation charge related to
stock options granted............ -- 5,222,410 -- -- -- 5,222,410
Exercise of stock options.......... 39,750 798 -- -- -- 798
Transfer of common stock from
founder to officer............... -- 496,000 -- -- -- 496,000
Common shares issued for
acquisition of intangible
assets........................... 100,000 550,000 -- -- -- 550,000
Cumulative unpaid dividends on
convertible preferred stock...... -- -- -- 84,370 (84,370) --
Net loss and comprehensive loss.... -- -- -- -- (18,421,727) (18,421,727)
---------- ----------- ------- ----------- ------------ ------------
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
========== =========== ======= =========== ============ ============
</Table>
- ---------------
(A) Restated as described in Note 1.
See accompanying notes.
F-4
COMMONWEALTH ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED JULY 31,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................... $(18,421,727) $ (8,646,089) $ 60,529,417
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation.................................. 251,566 687,125 860,726
Amortization.................................. -- 52,500 52,500
Provision for doubtful accounts............... 612,909 846,075 4,666,126
Stock-based compensation charges.............. 5,718,410 445,277 1,080,000
Fair value of stock options issued for
services received.......................... 669,347 -- --
Fair value of stock options issued as
severance costs............................ -- 414,800 --
Income tax benefits arising from exercise of
stock options.............................. -- -- 339,295
Deferred income taxes......................... -- -- (9,278,769)
Changes in operating assets and liabilities:
Billed accounts receivable................. (7,746,794) (9,278,406) (1,529,354)
Unbilled accounts receivable............... (1,620,743) (3,919,039) 2,994,924
Green power credits receivable............. (3,075,585) 269,077 1,629,897
Prepaid expenses and other assets.......... (535,752) (13,714) (4,674,414)
Accounts payable........................... 3,168,835 2,809,368 1,256,003
Other current liabilities.................. 715,868 1,305,141 3,901,596
------------ ------------ ------------
Net cash provided by (used in) operating
activities.................................... (20,263,666) (15,027,885) 61,827,947
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............. (1,988,096) (1,760,064) (1,149,927)
Purchase of intangible assets................... (500,000) -- --
------------ ------------ ------------
Net cash used in investing activities........... (2,488,096) (1,760,064) (1,149,927)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under (repayments of) line of
credit........................................ -- 5,281,272 (1,393,200)
Increase in restricted cash..................... (3,406,200) (2,740,139) (22,096,572)
Proceeds from sales of common stock............. 28,252,232 12,051,856 --
Repurchase of preferred stock................... -- -- (76,500)
Dividends paid on preferred stock............... -- -- (216,548)
Proceeds from exercises of stock options........ 798 70,115 5,678
------------ ------------ ------------
Net cash provided by (used in) financing
activities.................................... 24,846,830 14,663,104 (23,777,142)
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents................................... 2,095,068 (2,124,845) 36,900,878
Cash and cash equivalents at beginning of
year.......................................... 4,242,945 6,338,013 4,213,168
------------ ------------ ------------
Cash and cash equivalents at end of year........ $ 6,338,013 $ 4,213,168 $ 41,114,046
============ ============ ============
Cash paid for:
Interest expense.............................. $ 5,585 $ 87,708 $ 726,446
Income taxes.................................. -- -- 32,900,800
</Table>
SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended July 31, 1999, the Company issued 100,000 shares of
common stock having a fair value of $550,000 for a portion of the $1,050,000
purchase price of the intangible assets.
See accompanying notes.
F-5
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Commonwealth Energy Corporation (the "Company") was incorporated on August
15, 1997. The Company's primary business has been the sale of electric power to
retail customers in California and, beginning January 2000, in Pennsylvania and,
beginning in August 2000, 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.
Basis of Presentation
The consolidated financial statements of the Company include the accounts
of the Company's wholly-owned subsidiaries and Summit Energy Ventures, LLC
(Summit). All intercompany 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:
<Table>
<Caption>
YEAR ENDED JULY 31,
---------------------------------
1999 2000
--------------- ---------------
BASIC DILUTED BASIC DILUTED
----- ------- ----- -------
As restated.......................................... $(.84) $(.84) $(.30) $(.30)
As originally reported............................... (.69) (.69) (.26) (.26)
</Table>
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates in the Company's consolidated
financial statements relate to the allowance for doubtful accounts, unbilled
receivables, legal claims and the useful lives of property and equipment and
intangible assets. Actual results could differ from those estimates.
F-6
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
Revenue and Cost Recognition
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:
<Table>
<Caption>
YEAR ENDED JULY 31,
----------------------------------------
1999 2000 2001
----------- ----------- ------------
Retail and commercial end users.............. $35,583,644 $87,320,533 $ 99,981,187
Wholesale.................................... -- -- 79,303,586
----------- ----------- ------------
$35,583,644 $87,320,533 $179,284,773
=========== =========== ============
</Table>
Common Stock Grant
On January 20, 2000, the Board of Directors of the Company directed that,
in consideration of the purchase price being paid in 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.
Unbilled Receivables
The Company's customers are billed monthly at various dates throughout the
month. Unbilled receivables represent the amount of electric power delivered to
customers as of the end of a period, but not yet billed. 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
original maturities of three months or less.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property and
equipment is provided over their estimated useful lives, generally five to ten
years, using the straight line method. Expenditures for maintenance, repairs and
renewals are expensed as incurred. The Company capitalizes certain software
development costs incurred on significant projects for internal use in
accordance with the provisions of AICPA Statement of Position 98-1, Accounting
for Software Costs. Qualifying internal and external costs, consisting primarily
of third-party system development costs incurred during the application
development stage are capitalized and amortized on the straight-line basis over
five years.
F-7
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
Intangible Assets
Intangible assets are carried at cost. Amortization of intangible assets is
provided over their estimated useful life of 20 years.
Income Taxes
The Company utilizes the liability method of accounting for income taxes as
set forth in FASB Statement No. 109, Accounting for Income Taxes. Under the
liability method, deferred taxes are determined based on the differences between
the financial statement and tax bases of assets and liabilities using currently
enacted tax rates.
Advertising Costs
Advertising costs, consisting primarily of media advertising, are expensed
as incurred. Advertising costs were $1,670,270, $2,175,400 and $253,120 for
1999, 2000 and 2001, respectively.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123) and FASB Interpretation
No. 44, Accounting for Certain Transactions involving Stock Compensation, the
Company accounts for stock options granted to its employees and outside
directors using the intrinsic value method. Most of the Company's stock option
grants were granted with exercise prices below the fair value of the Company's
common stock as 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.
Concentration of Credit Risk
The Company maintains allowances for potential credit losses.
As of July 31, 2001, 52.3% 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
F-8
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
at July 31, 2001. 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 are
due primarily from wholesale customers including $4,417,841 due from Automated
Power Exchange (APX). This amount includes $2,226,630 in ISO credit holdbacks
relating to November 2000 and January 2001 activity. APX has informed the
Company that the holdbacks were made, in part, because certain organizations,
including PG&E and PX, which have declared bankruptcy, did not make their
scheduled payments to APX. The Company has provided an allowance of $1,471,142
for doubtful accounts related to the APX holdbacks.
No customer has accounted for more than 10% of net revenue in 1999, 2000 or
2001, 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.
Impairment of Long-Lived Assets
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.
Recent Accounting Pronouncements
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.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, billed and
unbilled accounts receivable, accounts payable and notes payable. The carrying
amounts of these financial instruments are reflected in the accompanying
consolidated balance sheets at amounts considered by management to approximate
their fair values due to their short-term nature.
F-9
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
2. MARKET AND REGULATORY RISKS
California Deregulated Electric Power Markets
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" 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 customers for an undetermined period of time. The Company is
actively seeking relief from this ruling.
In addition regulatory and legislative risks, one of the UDC's 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.
Commitments to Purchase Electric Power
For the California market, the Company has entered into a contract, which
expires on June 30, 2002 with Calpine Power Services Company, to acquire 3,000
MWH of electric power per day for the remainder of the contract. The Company is
obligated to minimum electric purchases of $32.3 million for the year ending
July 31, 2002 under this commitment. The electric power acquired under this
contract qualifies for the California "Green Power Credit" upon its resale to
certain classes of customers.
For the Pennsylvania market, the Company has entered into various
contractual arrangements for the purchase of electric power through May 2004.
The Company is obligated to minimum electric power purchases of $37.6 million
for the year ending July 31, 2002, and $51.9 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.
Pennsylvania Operations
During the year ended July 31, 2000, the Company began selling electric
power in Pennsylvania. In accordance with its standard customer contract in
Pennsylvania, the Company may only charge certain maximum rates for its sales of
electric power which, at times, could be less than the Company's costs of
acquiring, distributing and scheduling such electric power. Energy capacity
charges for servicing electric power in the Pennsylvania market varies
significantly from month to month and can effect gross profit margins.
California Green Power Credits
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 July 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
F-10
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
resources. The benefit of Green Power Credits has been passed through to the
Company's customers. The Program provides that this subsidy is available to
suppliers of "green power" through March 31, 2002 and the Company does not know
if the subsidy will be continued thereafter.
3. PER SHARE INFORMATION
Basic and diluted net income (loss) per common share, restated as described
in Note 1, is computed as follows:
<Table>
<Caption>
YEAR ENDED JULY 31,
-----------------------------------------
1999 2000 2001
------------ ----------- -----------
NUMERATOR:
Net income (loss)............................ $(18,421,727) $(8,646,089) $60,529,417
Preferred stock dividend..................... (84,370) (84,370) (81,188)
------------ ----------- -----------
Income (loss) applicable to common
stock -- Basic............................. (18,506,097) (8,730,459) 60,448,229
Assumed conversion of preferred stock........ -- -- 81,188
------------ ----------- -----------
Net income (loss) -- Dilutive................ $(18,506,097) $(8,730,459) $60,529,417
============ =========== ===========
DENOMINATOR (restated for 1999 and 2000):
Weighted - average outstanding
shares -- Basic............................ 21,905,210 28,794,921 29,384,617
Dilutive shares:
Exercise of dilutive stock options......... -- -- 3,842,866
Conversion of preferred stock into common
stock................................... -- -- 924,538
------------ ----------- -----------
Weighted - average outstanding
shares -- Dilutive......................... 21,905,210 28,794,921 34,152,021
============ =========== ===========
</Table>
For the years ended July 31, 1999 and 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, 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.
4. INVESTMENT IN SUMMIT ENERGY VENTURES, LLC
In July 2001, the Company invested $15,000,000 in Summit and, if Summit
invests 75% of the initial $15,000,000 investment by the Company, is committed
to 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. Summit
is to exist 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, 2001, 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 50% to the Company
and 50% 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 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.
F-11
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
Condensed balance sheet information for Summit at July 31, 2001, which is
included in the Company's consolidated financial statements, is as follows:
<Table>
Assets:
Cash and cash equivalents................................. $14,635,411
Prepaid management fees................................... 379,110
-----------
$15,014,521
===========
Members' equity............................................. $15,014,521
===========
</Table>
The effect of Summit's results of operations from its date of inception
through July 31, 2001 on the Company's consolidated results of operations was
insignificant.
5. OTHER CURRENT LIABILITIES AND RELATED MATTERS
Other current liabilities is comprised of:
<Table>
<Caption>
JULY 31,
------------------------
2000 2001
---------- ----------
Payroll and related......................................... $ 450,302 $ 467,511
Severance costs............................................. 956,978 75,000
Legal accruals.............................................. 1,249,897 1,476,584
Customer termination costs.................................. 681,270 65,000
Settlement of litigation with founder....................... -- 4,790,000
Other....................................................... 585,636 811,859
---------- ----------
$3,924,083 $7,685,954
========== ==========
</Table>
Severance Arrangements
The Company's founder and former Chairman and Chief Executive Officer had
an employment agreement with a subsidiary of the Company. He resigned from his
positions with the subsidiary in consideration of a severance agreement
effective June 1, 2000. The present value of $927,254 of this obligation, based
upon a discount rate of 10%, was recorded as of June 1, 2000 and is included in
general and administrative expenses for 2000. During 2001, the Company paid
$92,138 to its founder pursuant to this agreement. The Company ceased making
payments under this agreement to its founder in December 2000 pending resolution
of the litigation with the founder described in Note 11. In the settlement of
this litigation in August 2001, the founder released his claims for any further
payments due under the severance agreement.
The Company had granted its former President an option to acquire 1,000,000
shares of the Company's common stock. The options were fully vested at their
date of grant, had an exercise price of $2.50 per share and were to expire on
December 31, 2002. The fair value of $414,800 of these stock options, as
determined on the minimum value method, was included in general and
administrative expenses for 2000. By a subsequent agreement the former President
released his rights and waived any claims to said option. In addition, costs of
$425,000 and $300,000 were recorded in 1999 and 2000, respectively, related to
the severance of other employees.
Customer Termination Costs
The Company terminated certain California commercial and industrial
customers during June and July 2000. At July 31, 2000, an accrual of $681,270
was recorded to provide for the estimated costs of terminating these customers
including meter lease termination settlement costs and settlement of terminated
customer
F-12
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
damage claims. Except for $65,000 which was accrued at July 31, 2001, all of
these customer termination costs were paid during 2001.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net is comprised of the following:
<Table>
<Caption>
JULY 31,
-------------------------
2000 2001
---------- -----------
Office furniture and equipment............................. $1,237,053 $ 1,227,536
Information technology equipment and systems............... 2,882,360 4,094,531
Leasehold improvements..................................... 172,356 119,629
---------- -----------
4,291,769 5,441,696
Less accumulated depreciation and amortization............. (974,892) (1,835,618)
---------- -----------
$3,316,877 $ 3,606,078
========== ===========
</Table>
7. RESTRICTED CASH AND INTANGIBLE ASSETS
Restricted Cash
Restricted cash consists of the following:
<Table>
<Caption>
JULY 31,
-------------------------
2000 2001
---------- -----------
Short-term investments pledged as collateral for letters of
credit in connection with agreements for the purchase of
electric power........................................... $6,146,339 $13,607,500
Cash and cash equivalents of Summit........................ -- 14,635,411
---------- -----------
$6,146,339 $28,242,911
========== ===========
</Table>
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.
Intangible Assets
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 2000
and 2001.
8. LINE OF CREDIT
On June 29, 2000, the Company entered into a three-year, $15 million line
of credit. Borrowings under the line of credit, which amounted to $3,888,072 at
July 31, 2001, are 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%. At July 31, 2001, the interest
rate on borrowings under the line of credit was 8.5% and the average effective
interest rate on borrowings outstanding during the years ended July 31, 2000 and
2001 was 11.25% and 13.0%, respectively. The credit line is subject to certain
F-13
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
financial covenants in the event the Company's net worth falls below $15 million
or the Company operates with a negative gross profit.
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.
9. SHAREHOLDERS' EQUITY
Convertible Preferred Stock
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 $97,612 as of July 31, 2001. Each convertible preferred share is
convertible into one share of the Company's common stock at the shareholder's
discretion and has full voting rights. In addition, preferred shareholders are
entitled to preferential liquidation rights over common stock in the amount of
$1.00 per share plus an amount equal to all declared but unpaid dividends.
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 76,500 shares of
convertible preferred stock, who had also received 76,500 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.
Common Stock
The common stock of the Company has no conversion or preemptive shareholder
rights as to any securities issued by the Company and are not liable for
assessments and further calls. Each share of common stock is entitled to one
vote on all matters voted on by shareholders, and is entitled to equal dividends
when and as declared by the Board of Directors from funds legally available.
The Company has sold shares of its common stock in a series of private
placements. These sales of common shares were made by a specific group of
employees within the Company who were employed by the Company at the time of the
sales for this purpose. The sales commissions paid to these employees, both in
the form of cash and stock options granted, have been charged against the
proceeds of the common stock sales in the accompanying consolidated statements
of shareholders' equity. The amount of the charge for the stock options granted
represented the difference between the option exercise price and the fair value
of the Company's common stock at the date of grant as determined by the Company
for financial reporting purposes. All other costs related to these employees
were charged to expense.
At July 31, 2001, the Company has reserved the following shares of its
common stock for issuance upon conversion of the issued and outstanding shares
of convertible preferred stock, exercise of warrants and exercise of outstanding
stock options:
<Table>
Reserved for conversion of convertible preferred stock...... 862,500
Reserved for exercise of warrants........................... 100,000
Reserved for exercise of outstanding stock options.......... 10,283,192
----------
11,245,692
==========
</Table>
See Note 11 for a description of the legal status of common shares issued
to the Company's founder.
F-14
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
Stock Options
The Company's Board of Directors has approved grants of options to acquire
a total of 12,901,825 shares of the Company's common stock to the Company's
employees, outside directors and service providers. As of July 31, 2001,
10,283,192 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.
Stock option activity is set forth below:
<Table>
<Caption>
OPTIONS OUTSTANDING
-------------------------------------------------------------
WEIGHTED-
AVERAGE
WEIGHTED- FAIR VALUE
NUMBER OF EXERCISE PRICE AVERAGE OF COMMON
SHARES PER SHARE EXERCISE PRICE STOCK(A)
---------- -------------- -------------- --------------
Balance at July 31, 1998.................. 931,310 $.01 - $ .05 $0.011 $0.71
Options granted:
Exercise price less than fair value of
common stock(A):
-- Employee commissions for stock
sales.............................. 1,511,250 $.01 - $1.00 $0.067 $2.63
-- Other employee.................... 2,104,090 $.01 - $1.00 $0.339 $2.85
-- Outside service providers......... 254,675 $.01 - $1.00 $0.212 $3.54
-- Outside directors................. 40,000 $1.00 $ 1.00 $3.75
Exercise price equal to fair value of
common stock(A):
-- Employee commissions for stock
sales.............................. 425,000 $3.75 $3.750 $3.75
Options exercised......................... (39,750) $.01 - $ .05 $0.020
---------- ------------ ------
Balance at July 31, 1999.................. 5,226,575 $.01 - $3.75 $0.478
Options granted:
Exercise price 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
</Table>
F-15
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
<Table>
<Caption>
OPTIONS OUTSTANDING
-------------------------------------------------------------
WEIGHTED-
AVERAGE
WEIGHTED- FAIR VALUE
NUMBER OF EXERCISE PRICE AVERAGE OF COMMON
SHARES PER SHARE EXERCISE PRICE STOCK(A)
---------- -------------- -------------- --------------
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
========== ============ ======
</Table>
- ---------------
(A) At date of grant.
The weighted average remaining contractual life and weighted average
exercise price of options outstanding and of options exercisable as of July 31,
2001 were as follows:
<Table>
<Caption>
AVERAGE
NUMBER OF REMAINING WEIGHTED
RANGE OF SHARES CONTRACTUAL SHARES AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE EXERCISE PRICE
- --------------- ----------- ------------ ----------- --------------
$ .01 - $ .50 3,126,017 1.63 3,126,017 $ 0.11
$1.00 512,175 1.44 512,175 $ 1.00
$2.50 - $3.75 6,645,000 6.97 2,922,500 $ 2.65
---------- ---- --------- ------
Total 10,283,192 5.07 6,560,692 $ 1.31
========== ==== ========= ======
</Table>
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
F-16
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
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:
<Table>
<Caption>
NUMBER OF OPTIONS STOCK-BASED
---------------------- COMPENSATION
VESTED NOT EARNED RECOGNIZED
--------- ---------- ------------
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
========= ======= ========
</Table>
Performance criteria which have not been 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 are
as follows:
<Table>
<Caption>
STOCK-BASED
NUMBER OF COMPENSATION
UNVESTED OPTIONS RECOGNIZED
---------------- ------------
Completion of liquidity event, as defined in related
agreement(A)......................................... 750,000 $412,500
Completion of a successful initial public offering..... 300,000 165,000
Exceeding the Company's business plans for the calendar
year ending December 31, 2001 by 10% or more......... 300,000 165,000
--------- --------
1,350,000 $742,500
========= ========
</Table>
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 value of the Company's common stock.
Options Granted during the Year Ended July 31, 2001
During the year ended July 31, 2001, the Company granted 2,500,000 stock
options to employees and 150,000 stock options to non-employee directors. The
stock options granted to employees were 25% vested on their date of grant and
vest 25% at the anniversary of the dates of grant over the next three years.
These stock options expire on November 11, 2007.
F-17
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
Other Stock-Based Compensation
In connection with the granting of stock options to certain employees and
the Company's outside directors, the amount of related compensation to be
recognized was determined by the Company to be the difference between the option
exercise price and the fair value of the Company's common stock at the date of
grant as 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 248,000 and 123,500 shares of the Company's common
stock owned by him to two officers of the Company in 1999 and 2000,
respectively. In accordance with Staff Accounting Bulletin No. 79, Accounting
for Expenses or Liabilities Paid by Principal Stockholder, the estimated fair
value of such shares of $496,000 and $423,500 was included in stock-based
compensation charges in 1999 and 2000, respectively.
Stock-based compensation charges relate to the following:
<Table>
<Caption>
YEAR ENDED JULY 31,
-------------------------------------
1999 2000 2001
----------- -------- ----------
Stock options granted with fair value of
Company's common stock in excess of exercise
price of options............................. $ 8,548,500 $ 53,277 $ --
Performance-based stock options................ -- -- 1,080,000
Gift of shares from founder to officers........ 496,000 423,500 --
----------- -------- ----------
9,044,500 476,777 1,080,000
Less amount related to commissions on sales of
the Company's common stock................... (3,326,090) (31,500) --
----------- -------- ----------
$ 5,718,410 $445,277 $1,080,000
=========== ======== ==========
</Table>
Warrants
As part of the $15 million credit line agreement dated June 29, 2000, the
lender received warrants to purchase 100,000 shares of common stock. The
warrants are exercisable at $5.50 per share and expire upon the maturity of the
loan agreement on June 29, 2003. The fair value of the warrants was nominal at
their date of issuance.
Pro Forma Disclosures of the Effect of Stock-Based Compensation Plans
Pro forma information regarding results of operations and net 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
F-18
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
assumptions described above approximate the Company's reported amounts of net
income (loss) and net income (loss) per common share for each year.
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Net deferred income taxes
consist of the following:
<Table>
<Caption>
JULY 31,
---------------------------
2000 2001
------------ -----------
Deferred tax assets:
Net operating loss carryforwards....................... $ 9,846,000 $ 1,021,000
Stock options.......................................... 2,232,000 2,756,000
Allowance for doubtful accounts........................ 625,000 601,000
Reserves and accruals.................................. 1,641,000 4,421,000
State income taxes..................................... -- 1,586,000
------------ -----------
14,344,000 10,385,000
Less valuation allowance............................... (14,254,000) (1,021,000)
------------ -----------
90,000 9,364,000
Deferred tax liabilities:
Depreciation and amortization.......................... (72,000) (85,000)
Other.................................................. (18,000) --
------------ -----------
Net deferred tax asset................................... $ -- $ 9,279,000
============ ===========
</Table>
For the year ended July 31, 2001, the Company's provisions for income taxes
was comprised of the following:
<Table>
<Caption>
CURRENT DEFERRED TOTAL
----------- ----------- -----------
Federal..................................... $24,953,000 $(7,728,000) $17,225,000
State....................................... 6,178,000 (1,551,000) 4,627,000
----------- ----------- -----------
$31,131,000 $(9,279,000) $21,852,000
=========== =========== ===========
</Table>
There was no provision for income taxes for the years ended July 31, 1999
and 2000.
A reconciliation of the federal statutory income tax rate to the Company's
provision for income taxes as a percentage of loss before income taxes is as
follows:
<Table>
<Caption>
YEAR ENDED JULY 31,
-----------------------
1999 2000 2001
----- ----- -----
Federal statutory income tax rate........................... 34.0% 34.0% 35.0%
Valuation allowance recorded due to losses.................. (34.0) (34.0) --
Reversal of valuation allowance............................. -- -- (13.1)
State income taxes, net of federal benefit.................. -- -- 3.6
Other....................................................... -- -- 1.1
----- ----- -----
Income tax rate per financial statements.................... --% --% 26.6%
===== ===== =====
</Table>
A valuation allowance was recorded to reflect the uncertainty of
realization of the deferred tax asset during 1999 and 2000. The valuation
allowance at July 31, 2001 was recorded to reflect the uncertainty of the
F-19
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
deferred tax asset related to the net operating loss carryforward, the use of
which is limited as described in the following paragraph. The valuation
allowance increased by $7,881,000 and $2,840,000 during 1999 and 2000,
respectively, and during 2001 was 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 because of
the Company's profitable operations during the year ended July 31, 2001.
At July 31, 2001, the Company had net operating loss carryforwards of
approximately $2,330,000 for federal and state income tax purposes 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.
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Purchase Commitments
See Note 2 for a description of commitments to purchase electric power.
Leasing Arrangements
The Company is obligated under long-term leases for the rental of real
estate and office equipment. The Company conducts its main operations from
facilities that are leased under a five-year non-cancelable operating lease
expiring on April 24, 2004. The Company also leases four other locations for its
sales staff. The leases for certain locations contain escalation clauses
relating to increases to real property taxes and maintenance costs.
The following is a schedule of the future minimum rental payments required
under the above operating leases as of July 31, 2001:
<Table>
<Caption>
YEAR ENDING JULY 31,
--------------------
2002........................................ $ 841,087
2003........................................ 652,949
2004........................................ 371,835
2005........................................ 27,588
----------
$1,893,459
==========
</Table>
Rent expense for operating leases amounted to $367,300, $786,300 and
$697,498 in 1999, 2000 and 2001, respectively.
Employment contracts
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:
<Table>
<Caption>
YEAR ENDING JULY 31,
--------------------
2002........................................ $1,017,916
2003........................................ 1,172,917
2004........................................ 1,346,250
2005........................................ 627,083
</Table>
F-20
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
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 sec.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 sec.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.
CONTINGENCIES
California Department of Corporations Investigation
The California Department of Corporations ("DOC") initiated an
investigation of the Company in 1999 regarding the manner and extent of the
offers and sales of the Company's stock and whether or not said offers and sales
conformed to the requirements of the California Securities laws or allowable
exemptions to registration, and whether the Company's employees involved in such
sales should have been licensed. Shortly after the initial inquiry, there was a
change in management of the Company and all of such sales activities ceased, and
the employment of all employees involved in such sales activities was
terminated. The Company had entered into negotiations with the DOC to resolve
this investigation and reached mutually agreeable terms of settlement, which
include a payment of $150,000 by the Company to the DOC, which the Company
accrued as of July 31, 2000, and an agreement to cooperate with the DOC in any
further investigations which may arise related to these matters. In February
2001, upon the payment of $150,000 by the Company to the DOC, this investigation
was closed.
California Public Utilities Commission Investigation
In 1999, the Consumer Services Division of the 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).
Litigation with Company's Founder
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
F-21
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
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. Founder also agreed to release his claims to the 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.
Litigation
From time to time, the Company is involved in legal proceedings, claims,
and litigation arising in the ordinary course of business. Management does not
believe the outcome of these matters will have a material effect on the
Company's consolidated financial condition or its consolidated results of
operations.
F-22
COMMONWEALTH ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 2001
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
--------------------------------------------------
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31
---------- ---------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE INFORMATION)
Year ended July 31, 2000:
Net revenue................................... $20,169.4 $18,670.8 $17,950.0 $42,834.1
Gross margin.................................. 2,796.8 1,040.0 2,389.6 6,666.0
Net income (loss)............................. (2,137.8) (3,548.7) (3,305.1) 345.5
Net income (loss) per common share
(restated)(A):
Basic and diluted........................... (.08) (.12) (.11) .01
Net income (loss) per common share
(as originally reported)(A):
Basic and diluted........................... (.07) (.10) (.10) .01
Year ended July 31, 2001:
Net revenue................................... $43,106.0 $52,659.0 $48,272.6 $39,226.1
Gross margin.................................. 18,833.0 41,153.9 28,431.2 18,230.0
Net income.................................... 11,759.2 27,865.2 14,509.6 6,395.5
Net income per common share (restated)(A):
Basic....................................... .40 .95 .49 .22
Diluted..................................... .34 .81 .43 .19
Net income per common share
(as originally reported)(A):
Basic....................................... .35 .86 .51
Diluted..................................... .30 .75 .44
</Table>
- ---------------
(A) See Note 1, "Adjustment of Number of Outstanding Shares and Restatement of
Per Share Information" for a description of the basis of the restatement of
the per share information for the quarters ended October 31, 1999 and 2000,
January 31, 2000 and 2001, and April 30, 2000 and 2001.
F-23
SCHEDULE II
COMMONWEALTH ENERGY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<Table>
<Caption>
COLUMN A COLUMN B COLUMN C COLUMN D
---------- ------------ ---------- -------------
CHARGED TO
COSTS AND
EXPENSES
BEGINNING OR SALES BALANCE AT
OF PERIOD ALLOWANCES DEDUCTIONS END OF PERIOD
---------- ------------ ---------- -------------
Year ended July 31, 2001:
Allowance for Bad Debts...................... $1,458,984 $4,666,126 $2,178,722 $3,946,388
Year ended July 31, 2000:
Allowance for Bad Debts...................... 612,909 846,075 -- 1,458,984
Year ended July 31, 1999:
Allowance for Bad Debts...................... -- 612,909 -- 612,909
</Table>
F-24
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: November 14, 2001 COMMONWEALTH ENERGY CORPORATION
By: /s/ IAN B. CARTER
--------------------------------------
Name: Ian B. Carter
Title: Chief Executive Officer
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER TITLE OF EXHIBIT
- ------- ----------------
3.1 Articles of Incorporation of Commonwealth Energy Corporation
dated August 14, 1997 and filed with the Secretary of State
of the State of California on August 15, 1997*
3.2 Certificate of Amendment of Articles of Incorporation of
Commonwealth Energy Corporation dated December 31, 1998 and
filed with the Secretary of State of the State of California
on February 19, 1999*
3.3 Bylaws of Commonwealth Energy Corporation, as amended*
10.1 Power Purchase Agreement dated April 27, 1999, between
Commonwealth Energy Corporation and Calpine Power Services
Company*
10.2 First Amendment to Power Purchase Agreement dated as of
April 29, 1999*
10.3 Second Amendment to Power Purchase Agreement dated as of May
28, 1999, between Commonwealth Energy Corporation and
Calpine Power Services Company*
10.4 Loan and Security Agreement dated June 28, 2000 between
Commonwealth Energy Corporation, electricAmerica, Inc. and
electric.com, Inc. and Coast Business Credit*
10.5 Warrant dated June 28, 2000, issued by Commonwealth Energy
Corporation in favor of Coast Business Credit.*
10.6 Limited Liability Company Agreement of Summit Energy
Ventures, LLC, as amended by the First Amendment to the
Limited Liability Company Agreement of Summit Energy
Ventures, LLC, dated August 2001
10.7 PECO Energy Company Confirmation Agreement dated January 30,
2001.*
10.8 Exelon Generation Company, LLC Confirmation Agreement dated
May 13, 2001*
10.9 Standard Office Lease -- Gross dated April 1, 1997, for
property located at 15941 Redhill Avenue, Suite 200, Tustin,
California, together with Rules and Regulations and Work
Letter attached thereto*
10.10 Standard Sublease dated November 12, 1998, between Kurt
Busch and Commonwealth Energy Corporation, for property
located at 15991 Redhill Avenue, Suite 200, Tustin,
California.*
10.11 Severance Agreement dated June 1, 2000, among Commonwealth
Energy Corporation, electricAmerica, Inc. and Frederick M.
Bloom*
10.12 Employment Agreement dated January 1, 2000, between
Commonwealth Energy Corporation and Ian Carter, as modified
by an Addendum to Employment Agreement dated as of November
1, 2000*
10.13 Employment Agreement dated November 1, 2000, between
Commonwealth Energy Corporation and Richard Paulsen
10.14 Employment Agreement dated November 1, 2000, between
Commonwealth Energy Corporation and James Oliver
10.15 Employment Agreement dated November 1, 2000, between
Commonwealth Energy Corporation and John Barthrop
10.16 Commonwealth Energy Corporation 1999 Equity Incentive Plan
for Employees
10.17 Amendment Number 6 to Lease by and between Warner/Redhill
Associates and Frederick Michael Bloom
21.1 Subsidiaries of the Registrant
</Table>
- ---------------
*Each of these exhibits is incorporated by reference to Commonwealth Energy's
Form 10 filed with the Securities and Exchange Commission on August 9, 2001
(File No. 000-33069).