-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mgf6A9ZbG03GR/+HperR2niMpSLYaIPcZL4+JxFGbYdIZsmKLsLikvklJlwe5BDT ssStVn1vAZrhE9cYEvYafA== 0000892569-01-501305.txt : 20020413 0000892569-01-501305.hdr.sgml : 20020413 ACCESSION NUMBER: 0000892569-01-501305 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011031 FILED AS OF DATE: 20011217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMONWEALTH ENERGY CORP CENTRAL INDEX KEY: 0001156443 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 330769555 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-33069 FILM NUMBER: 1815814 MAIL ADDRESS: STREET 1: 15901 RED HILL AVENUE STREET 2: SUITE 100 CITY: TUSTIN STATE: CA ZIP: 92780 10-Q 1 a77918e10-q.txt FORM 10-Q QUARTER ENDED OCTOBER 31, 2001 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q --------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO __________ COMMISSION FILE NUMBER: 000-33069 COMMONWEALTH ENERGY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 33-0769555 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 15901 RED HILL AVENUE, SUITE 100, TUSTIN, CALIFORNIA 92780 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 258-0470 INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934, DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES ( ) NO ( X ) AS OF OCTOBER 31, 2001, 27,311,703 SHARES OF THE REGISTRANT'S COMMON STOCK WERE OUTSTANDING. THERE WAS NO MARKET FOR THE REGISTRANTS SHARES AT SUCH DATE. COMMON STOCK (TITLE OF CLASS) ================================================================================ TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements: Condensed consolidated balance sheets--October 31, 2001 (unaudited) and July 31, 2001..... 3 Condensed consolidated statements of operations--Three months ended October 31, 2000 and 2001 (unaudited)......................................................................... 4 Condensed consolidated statements of cash flows--Three months ended October 31, 2000 and 2001 (unaudited)......................................................................... 5 Notes to condensed consolidated financial statements--October 31, 2001 (unaudited)......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 14 Item 3. Quantitative and Qualitative Disclosure about Market Risk.................................... 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................................................... 17 Item 2. Changes In Securities and Use of Proceeds.................................................. 18 Item 3. Defaults upon Senior Securities............................................................ 18 Item 4. Submission of Matters to a Vote of Security Holders........................................ 18 Item 5. Other Information.......................................................................... 18 Item 6. Exhibits and Reports on Form 8-K........................................................... 19
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COMMONWEALTH ENERGY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
----------------------------------- JULY 31, 2001 OCTOBER 31, 2001 ------------- ---------------- (Unaudited) Current assets: Cash and cash equivalents ................................................. $ 41,114,046 $ 34,385,629 Accounts receivable: Billed ................................................................. 16,818,659 16,129,080 Unbilled ............................................................... 3,338,172 3,035,103 Green power credits .................................................... 1,176,611 1,078,360 ------------- ------------- 21,333,442 20,242,543 Less allowance for doubtful accounts ................................... (3,946,388) (4,178,680) ------------- ------------- Net accounts receivable ................................................... 17,387,054 16,063,863 Prepaid income taxes ...................................................... 2,109,997 2,138,428 Deferred tax asset ........................................................ 6,607,711 2,800,443 Prepaid expenses and other assets ......................................... 3,943,625 2,271,340 ------------- ------------- Total current assets .............................................. 71,162,433 57,659,703 Property and equipment, net ................................................. 3,606,078 3,693,554 Restricted cash ............................................................. 28,242,911 26,294,575 Other assets: Intangible assets ......................................................... 945,000 931,875 Investment in Envenergy, Inc., at cost .................................... -- 2,000,000 Deposits and notes receivable ............................................. 388,466 483,465 Deferred tax asset ........................................................ 2,671,058 7,005,316 ------------- ------------- Total other assets ................................................ 4,004,524 10,420,656 ------------- ------------- Total assets ...................................................... $ 107,015,946 $ 98,068,488 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .......................................................... $ 9,404,851 $ 9,116,188 Notes payable under line of credit ........................................ 3,888,072 3,602,171 Other current liabilities ................................................. 7,685,954 2,413,983 ------------- ------------- Total current liabilities ......................................... 20,978,877 15,132,342 Commitments and contingencies Shareholders' equity: Convertible preferred stock -- 10,000,000 shares authorized with no par value; 862,500 and 812,500 shares issued and outstanding at July 31, 2001 and October 31, 2001, respectively ........ 842,112 826,392 Common stock -- 50,000,000 shares authorized with no par value; 29,360,363 and 27,311,703 shares issued and outstanding at July 31, 2001 and October 31, 2001, respectively ........ 60,304,847 57,904,896 Retained earnings ......................................................... 24,890,110 24,204,858 ------------- ------------- Total shareholders' equity ........................................ 86,037,069 82,936,146 ------------- ------------- Total liabilities and shareholders' equity ........................ $ 107,015,946 $ 98,068,488 ============= =============
See accompanying notes. 3 COMMONWEALTH ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED OCTOBER 31, ------------------------------- 2000 2001 ------------ ------------ Net energy sales ................................... $ 41,500,844 $ 26,946,459 Green power credits ................................ 1,605,183 1,214,336 ------------ ------------ Net revenue ........................................ 43,106,027 28,160,795 Direct energy costs ................................ 24,273,025 24,802,027 ------------ ------------ Gross margin ....................................... 18,833,002 3,358,768 Selling and marketing expenses ..................... 965,085 875,068 General and administrative expenses ................ 3,190,498 4,079,825 ------------ ------------ Income (loss) from operations ...................... 14,677,419 (1,596,125) Interest income .................................... 236,400 477,675 Interest expense ................................... (217,376) (103,569) ------------ ------------ Income (loss) before provision for income taxes .... 14,696,443 (1,222,019) Provision (benefit) for income taxes ............... 2,937,289 (555,421) ------------ ------------ Net income (loss) .................................. $ 11,759,154 $ (666,598) ============ ============ Net income (loss) per common share: Basic ........................................... $ 0.40 $ (.02) ============ ============ Diluted ......................................... $ 0.34 $ (.02) ============ ============
See accompanying notes. 4 COMMONWEALTH ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED OCTOBER 31, ------------------------------- 2000 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) .................................................... $ 11,759,154 (666,598) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation ....................................................... 252,400 283,890 Amortization ....................................................... 13,125 13,125 Provision for doubtful accounts .................................... 322,663 232,292 Tax benefit arising from exercise of stock options ................. (271,633) -- Deferred income taxes .............................................. -- (526,990) Changes in operating assets and liabilities: Billed accounts receivable ...................................... 7,039,276 689,580 Unbilled accounts receivable .................................... 2,040,301 303,069 Green power credits receivable .................................. 1,131,063 98,251 Inventory, prepaid expenses and other assets .................... 145,508 1,548,854 Accounts payable ................................................ (6,643,085) (288,662) Income taxes payable ............................................ 2,937,290 -- Accrued expenses ................................................ (48,800) (5,271,973) ------------ ------------ Net cash provided by (used in) operating activities .................. 18,677,262 (3,585,162) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment .................................. (304,452) (371,366) ------------ ------------ Net cash used in investing activities ................................ (304,452) (371,366) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under (repayments of) line of credit ...................... 32,863 (285,901) Increase in restricted cash .......................................... (152,294) (51,664) Cumulative preferred dividends ....................................... -- (9,375) Repurchase of preferred stock ........................................ -- (25,000) Repurchase of common stock ........................................... -- (2,400,000) Proceeds from exercise of stock options .............................. -- 50 ------------ ------------ Net cash used in financing activities ................................ (119,431) (2,771,890) ------------ ------------ Increase (decrease) in cash and cash equivalents ..................... 18,253,379 (6,728,418) Cash and cash equivalents at beginning of period ..................... 4,213,168 41,114,046 ------------ ------------ Cash and cash equivalents at end of period ........................... $ 22,466,547 $ 34,385,628 ============ ============ Supplemental disclosure of cash flow information: CASH PAID FOR: Interest expense ..................................................... $ 217,376 $ 103,569 ============ ============ Income taxes ......................................................... $ 2,937,289 $ -- ============ ============
See accompanying notes. 5 COMMONWEALTH ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Commonwealth Energy Corporation (the "Company") was incorporated on August 15, 1997. The Company's primary business has been the sale of electric power to retail customers in California and, beginning January 2000, in Pennsylvania and beginning in August 2000, the sale of electric power to wholesale customers in California and Pennsylvania. The Company is licensed by the Federal Energy Regulatory Commission (FERC) as a power marketer, by California as an Electric Service Provider and by Pennsylvania as an Electric Generation Supplier. The Company plans to enter new deregulated electric power markets in the future. The electric power sold by the Company to its retail customers is delivered to the Company's customers by Utility Distribution Companies (UDCs) in California and an Electric Distribution Company (EDC) in Pennsylvania, which measure electric power usage by the Company's customers and bill the customers on behalf of the Company. There are three UDCs in California and one EDC in Pennsylvania which conduct these activities on behalf of the Company. The Company's operations have been in one reportable segment, the domestic electricity distribution industry. Basis of Presentation The condensed consolidated interim financial statements of the Company include the accounts of the Company's wholly-owned subsidiaries and Summit Energy Ventures, LLC (Summit). All intercompany transactions have been eliminated in consolidation. The condensed consolidated interim financial statements as of October 31, 2001 and for the three month period ended October 31, 2000 and 2001 are unaudited but, in the opinion of management, have been prepared on the same basis as the audited financial statements and reflect all adjustments, consisting of normal recurring accruals necessary for a fair presentation of the information set forth therein. The results of operations for the three month period ended October 31, 2001 are not necessarily indicative of the operating results to be expected for the full year or any other period. These financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements of the Company for the year ended July 31, 2001. Adjustment of Number of Outstanding Common Shares and Restatement of Per Share Information The Company disputed whether certain shares of its common stock issued to its founder were validly issued. Litigation ensued between the Company 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 legal 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 certain previously reported net income per share information, including the results for the three months ended October 31, 2000 which have been restated as follows:
Basic Diluted ----- ------- As restated $0.40 $0.34 As originally reported $0.35 $0.30
6 Estimates and Assumptions The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in the Company's consolidated financial statements relate to the allowance for doubtful accounts, unbilled receivables, legal claims and the useful lives of equipment. Actual results could differ from those estimates. Revenue and Cost Recognition 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 debt 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:
THREE MONTHS ENDED OCTOBER 31, ------------------------------ 2000 2001 ----------- ----------- Retail and commercial end users ..... $31,416,756 $19,864,740 Wholesale ........................... 11,689,271 8,296,055 ----------- ----------- $43,106,027 $28,160,795 =========== ===========
Unbilled Receivables The Company's customers are billed monthly at various dates throughout the month. Unbilled receivables represent the amount of electric power delivered to customers at the end of a period, but not yet billed. Unbilled receivables from sales in California through January 19, 2001 were estimated by the Company as the number of kilowatt hours delivered times 95% of the California Power Exchange ("PX") cost as published by Southern California Edison for residential customers. On January 20, 2001, the PX ceased operations and the Company replaced the PX cost amount with the individual Utility Purchased Energy cost as published by each individual utility. Stock-Based Compensation As permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) and FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, the Company accounts for stock options granted to its employees and outside directors using the intrinsic value method. Most of the Company's stock option grants were granted with exercise prices below the fair value of the Company's common stock as estimated by the Company's management for financial reporting purposes. In addition, since most stock option grants were vested at their dates of grant, the difference between the exercise prices and such estimated fair values was expensed as stock-based compensation charges as of the date of grant. Concentration of Credit Risk The Company's concentration of credit risk with respect to accounts receivable is limited due to the large number of customers who are spread primarily throughout California. In addition, the Company maintains allowances for potential credit losses. As of October 31, 2001, 53.5% 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 an make remittances to the UDC's or the EDC that deliver their electricity which, in turn, forward such remittances to the Company. One of the UDC's, Pacific Gas and Electric (PG&E), filed for bankruptcy in April 2001 and has withheld from payment to the Company a portion of the remittances due to the Company. The Company has filed a Proof of Claim in PG&E's bankruptcy proceedings to recover these amounts which approximated $1,100,000 at October 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. 7 The remainder of the Company's billed and unbilled accounts receivable are due primarily from wholesale customers including $4,310,630 due form 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. During the three months ended October 31, 2001, sales to PJM Interconnection in Pennsylvania represented approximately 19% of the Company's total net revenue. Payment terms of these energy sales are net 15 days of the invoice date. During the three months ended October 31, 2001, no other customer represented over 10% of the Company's net revenue. During the three months ended October 31, 2000, no customer accounted for more than 10% of the Company's net revenue. 2. MARKET AND REGULATORY RISKS California Deregulated Electric Power Markets California has been experiencing extreme fluctuations in the cost of wholesale energy since May 2000. 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 to 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, to acquire 2,400 MWH of electric power per day through December 31, 2000 and 3,000 MWH per day for the remainder of the contract. The Company is obligated to minimum electric purchases of $32.3 million during 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 $37.9 million during the year ending July 31, 2002 and $51.9 million thereafter under these contracts. Since the price at which the Company can purchase this electric power is 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 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 Pennsylvania market varies significantly form month to month and can effect gross profit margins. California Green Power Credits The state of California enacted the Public Purpose Program which established a $540 million fund to provide overall incentives to suppliers of "green" power to initially reduce, among other things, the net costs of such power to certain consumers by 1.5 cents per KWH which effective July 31, 2000, has been at a rate 1.0 cent per KWH. The Company received Green Power Credits of 8 $1,605,184 for the three months ended October 31, 2000 and $1,214,336 for the three months ended October 31, 2001, which are included in the Company's net revenue. The benefit of these credits has been passed through to the Company's customers. The Public Purpose Program provides that this subsidy is available to suppliers of "green power" through March 31, 2002 and the Company does not know if the subsidy will be continued thereafter. 3. PER SHARE INFORMATION The amount of net income (loss) used in the calculations of basic and diluted net income (loss) per common share includes cumulative preferred dividend requirements of $21,237 and $18,654 for the three months ended October 31, 2000 and 2001, respectively. Basic and diluted net income (loss) per common share is computed as follows:
THREE MONTHS ENDED OCTOBER 31, ------------------------------- 2000 2001 ------------ ------------ NUMERATOR: Net income (loss) ..................................... $ 11,759,154 $ (666,598) Preferred stock dividend .............................. (21,237) (18,654) ------------ ------------ Income (loss) applicable to common stock -- Basic ..... 11,737,917 (685,252) Assumed conversion of preferred stock ................. 21,237 -- ------------ ------------ Net income (loss) -- Dilutive ......................... $ 11,759,154 $ (685,252) ============ ============ DENOMINATOR: Average outstanding shares -- Basic ................... 29,352,914 27,836,368 Dilutive shares: Exercise of stock options ........................... 4,364,685 -- Conversion of preferred stock into common stock ..... 939,000 -- ------------ ------------ Average outstanding shares -- Dilutive ................ 34,656,599 27,836,368 ============ ============
For the three months ended October 31, 2001, the effects of the exercise of all stock options and warrants and the assumed conversion of preferred stock into common stock are anti-dilutive and have been excluded from the calculation of dilutive earnings per share information. For the three months ended October 31, 2000, 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 financial statements are included in the Company's consolidated financial statements. As of October 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. 9 Condensed balance sheet information for Summit at October 31, 2001, which is included in the Company's consolidated financial statements, is as follows: Assets: Cash and cash equivalents ............................................. $ 12,654,970 Prepaid management fees ............................................... 340,582 Investment in Evenergy, Inc., at cost ................................. 2,000,000 ------------ $ 14,995,552 ============ Members equity ............................................................ $ 14,995,522 ============
The effect of Summit's results of operations during the three months ended October 31, 2001 on the Company's consolidated results of operations was insignificant. In October 2001, Summit Energy invested $2,000,000 in Envenergy, Inc. representing a 9% ownership in the company which will be accounted for as an available for sale equity investment. 5. OTHER CURRENT LIABILITIES Other current liabilities is comprised of the following at October 31, 2001: Payroll and related ....................................................... $ 639,650 Legal accruals ............................................................ 1,188,584 Other ..................................................................... 585,749 ------------ $ 2,413,983 ============
6. PROPERTY AND EQUIPMENT, NET Property and equipment, net is comprised of the following at October 31, 2001: Office furniture and equipment ............................................. $ 1,249,536 Information technology equipment and systems ............................... 4,438,088 Leasehold improvements ..................................................... 125,438 ------------ 5,813,062 Less accumulated depreciation and amortization ............................. (2,119,508) ------------ $ 3,693,554 ============
7. RESTRICTED CASH AND INTANGIBLE ASSETS Restricted Cash Restricted cash consists of the following: Short-term investments pledged as collateral for letters of credit in connection with agreements for the purchase of electric power .............. $ 13,639,605 Cash and cash equivalents of Summit ........................................ 12,654,970 ------------ $ 26,294,575 ============
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 $13,125 for the three months ended October 31, 2000 and 2001. 10 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 $3,602,171 at October 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 closing fee of $300,000, one-half of which was paid at closing and the remainder to be paid incrementally at each annual renewal date. The Company also issued the lender a warrant expiring June 29, 2003 to purchase 100,000 shares of the Company's common stock at a price of $5.50 per share. Interest on borrowings is based on the lender's prime rate plus 1.75%. At October 31, 2001, the interest rate on borrowings under the line of credit was 9.0%. The credit line is subject to certain financial covenants in the event the Company's net worth falls below $10 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 provides cumulative dividends which accrue at an annual rate of 10% and are payable at the discretion of the Company. Cumulative unpaid dividends were $96,893 as of October 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. Common Stock At October 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: Reserved for conversion of convertible preferred stock ....... 812,500 Reserved for exercise of common stock warrants ............... 100,000 Reserved for exercise of outstanding stock options ........... 10,280,192 ---------- 11,192,692 ==========
Founder's Shares The Company's corporate records state that the founder's shares of common stock were issued in exchange for the payment of $140,000 in the form of cash payments totaling $90,000 and personal property having a value of $50,000; however, the Company was not able to verify that all of this consideration was actually paid to the Company. Accordingly, the Company's Board of Directors, on February 23, 2001, instructed the Company's management to reflect on the corporate records that only a portion of the shares issued to the founder be recognized as validly issued. 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 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. 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. 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 October 31, 2001, 10,280,192 of these stock options were outstanding. 11 Stock option activity for the three months ended October 31, 2001 is set forth below:
OPTIONS OUTSTANDING ------------------------------------------------- EXERCISE WEIGHTED- NUMBER PRICE AVERAGE OF SHARES PER SHARE EXERCISE PRICE ----------- -------------- -------------- Balance at July 31, 2001 ........ 10,283,192 $ .01 -- $3.75 $ 1.792 Options granted ................. 2,000 $ $3.75 $ 2.725 Options exercised ............... (5,000) $ .01 $ .010 ----------- -------------- -------- Balance at October 31, 2001 ..... 10,280,192 $ .01 -- $3.75 $ 1.793 =========== ============== ========
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. 10. INCOME TAXES For the three months ended October 31, 2001, the Company's provision for income taxes was comprised of the following:
CURRENT DEFERRED TOTAL ------- --------- --------- Federal ........................... $ -- $(555,421) $(555,421) State ............................. -- -- -- ------- --------- --------- Total ............................. $ -- $(555,421) $(555,421) ======= ========= =========
The Company's net deferred tax asset as of October 31, 2001 was $9,691,585 and is net of a valuation allowance of $908,816. During the three months ended October 31, 2001, the valuation allowance was reduced by $112,181. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has available for federal and state income tax purposes a net operating loss carry forward of approximately $2,300,000, which will begin to expire in 2018 and 2006, respectively, if not sooner utilized. The Company has experienced an ownership change under federal and state income tax law. Accordingly, the amount of the Company's taxable income which may be offset by losses generated prior to the ownership change is limited. 11. COMMITMENTS AND CONTINGENCIES Severance Agreement and Litigation with Company's Founder The Company's founder and former chairman and Chief Executive Officer had an employment agreement with a subsidiary of the Company. He was asked to resign and he subsequently resigned from his positions with the subsidiary in consideration of a severance agreement effective June 1, 2000. Said severance agreement expressly waives any claims by him for any bonuses otherwise referenced in his previous five-year employment agreement with the subsidiary of the Company. The severance agreement also provided for monthly payments to him for $21,261 through December 31, 2004. The present value of $927,254 of this obligation to the Company's former chairman and Chief Executive Officer, based upon a discount rate of 10%, was recorded as of June 1, 2000. In December 2000, the Company ceased making severance payments under this arrangement pending the outcome of litigation between the Company and its founder as more fully described in Note 9. 12 Litigation From time to time, the Company is involved in legal proceedings, claims, and litigation arising in the ordinary course of business. Management does not believe the outcome of these matters will have a material effect on the Company's financial condition or its results of operations. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Our primary business to date has been the sale of electric power to retail customers 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 October 31, 2001, we delivered electricity to approximately 89,000 customers in California and Pennsylvania. The growth of this business depends upon the deregulated status of each state, the availability of cost-effective energy purchases to us and the acquisition of retail or commercial customers by us. We do not have our own electricity generation facilities. The power we sell to our customers is purchased from 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 THREE MONTHS ENDED OCTOBER 31, 2001 COMPARED TO THREE MONTHS ENDED OCTOBER 31, 2000 Net revenue Net revenue decreased by $14.9 million, or 34.6%, from $43.1 million for the three months ended October 31, 2000 to $28.2 million for the three months ended October 31, 2001. California electricity sales decreased by $21.9 million offset by increases in Pennsylvania electricity sales of $7.5 million. The decrease in green power credit revenue from $1.6 million for the three months ended October 31, 2000 to $1.2 million for the three months ended October 31, 2001 accounts for the remaining $.4 million decrease in net revenue. Our California wholesale electricity sales decreased $8.7 million and the remainder of the California decrease resulted from decreased electricity prices to retail and commercial end-users. The increase in Pennsylvania sales was attributable to increased sales prices to retail and commercial end-users and to increased wholesale electricity sales of $5.3 million. There were no wholesale electricity sales in Pennsylvania during the three months ended October 31, 2000. The decrease in green power credit revenue is due to fewer customers being eligible for large green power credits and more of the remaining eligible customers reaching their annual limits prior to the three months ended October 31, 2001 compared to the same period in the prior year. For the three months ended October 31, 2001, we sold 549,787,215 kwh of electricity at an average price of $.05 per kwh compared to 345,195,134 kwh sold at an average price of $.12 per kwh during the three months ended October 31, 2000. At October 31, 2001, we had 89,000 customers compared to 84,500 customers at October 31, 2000. Direct energy costs Direct energy costs increased to $24.8 million for the three months ended October 31, 2001, an increase of $.5 million, or 2%, from $24.3 million for the three months ended October 31, 2000. California direct energy costs decreased from $19.9 million during the three months ended October 31, 2000 to $9.9 million for the three months ended October 31, 2001. Pennsylvania direct energy costs increased from $4.1 million for the three months ended October 31, 2000 to $14.8 million during the three months ended October 31, 2001. The decrease in California direct energy costs was the result of lower energy purchase price and scheduling costs. Our California average energy purchase price decreased from $.05 per kwh during the three months ending October 31, 2000 to $.03 per kwh for the three months ended October 31, 2001. California scheduling costs were reduced $5.4 million by using one scheduler during the three months ended October 31, 2001 compared to three schedulers during the three months ended October 31, 2000. Pennsylvania direct energy costs increased due to purchases of 285,325,000 kwh of electricity during the three months ended October 31, 2001 compared to purchases of 93,434,750 kwh during the three months ended October 31, 2000. Pennsylvania scheduling costs increased $2.6 million as a result of scheduling more kwh across the grid during the three months ended October 31, 2001 compared to the three months ended October 31, 2000. Direct energy costs, as a percent of net revenues, increased from 56.3% for the three months ended October 31, 2000 to 88.1% for the three months ended October 31, 2001. This increase was the result of decreased sales prices in the California wholesale market. Selling and marketing expenses Selling and marketing expenses decreased $.1 million, or 9.3%, from $1.0 million for the three months ended October 31, 2000 to $.9 million for the three months ended October 31, 2001. The decrease is primarily a result of a decrease in call center activities as 14 the Company reduced its activities for the solicitation of new customers and a closed retail store. Telemarketing payroll decreased by $.08 million and the store closure contributed a decrease of $.04 million. General and administrative expenses General and administrative expenses increased from $3.2 million for the three months ended October 31, 2000, an increase of $.9 million, or 27.9% to $4.1 million for the three months ended October 31, 2001. This is primarily the result of increased legal expenses of $.4 million, the continued development of our billing system of $.3 million, management fees for Summit Energy Ventures of $.1 million, and Pennsylvania gross receipt taxes of $.1 million. The increase in legal expenses is primarily related to litigation regarding prior management. Summit Energy management fees are related to the formation of the Summit Energy Venture subsidiary in July 2001. Pennsylvania gross receipts tax was not due or paid during the three months ended October 31, 2000. Interest income Interest income increased to $477,675 for the three months ended October 31, 2001, an increase of $241,275 or 98.0%, from $236,400 for the three months ended October 31, 2000. The increase is attributable to the increase in cash flow available for investments provided from operations during fiscal 2001, partially offset by lower yields on short-term investments during the three months ended October 31, 2001. Interest expense Interest expense decreased to $103,569 for the three months ended October 31, 2001, a decrease of $113,807 or 52.4%, from $217,376 for the three months ended October 31, 2000. The decrease is attributable to lower borrowings under our revolving line of credit and a decline in the average interest rate for the three months ended October 31, 2000. Provision for income taxes There was a benefit for income taxes during the three months ended October 31, 2001 of $.5 million compared to a provision for income taxes of $2.9 million for the three months ended October 31, 2000. We reported a loss of $1.2 million before income taxes for the three months ended October 31, 2001 compared to income before income taxes of $14.7 million for the three months ended October 31, 2000. Net income (loss) Net income (loss) decreased to a $.7 million loss for the three months ended October 31, 2001, a decrease of $12.5 million from the $11.8 million net income for the three months ended October 31, 2000. This decrease in net income is primarily attributable to a $15.4 million decrease in gross margin and an increase in general and administrative costs of $.9 million, offset in part by a decrease in the provision for income taxes of $3.5 million and increase in net interest income of $.4 million. Liquidity and Capital Resources Through July 31, 2000, most of our capital was raised through a series of private placements for the sale of all classes of stock which provided an aggregate of $51.1 million of net proceeds, of which $41.3 million was used to support our operating activities which were unprofitable through July 31, 2000. We began profitable operations during the three months ended October 31, 2000. Cash flow used in operations for the three months ended October 31, 2001 was $3.6 million a decrease of $22.3 million compared with cash provided by operations for the three months ended October 31, 2000 of $18.7 million. Net loss for the three months ended October 31, 2001 of $.7 million, compared to a net profit of $11.8 million for the three months ended October 31, 2000, was the primary reason for this decrease which primarily resulted from California's lower wholesale prices. In addition, during the three months ended October 31, 2001, there was a decrease in energy receivables of $9.1 million also due to the lower wholesale prices in California. Investing activities for three months ended October 31, 2001 include only purchases of property and equipment of $.4 million, a increase of $.1 million compared to the three months ended October 31, 2000. 15 Cash flow used in financing activities for the three months ended October 31, 2001 was $2.8 million, compared to cash used of $.1 million for the three months ended October 31, 2000. The increase of $2.7 million is due primarily to the $2.4 million repurchase of common stock during the three months ended October 31, 2001 and an decrease in borrowings under our line of credit of $.3 million The most significant trend that has contributed to the decrease in our liquidity and capital resources during the three months ended October 31, 2001 was the significant decrease 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 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) related 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 base 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. 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. In order to mitigate the risk of the state preventing the growth of our customer base, and to enhance our profitability we entered into long-term electric service agreements with several large commercial and industrial customers in California. The contracts were all completed prior to the September 20, 2001, CPUC ruling to suspend "direct access." Based on the historical consumption data of these commercial and industrial customers, we expect to add approximately 600,000 MWh's annually at an average rate of $89 per MWh. Delivery to these customers began in October 2001 and is it anticipated that all the customer meters will be on-line by January 2002. With the achievement of these agreements, we have increased the quantity of electricity delivered to customers by more than 100 percent in California. Revenues related to these contracts was not material for the three months ended October 31, 2001. As of October 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. 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. Inflation. Inflation has not been a material factor in either revenue or operating expenses during our existence. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not have or use any derivative instruments as of October 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. 16 An electricity price change of $.01 per kWh, has an estimated annual impact on our net revenue of: California $18.1 million Pennsylvania $11.0 million
Forward-Looking Statements. This registration statement includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts contained in this documents are forward-looking statements. Forward-looking statements include, but are not limited to, statements relating to expansion opportunities for the subsidiary companies, extension of Commonwealth's business model to new markets and industries, demand in the market for UtiliHost services, completion of acquisitions of certain assets, and growth or retail energy operations and demand for retail energy outsourcing and back office solutions. When used in this document, the words "anticipate," "believe," "estimate," "expects," "intend," "may," "project," "plan," "should," and similar expressions are intended to be among the statements that identify forward-looking statements. Although Commonwealth believes that its expectations reflected in these forward-looking statements are based on reasonable assumptions, such statements involve risks and uncertainties and no assurances can be given that actual results will be consistent with these forward looking statements. In particular, the following items may affect our future: - The California State Legislature, the Governor's Office and the California Public Utilities Commission may enact and enforce legislation that could adversely affect our operations in California. - We are required to obtain and maintain licenses from the states in which we sell electricity. - In certain states, competitive restructuring of retail marketing may prevent us from selling electricity. - We are completely dependant upon a limited number of third parties that we do not control to generate and supply to us electricity and their failure or delay in entering into or performing their contracts with us will have a material adverse effect on our operations and financial condition. - We are completely dependent upon a limited number of utilities that we do not control for the transmission and distribution of the electricity we sell to our customers and their failure or delay in entering into or performing their contracts with us will have a material adverse effect on our operations and financial condition. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this report, we are not a party to any legal proceedings, the adverse outcome of which, in management's opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position. 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. 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 also confirmed that his record ownership of and voting rights to a separate 1,200,000 shares were forfeited and he agreed to release any claims under an Accommodation Agreement dated May 31,2000 and agreed that he would have no future ownership in 17 Commonwealth Energy Corporation. Finally, Mr. Bloom agreed not to compete with our business for two years in certain specified energy-related areas. Joseph P. Saline, a board member of our Board elected by the cumulative ballot vote of our former founder and Chief Executive Officer Frederick Bloom (see disclosure above), has filed two lawsuits. On August 16, 2001, Mr. Saline 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. On October 29, 2001, Mr. Saline filed a claim for certain preferred shareholder rights which differ from the rights set forth in the Certificate of Determination concerning preferred shares filed with the California State Department of Corporations. The Company has answered and filed a cross-action for declaratory relief. This litigation is ongoing. Thirteen former stock sales employees led by Mr. David James commenced a lawsuit against us on February 23, 2001 in Orange County Superior Court 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. The plaintiffs have not identified the basis for the number of respective shares under option they claim 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 contract, unfair business practices, misappropriation of trade secrets, intentional interference with prospective economic advantage, unjust enrichment, slander, and fraud. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our annual meeting of shareholders was held on November 27, 2001. Of the 27,311,703 shares of our common stock issued and outstanding and entitled to vote at the meeting, there were present at the meeting, in person or by proxy, the holders of approximately 19,375,000 common shares, representing 71% of the total number of shares entitled to vote at the meeting. The percentage represents a quorum. The following three proposals were presented and voted on at the shareholders meeting: Proposal One: Amendment to our Bylaws to provide for a variable Board to be comprised of between five and nine members. Proposal Two: Appointment of Ernst & Young LLP as auditors. Proposal Three: Election of five directors. Two of the three ballot proposals are contested. The outcome of the aforementioned votes is under review and will not be available until late December 2001 or in January 2002. ITEM 5. OTHER INFORMATION In order to mitigate the risk of the state preventing the growth of our customer base, and to enhance our profitability we entered into long-term electric service agreements with several large commercial and industrial customers in California. The contracts were 18 all completed prior to the September 20, 2001, CPUC ruling to suspend "direct access" pursuant to legislation by the California state legislature. Based on the historical consumption data of these commercial and industrial customers, we expect to add approximately 600,000 MWh's annually at an average rate of $89 per MWh. Delivery to these customers began in October 2001 and is it anticipated that all the customer meters will be on-line by January 2002. With the achievement of these agreements, we have increased the quantity of electricity delivered to customers by more than 100 percent in California. Revenues related to these contracts was not material for the three months ended October 31, 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 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. (a) The following exhibits are attached hereto or incorporated by reference, as required by Item 601 of Regulation S-K:
EXHIBIT NUMBER TITLE OF EXHIBIT ------- ---------------- 3.1 Articles of Incorporation of Commonwealth Energy Corporation dated August 14, 1997 and filed with the Secretary of State of the State of California on August 15, 1997 (1) 3.2 Certificate of Amendment of Articles of Incorporation of Commonwealth Energy Corporation dated December 31, 1998 and filed with the Secretary of State of the State of California on February 19, 1999 (1) 3.3 Bylaws of Commonwealth Energy Corporation, as amended (1) 3.4 Certificate of Determination of Commonwealth Energy Corporation dated September 22, 1997 and filed with the Secretary of State of California on March 13, 1998 10.1 Power Purchase Agreement dated April 27, 1999, between Commonwealth Energy Corporation and Calpine Power Services Company (1) 10.2 First Amendment to Power Purchase Agreement dated as of April 29, 1999 (1) 10.3 Second Amendment to Power Purchase Agreement dated as of May 28, 1999, between Commonwealth Energy Corporation and Calpine Power Services Company (1) 10.4 Loan and Security Agreement dated June 28, 2000 between Commonwealth Energy Corporation, electricAmerica, Inc. and electric.com, Inc. and Coast Business Credit (1) 10.5 Warrant dated June 28, 2000, issued by Commonwealth Energy Corporation in favor of Coast Business Credit (1) 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 (1) 10.7 PECO Energy Company Confirmation Agreement dated January 30, 2001 (1) 10.8 Exelon Generation Company, LLC Confirmation Agreement dated May 13, 2001 (1) 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 (1) 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 (1) 10.11 Severance Agreement dated June 1, 2000, among Commonwealth Energy Corporation, electricAmerica, Inc. and Frederick M. Bloom (1) 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 (1) 10.13 Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and Richard Paulsen (1) 10.14 Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and James Oliver (1) 10.15 Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and John
19
EXHIBIT NUMBER TITLE OF EXHIBIT ------- ---------------- Barthrop (1) 10.16 Commonwealth Energy Corporation 1999 Equity Incentive Plan for Employees (1) 10.17 Amendment Number 6 to lease by and between Warner/Redhill Associates and Frederick Michael Bloom (1) 10.18 Commonwealth vs. Bloom Settlement Agreement Terms, dated August 10, 2001
(1) Incorporated by reference to the exhibits filed with the Registration Statement on Form 10, File No. 0-33069 (b) Reports on Form 8-K. None 20 SIGNATURES All Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Commonwealth Energy Corporation Date: December 14, 2001 By: /s/ Ian B. Carter --------------------------------- Title: Chief Executive Officer Date: December 14, 2001 By: /s/ Scott A. Petterson --------------------------------- Title: Chief Accounting Officer and Corporate Controller 21 EXHIBIT INDEX
EXHIBIT NUMBER TITLE OF EXHIBIT ------- ---------------- 3.1 Articles of Incorporation of Commonwealth Energy Corporation dated August 14, 1997 and filed with the Secretary of State of the State of California on August 15, 1997 (1) 3.2 Certificate of Amendment of Articles of Incorporation of Commonwealth Energy Corporation dated December 31, 1998 and filed with the Secretary of State of the State of California on February 19, 1999 (1) 3.3 Bylaws of Commonwealth Energy Corporation, as amended (1) 3.4 Certificate of Determination of Commonwealth Energy Corporation dated September 22, 1997 and filed with the Secretary of State of California on March 13, 1998 10.1 Power Purchase Agreement dated April 27, 1999, between Commonwealth Energy Corporation and Calpine Power Services Company (1) 10.2 First Amendment to Power Purchase Agreement dated as of April 29, 1999 (1) 10.3 Second Amendment to Power Purchase Agreement dated as of May 28, 1999, between Commonwealth Energy Corporation and Calpine Power Services Company (1) 10.4 Loan and Security Agreement dated June 28, 2000 between Commonwealth Energy Corporation, electricAmerica, Inc. and electric.com, Inc. and Coast Business Credit (1) 10.5 Warrant dated June 28, 2000, issued by Commonwealth Energy Corporation in favor of Coast Business Credit (1) 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 (1) 10.7 PECO Energy Company Confirmation Agreement dated January 30, 2001 (1) 10.8 Exelon Generation Company, LLC Confirmation Agreement dated May 13, 2001 (1) 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 (1) 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 (1) 10.11 Severance Agreement dated June 1, 2000, among Commonwealth Energy Corporation, electricAmerica, Inc. and Frederick M. Bloom (1) 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 (1) 10.13 Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and Richard Paulsen (1) 10.14 Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and James Oliver (1) 10.15 Employment Agreement dated November 1, 2000, between Commonwealth Energy Corporation and John Barthrop (1) 10.16 Commonwealth Energy Corporation 1999 Equity Incentive Plan for Employees (1) 10.17 Amendment Number 6 to lease by and between Warner/Redhill Associates and Frederick Michael Bloom (1) 10.18 Commonwealth vs. Bloom Settlement Agreement Terms, dated August 10, 2001
(1) Incorporated by reference to the exhibits filed with the Registration Statement on Form 10, File No. 0-33069 EX-3.4 3 a77918ex3-4.txt EXHIBIT 3.4 EXHIBIT 3.4 CERTIFICATE OF DETERMINATION OF COMMONWEALTH ENERGY CORPORATION A CALIFORNIA CORPORATION The undersigned, Fred Bloom, President, and David Mensch, Secretary, certify that: 1. Fred Bloom is the President, and David Mensch is the Secretary, of Commonwealth Energy Corporation, a California corporation (the "Company"). 2. The number of shares of Series A Convertible Preferred Stock shall be 1,000,000, none of which have been issued. 3. By action of the Board of Directors of the Company on September 15, 1997 at the Company's office located at 15941 Redhill Ave., Ste. 200, Tustin, California 92780, County of Orange, and State of California, the following resolution was adopted by unanimous written consent of the directors: WHEREAS, Article Four of the Articles of Incorporation of the Company authorizes a class of shares designated as Preferred shares consisting of 1,000,000 shares, the rights, preferences, privileges to be determined by the Board of Directors; and WHEREAS, none of the shares have previously been issued and it is now the desire of the Board of Directors, pursuant to the authority vested in it by the Articles of Incorporation as hereinabove set forth, to fix and determine the rights, preferences, privileges, and restrictions of the Preferred shares. NOW THEREFORE, BE IT RESOLVED that the Board of Directors does hereby provide for the issuance of Preferred Shares of the Company and does hereby fix and determine the rights, preferences, privileges, and restrictions of, and other matters relating to, that series, as follows: I. 1,000,000 shares shall be designated as "Series A Convertible Preferred Stock", none of which have been previously issued, with the powers, preferences, rights, restrictions, and other matters as follows: (1) Dividends. (a) Subject to the provisions hereof, the annual rate of dividends payable on each Share shall be 10% of the original issue price or the maximum rate as allowed by law, whichever is less. Dividends shall be calculated from the date issue and payable, in each case quarterly on the first day of January, April, June and September of each year ("Dividend Payment Date"), commencing January 1, 1998, unless any such day is not a business day (a day other than Saturday, Sunday or legal holiday) in which event on the next business day. The amount of dividends payable on these Shares for each full semi-annual dividend period shall be computed by dividing by two the annual rate per share set forth in this Section (a). The amount of dividends payable on these Shares for any period less than each quarterly dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. Dividends shall be paid, when, as and if declared by the Board of Directors, to record holders of these Shares as of the close of business on the preceding December 1 with respect to a dividend payable on January 1; March 1 with respect to a dividend payable on April 1; May 1 with respect to a dividend payable on June 1 and August 1 with respect to a dividend payable on September 1, except that if such date for determination of record holders is not a Business Day, such date shall be the next Business Day (the "Dividend Record Date"). (b) The holders of these Shares shall be entitled to receive, when, as and if declared by the Board of Directors and out of the assets of the Corporation which are by law available for the payment of dividends, cumulative dividends payable in cash. (c) (i) Dividends on these Shares shall be cumulative. Such dividends shall accrue from the date of issuance and shall be deemed to accrue from day to day whether or not earned or declared. Such dividends shall be payable before any dividends shall be declared, set apart, or paid for the Common Stock, and shall be cumulative so that if for any dividend period such dividends on the outstanding Preferred Shares at the rate herein specified are not paid or declared and set apart therefor, the deficiency shall be fully paid or declared and set apart for payment, without interest, before any distribution, by dividend or otherwise, shall be paid on, declared, or set apart for the Common Stock. (ii) Each period beginning on the day next following a Dividend Payment Date and ending on the next succeeding Dividend Payment Date shall be a "Dividend Period". Dividends shall accrue but not compound on a daily basis at the semi-annual dividend rate in effect at such time. (iii) If full dividends on all outstanding Shares at that rate per share set out in (a) shall not have been declared and paid or set aside for payment for the immediately preceding Dividend Period, the Corporation shall not, until full dividends have been declared and paid or set aside for payment on all outstanding Shares for a subsequent Dividend Period, (A) declare or pay or set aside for payment any dividends or make any other distribution or payments on the Common Stock or (B) make any payment on account of the purchase, redemption or other retirement of, or pay or make available any monies for a sinking fund for the redemption of, any shares of Common Stock. (2) Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of Common Stock or other junior equity security by reason of their ownership thereof, an amount per share equal to the sum of (i) $1.00 for each outstanding share of Series A Preferred Stock (the "Original Issue Price"), and (ii) an amount equal to all declared but unpaid dividends on each such share. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the 2 Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the product of the liquidation preference of each such share and the number of such shares owned by each such holder. (b) After the distribution described in subsection (a) above has been paid, the remaining assets of the Company available for distribution to stockholders shall be distributed among the holders of Common Stock pro rata based on the number of shares of Common Stock held by each. (c) For purposes of this Section 2, (i) any acquisition of the Company by means of merger or other form of corporate reorganization in which the shareholders of the Company do not own a majority of the outstanding shares of the surviving Company or (ii) a sale of all or substantially all of the assets of the Company shall be treated as a liquidation, dissolution or winding up of the Company and shall entitle the holders of Series A Preferred Stock and Common Stock to receive at the closing cash, securities or other property as specified in Sections 2(a) and 2(b) above. (d) Any securities to be delivered to the holders of Series A Preferred Stock and Common Stock pursuant to Section 2(c) above shall be valued as follows: (i) Securities not subject to investment letter or other similar restrictions on free marketability: (A) If traded on a securities exchange, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty (30) day period ending three (3) days prior to the closing; (B) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid and asked prices over the thirty (30) day period ending three (3) days prior to the closing; and (C) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Company and the holders of not less than a majority of the then outstanding shares of Series A Preferred Stock. (ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability shall be to make an appropriate discount from the market value determined as above in clauses (i)(A), (B) or (C) to reflect the approximate fair market value thereof, as mutually determined by the Company and the holders of a majority of the then outstanding shares of Series A Preferred Stock. (e) The Company shall give each holder of record of Series A Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the stockholders' meeting called to approve such transaction, or twenty (20) 3 days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the Company shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place earlier than twenty (20) days after the Company has given the first notice provided for herein or earlier than ten days after the Company has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of a majority of the shares of Series A Preferred Stock then outstanding. (3) Conversion. The holders of Series A Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right To Convert. Subject to subsection (d), each share of outstanding Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Company or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price by the Conversion Price in effect at the time for the Series A Preferred Stock (the "Conversion Price"). The initial Conversion Price per share for shares of Series A Preferred Stock shall be the Original Issue Price, subject to adjustment as set forth in subsection (d). (b) Automatic Conversion. Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price then in effect for the Series A Preferred Stock immediately upon (i) the closing of the sale of the Company's Common Stock in a bona fide, firmly underwritten public offering registered under the Securities Act of 1933, as amended (the "Securities Act") pursuant to a registration statement on Form S-1 or any successor or similar form or (ii) the approval of holders of 66-2/3 % of the outstanding shares of Series A Preferred Stock. (c) Mechanics of Conversion. (i) Before any holder of Series A Preferred Stock shall be entitled voluntarily to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for such stock, and shall give written notice to the Company at such office that he elects to convert the same and shall state therein the number of shares to be converted and the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued. The Company shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled. Such conversion shall be deemed to have been made immediately prior to the close of business on the date or surrender of the shares of Series A Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. 4 (ii) If the conversion is in connection with an underwritten offering of securities pursuant to the Securities Act, the conversion may, at the option of any holder tendering shares of Series A Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Series A Preferred Stock shall not be deemed to have converted such Series A Preferred Stock until immediately prior to the closing of such sale of securities. (d) Adjustments to Conversion Prices for Stock Dividends and for Combinations or Subdivisions of Common Stock. In the event that the Company at any time or from time to time after the first date of any issuance of Series A Preferred Stock (the "Original Issue Date") shall declare or pay, without consideration, any dividend on the Common Stock payable in Common Stock or in any right to acquire Common Stock for no consideration, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock), or in the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Conversion Price in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. In the event that the Company shall declare or pay, without consideration, any dividend on the Common Stock payable in any right to acquire Common Stock for no consideration, then the Company shall be deemed to have made a dividend payable in Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire Common Stock. (e) Adjustments for Reclassification and Reorganization. If the Common Stock issuable upon conversion of the Series A Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for in Section 3(d) above or a merger or other reorganization referred to in Section 2(d) above), the Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted so that the Series A Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion- of the Series A Preferred Stock immediately before that change. (f) No Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as 5 may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock against impairment. (g) Certificates as to Adjustments. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 3, the Company, at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock a certificate executed by the Company's President or Chief Financial Officer setting forth such adjustment or readjustment and showing in detail the facts upon which the Company shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Series A Preferred Stock. (h) Notices of Record Date. In the event that the Company shall propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or (iv) to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; then, in connection with each such event, the Company shall send to the holders of Series A Preferred Stock: (A) At least twenty (20) days prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (iii) and (iv) above; and (B) In the case of the matters referred to in (iii) and (iv) above, at least twenty (20) days prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event). (i) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued 6 shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Certificate. (j) Fractional Shares. No fractional share shall be issued upon the conversion of any share or shares of Series A Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series A Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Company shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors). (k) Notices. Any notice required by the provisions of this Section 3 to be given to the holders of shares of Series A Preferred Stock shall be deemed given if reposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Company. (4) Voting Rights. The holder of each share of Series A Preferred have the right to one vote for each share of Common Stock into which such share of Series A Preferred Stock could be converted on the record date for the vote or written consent of stockholders. In all cases any fractional share, determined on an aggregate conversion basis, shall be rounded to the nearest whole share. With respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders meeting in accordance with the bylaws of the Company, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. (5) Status of Converted Stock. In the event any shares of Series A Preferred Stock shall be converted pursuant to Section 3 hereof, the shares so converted shall be canceled and shall not be issuable by the Company, and all such shares shall be canceled, retired and eliminated from the shares which the Company is authorized to issue. (6) Restrictions and Limitations. So long as any shares of Series A Preferred Stock remain outstanding, the Company shall not without the vote or written consent by the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, amend these Articles of Incorporation if such amendment would adversely affect any of the rights, preferences or privileges provided for herein for the benefit of the Series A Preferred Stock. RESOLVED FURTHER, that the President and Secretary of the Company are hereby authorized and directed to prepare, execute, verify, and file in the office of the California Secretary of State, a Certificate of Determination in accordance with this resolution as required by law. 7 WE FURTHER DECLARE, under penalty of perjury under the laws of the State of California, that the matters set forth in this Certificate of Determination are true and correct of our own knowledge. Executed this 22nd day of September, 1997 in Costa Mesa, California. /s/ Fred Bloom ------------------------------------ Fred Bloom, President /s/ David Mensch ------------------------------------ David Mensch, Secretary Filed with the California Secretary of State on March 13, 1998 8 EX-10.18 4 a77918ex10-18.txt EXHIBIT 10.18 EXHIBIT 10.18 COMMONWEALTH V. BLOOM SETTLEMENT AGREEMENT TERMS The following is a summary of the terms of settlement reached between the parties identified below. A final Settlement Agreement document shall be drafted and circulated for comments by McDermott, Will & Emery. The Settlement Agreement will be the final integrated agreement between the parties and shall reflect the terms herein. Frederick Bloom, Lucinda Bloom and the Bloom Family Trust (along with each of their past and present partners, partnerships, employees, agents, representatives, insurers. attorneys, heirs, predecessors, successors, assignors and assignees, and all persons and entities acting or claiming by, through, under, or in concert with them or any of them, hereinafter collectively "Bloom") on one hand, and Commonwealth Energy Corporation, ElectricAmerica, Inc., Ian B. Carter, Bradley L. Gates, Robert C. Perkins, Vivian L. Anderson and Junona Jonas (along with each of their shareholders, officers, directors, employees, predecessors, successors, subsidiaries, divisions, affiliated companies, parent companies, holding companies, partners, partnerships, officers, directors, agents, representatives, insurers, attorneys, heirs, assignors and assignees, bankers, investment bankers, and all persons and entities acting or claiming by, through, under, or in concert with them or any of them, hereinafter collectively "Commonwealth"), on the other hand, in order to resolve the action known as Commonwealth Energy Corporation, et al. v. Bloom,, et al., Orange County Superior Court Case 00CC15507 and all related and/or consolidated actions hereby agree as follows: Collectively, Bloom and Commonwealth shall be referred to as the Parties. 1. Bloom will surrender all 5,895,160 shares and any options in Commonwealth to Commonwealth. To the extent that Bloom possesses or controls, directly or indirectly, any other shares or options of any kind in Commonwealth, he shall forfeit such shares to Commonwealth. To the extent that Bloom has optioned or transferred shares to any third parties, those shares must be forfeited to Commonwealth. 2. Mutual release of all claims plus provide a section 1542 waiver. 3. The Parties agree to obtain a Court order signed by a judge of the Orange County Superior Court approving the settlement. 4. Payment from Commonwealth to Bloom is to be made within 24 hours of court approval of settlement. Additional time will be allowed to make payment if the 24 hour period includes a weekend or bank holiday. 5. Bloom will not disparage, directly or indirectly, Commonwealth. Commonwealth will not disparage, directly or indirectly, Bloom but Bloom recognizes that Commonwealth may have to cooperate with governmental agencies, including but not limited to the California Public Utilities Commission, California Department of Corporations or other state and/or federal enforcement agencies in investigations against Bloom. Notwithstanding the foregoing, Commonwealth will not affirmatively request any action against Bloom that is not otherwise consistent with the fiduciary duties and legal obligations of Commonwealth's Board of Directors. Commonwealth's counsel will write a letter to any regulatory agencies that Commonwealth has communicated with concerning Bloom, including the Department of Corporations, the District Attorney's office, and the Orange County Sheriff's Department, notifying them of the settlement this matter and confirming that Commonwealth has no interest in pursuing claims against Bloom. CEC will not send any additional unsolicited letters to any local, state or federal agencies concerning Bloom. 6. Commonwealth will indemnify Bloom for expenses, including attorneys fees, incurred in the Julian and Wykydal litigation. All such outstanding fees will be paid by August 30, 2001. Commonwealth will have no additional future indemnification obligations to Bloom, however, to the extent there is insurance coverage for future cases involving Bloom, Commonwealth will not object to Bloom seeking coverage under the policies. 7. Bloom cannot approach Commonwealth's shareholders, banking institutions, employees, officers or board members either directly or indirectly for the purpose of discussing anything with respect to Commonwealth. Bloom can take no direct or indirect action that interferes with Commonwealth's operations. Bloom will make no attempt to solicit current Commonwealth employees for a period of two (2) years. 8. Bloom can never own any interest, directly or indirectly in Commonwealth. This includes proxies or third parties that Bloom may choose to work through. 9. Both Commonwealth and Bloom will place $100,000 each into a designated escrow account (with Bloom's portion to be placed directly into such account by Commonwealth out of the proceeds of the settlement funds) for the purpose of liquidated damages in the event that any party is found to have breached the terms of this Agreement. Whether a Parry is in breach of this Agreement is to be decided by a single neutral arbitrator to be agreed to by the parties. The funds will be held for a two year period and liquidated damages will be $20,000 per occurrence. In the event either party pays a sanction they are required to replenish the account back to $100,000. 9a. The Parties agree that if this matter is disputed, such disputes will be arbitrated before JAMS. 10. Bloom will assign the rights to his CEC.investors.com website and will agree physically to turn that website over to Commonwealth as well as the domaine authority for the site. Bloom will also agree not to start or participate in any other website related in any way to Commonwealth. 11. Bloom will turn back to the company his shareholder list and any copies that he has made and will not use or request copies of the shareholder list in the future. He will identify any third parties to whom he has provided a copy of the list and will request the return of the copies in writing. 2 12. Bloom agrees to reasonably cooperate in any lawsuits brought by or against the company to include, but not limited to Gary Wykidal, David James, etc. 13. To the extent Bloom can accomplish an assignment of lease of Commonwealth's offices at no cost to Commonwealth, Commonwealth will assume liability on the lease. 14. Bloom agrees to withdraw support from Joseph Saline and ask him to resign both orally and in writing prior to the final approval of this settlement. The Agreement is not contingent upon Saline's resignation. 15. Bloom agrees not to compete with Commonwealth in any of the listed activities for at least two (2) years in any capacity. Bloom will relinquish his right to be a 1% investor, or a principal, employee, officer in any company that is engaged wholly or in part in the listed activities, including but not limited to any entity funded by John Kuhns or Kuhns Brothers Securities. The listed activities are: 1. Retail or wholesale sale of electric energy or distributed electrical power; 2. Alternative electrical generation sources; 3. Development and design of electrical fuel cells; 4. Manufacture or distribution of electric energy conservation devices; 5. Energy management or consulting services; 6. Electrical service call centers; and 7. Electrical energy billing and backroom software. 17. Bloom agrees not to participate or help in any way in any shareholder action adverse to Commonwealth, including but not limited to a hostile takeover or proxy contest or merger. 18. Bloom agrees to the terms of the Accommodation Agreement and he makes no claims now or in the future to the shares encompassed in that Accommodation Agreement and he agrees to release the 1.2 million shares that have been transferred to Commonwealth per the terms of the Accommodation Agreement. 19. Bloom agrees that all agreements under this Settlement Agreement, including but not limited to the Severance Agreement and Employment Agreement, are terminated. 20. Bloom will agree not to disclose any intellectual property belonging to or developed by Commonwealth, including but not limited to Triumph software and agrees not to use any confidential information learned from Commonwealth in connection with any competing entity. 21. All pending motions, depositions, etc. shall be taken off calendar and a stay agreed to until such time as the court approves or disapproves the settlement agreement. 3 22. Mutual return of all subpoenaed documents and documents exchanged in discovery. 23. Commonwealth will pay $7,190,000 in full settlement of this matter as designated by Bloom. Of that amount, Commonwealth is paying $4,790,000 in damages. The remaining $2,400,000 is paid by Commonwealth to purchase 1,175,160 shares of Bloom's stock. The parties agree that the remaining shares held by Bloom - 4,720,000 shares - are void. 24. The parties agree to file dismissals of their respective complaints with prejudice after the settlement funds are in Bloom's account. 25. In the event of any disputes under this agreement the prevailing party will be entitled to the payment of its attorney's fees. 26. The Settlement Agreement terms are subject to a final vote of the Board of Directors of Commonwealth Energy, which is scheduled for Monday, August 13, 2001. The Directors signing this agreement will recommend approval and a vote in favor. By entering into this agreement neither party admits any wrongdoing or liability. 27. The parties intend to seek court approval of the settlement agreement within one week of today's date. If the parties cannot agree or any subsequent settlement agreement, either party may enforce the terms of this agreement. Dated: August 10, 2001 /s/ Fred Bloom ------------------------------------------- Fredrick Bloom Individually and for Bloom Family Trust Dated: August 10, 2001 /s/ Lucinda Bloom ------------------------------------------- Lucinda Bloom Individually and for Bloom Family Trust Dated: August 10, 2001 /s/ Bradley L. Gates ------------------------------------------- Bradley Gates for Commonwealth Energy Corporation, et al. Dated: August 10, 2001 /s/ Robert Perkins ------------------------------------------- Robert C. Perkins for Commonwealth Energy Corporation, et al. 4 -----END PRIVACY-ENHANCED MESSAGE-----